Longer Terms Denigrate Voters

Should Queensland join all the other states and allow parliamentarians to serve four year terms before facing re-election, rather than the present three years?

In a 1991 referendum Queenslanders said "no", and that should have been the end of it for at least a generation.  (After all, we are out of step with the rest of Australia in not having an upper house of parliament, but we don't seem to suffer any worse government as a result).

Nevertheless, today's politicians won't take "no" for an answer, and it looks as though we may have to vote on the issue again.  The Beattie Government will soon table a report by constitutional expert Professor Colin Hughes, which recommends that the state parliamentary term should be extended to four years.

No doubt many sensible reasons will be offered to justify such a proposal.  Elections are expensive to run, and we all know how unhappy governments are about spending taxpayers' money.  Governments frequently have to make tough and unpopular decisions, and politicians are more likely to have stronger backbones when they feel that the electorate will have a few years to forget its anger and pain.  Short parliamentary terms, so the argument goes, only promote short term thinking and encourage governments to pander unnecessarily to populism and prejudice.

These are not trifling arguments, although I suspect that our elected representatives seek longer parliamentary terms for less exalted reasons.  And the support of business and other interest groups for four year parliaments probably depends less on concerns about efficiency than on the desire for a longer period of return on all the time and resources they spend in cultivating the party in power.

But whatever the reasons that may be offered in their favour, moves towards longer parliamentary terms still represent a retreat from important democratic principles.  Certainly, they would have dismayed the reformers who championed the features of our parliamentary system that we now take for granted.

In 1838 William Lovett and Francis Place, two radical and self-educated English tradesmen, drew up the "People's Charter", a six point program of democratic reform, on behalf of the London Workingmen's Association.

The charter called for universal suffrage (but only for men -- even progressives have their blind spots), electoral districts containing equal numbers of voters, a secret ballot, abolition of the requirement that members of parliament had to be property owners, and payment for M.P.s to make it feasible for ordinary men to stand as candidates.  Lovett and Place also advocated annual general elections, so that citizens would have much greater control over their parliamentary representatives.

The Chartists, as their supporters were called, presented a number of petitions containing millions of signatures to the House of Commons, first in 1839, and then again in 1842 and in 1848.  Each was rejected.  Their cause was not helped by the fact that a great many signatures on the last petition were found to be fraudulent;  nor by the willingness of some Chartists to resort to violence in pursuit of their aims.

Nevertheless, although Chartism had effectively disappeared as a political movement by the end of the 1840s, the influence of its ideas was far-reaching, particularly in the Australian colonies, where dozens of Chartists were transported after riots in 1839 and 1842.  The colonial legislative assemblies which were established from the 1850s onwards soon incorporated four of the six Chartist demands, and a fifth, the payment of parliamentarians, came later.

But the idea of electing parliaments every year -- or even every two years as is the case with the House of Representatives in the United States -- has always been seen as too radical.  True, short-term parliaments can have their dangers.  But from another perspective they can also help to foster more responsible and accountable governments.

I think that the position you take on the issue ultimately hinges on your view of the electorate.  If, like Malcolm Turnbull's Republicans or the conservatives who initially resisted the Chartists' demands, you feel that most people are short-sighted, selfish and readily swayed by glitzy campaigns, you will be convinced that nothing but harm would ever come from more frequent elections.  They would only encourage increasingly reckless governments and an even greater amount of populist rhetoric and pork-barrelling.

On the other hand, if you believe that most of our leaders and commentators usually misjudge the good sense and decency of the electorate, and underestimate its willingness to accept difficult but necessary decisions provided their rationale is honestly spelt out, the situation looks rather different.

To a considerable extent expectations can become self-fulfilling.  Good government and far-sighted policies are more likely when everyone assumes that the electorate is intelligent and responsible.  But if the electorate is treated as though it is foolish and easily manipulated, it is more likely to throw up leaders and governments to match.  This is not because people are really stupid, but because such treatment encourages them to become cynical and apathetic, and to feel that scrutinising political parties and candidates is a waste of time.

Four year terms are really a vote of no confidence in the electorate, and will do nothing to reverse what appears to be a growing sense of public disillusion and mistrust in our political processes.  We need more, rather than fewer elections.

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Opportunities in Excellence

An address to the Compaq Computer Australia
Opportunities in Excellence luncheon series,
22 February 2000

IAN PENMAN, COMPAQ COMPUTER AUSTRALIA

I'm Ian Penman, Managing Director of Compaq Computer Australia.  It's my pleasure to welcome you to the eleventh Compaq Opportunities in Excellence luncheon.

Before introducing our guest speaker I would like to quickly recap on the progress of our seminar series.  Our first Opportunities in Excellence luncheon was held late in 1995, and we're really pleased that a lot of you have been coming back many times to these sessions.

Today Compaq is the second largest computer company in the world, the largest supplier of PCs, servers and storage solutions, and the second largest global supplier of notebooks.  Compaq is also one of the leading professional services organisations.  We provide end-to-end, full life cycle services that cover systems design and implementation, management, and the support of networks, applications and systems.

The Canberra market is critical to our future success, so we are eager to hear your questions and thoughts over lunch today on how Compaq is serving this market, and how we can help you achieve your business goals in the future.

In our Opportunities in Excellence series, we always strive to deliver topics that are relevant and speakers who can entertain as well as inform.  The feedback we have received over the years indicates that we have been meeting those objectives and today's topic and speaker is certainly no exception.  Compaq's role for today's lunch, and the entire series, has always been that of a facilitator.  We are non-partisan, providing the forum for independent experts to provide their views on key issues confronting Australian industry and government.

One such issue is the development of regional Australia which has been top of mind in government circles lately, particularly following the Prime Minister's "Listening Tour" of regional areas.  Australia is moving quickly from the industrial age to the information age and we must address how we manage this change in ways that give our regional communities their best opportunities for a secure future.

In October 1999, the Honorable John Anderson called the Regional Australia Summit because he said he is worried that regional Australia is not sufficiently prepared for the information age.  The Summit participants discussed areas of importance including access to telecommunications services and the rollout of necessary infrastructure, e-commerce and teleworking opportunities, the delivery of Local, State and Federal Government services, the ability to attract new industries to regional areas and the role government plays in this, and the retention of skills in the regional areas.

At the end of the Summit, the participants defined a vision for regional Australia, which is:  "a strong and resilient regional Australia which has the resources, recognition and skills to play an equal role in building Australia's future and is able to turn uncertainty and change into opportunity and prosperity."

To share his expert opinion on the future of regional Australia, I would like to welcome Mr Richard Wood, Councillor on Commerce Queensland's South-West Region Council.  Mr Wood will discuss many of the issues covered in the Summit and outline the growth pattern for development in industries such as call centres, value added processing, transactional centres, and community banking.  He will also cover Australia's opportunities to increase its economic competitiveness through the development of its regional areas, including expansion into Asian markets.

Mr Wood is widely recognised as an expert on this topic, having written numerous publications and research papers about the development of regional Australia.  He has been in his current role with Commerce Queensland since 1997.  Educated in Toowoomba, Mr Wood commenced his career establishing his own financial management practice in March 1996.  With an entrepreneurial spirit and vision as Managing Partner, he has developed and guided his business to where it is today, providing solutions for Accountants, Banks and Business globally, delivering leading risk management, relationship and portfolio management and monitoring capabilities.

Unlike traditional accountants, Mr Wood does not position himself as external to his clients' businesses.  Where possible, he becomes a part of the client -- knowing as much about their operations and corporate and marketing challenges as possible.  This provides a sound foundation from which to develop financial and accountancy strategies which are tailored to meet their individual requirements.  Importantly, it also allows him to identify business opportunities for his clients on a progressive basis, and combat any commercial threats before they take effect.

Ladies and gentlemen, please join me in welcoming today's speaker, Richard Wood.

MR RICHARD WOOD

I would like to thank Ian Penman and Compaq Computer Australia for giving me the chance to address one of the major issues facing Australia into the 21st Century.

We live in exciting and strange times.  The world is experiencing growth in opportunities and wealth not seen since the latter part of the 19th century.  Yet there is a deep angst in the community, particularly in rural Australia.  Why?  In term of microeconomic outcomes, the reforms put in place over the last 15 years has paid off in a big way.

The Australian economy is humming.  According to Paul Krugman -- one of the world's most respected economists -- Australia is a "miracle economy".  It has withstood the Asian crisis without missing a beat.  It is into its eighth year of economic growth.  Since 1996, GDP growth, adjusted for population and inflation, has been near the top of the pack in the OECD.  Productivity is growing at over 2.5% -- more than double the rate achieved over the 1970s and 1980s.  In short, we are experiencing growth in the overall economy and in productivity not seen in Australia since the 1950s.

Wealth has also grown steadily for most of the last decade, reaching a growth rate of 10% last year.  Wealth is also being distributed quite evenly in relative terms.  Australia now leads the world in share ownership and is at the top of the pack in home ownership.  Inflation -- which in the past has ravaged people on fixed incomes -- is down and under control.  Moreover, the intensity of competition is up across the economy.

A U.S. magazine, Site Location -- a bible for people seeking to relocate footloose investment projects around the world -- rates the business climate in Australia as the best in the world after the U.S. Electricity, telecommunications and gas prices are down, as are rail and transport charges.

Despite the noise from the "social justice industry", the distribution of income -- adjusted for transfer payments, taxes and housing subsidies -- has narrowed over the last fifteen years and poverty has declined.  These outcomes have not been a fluke;  they are the explicit result of ongoing reform implemented by governments of both parties over fifteen years at both a State and Federal level.

These improvements also have been driven by major global changes.  We are currently going through not one, but two revolutions;  a bio-technology revolution and a communications revolution.  These are creating huge opportunities, but also huge uncertainty.  They offer growth and wealth but also impose change and adjustment.  Of course, nations can opt out, but the cost of doing so is higher than ever.

Despite the benefits of reform, despite the good overall economic outlook and despite the improved distribution of wealth and income, we are experiencing a backlash against reform.  Of course the existence of a backlash per se is not surprising.  Some people are inherently risk averse.  They don't like change.  But more importantly, they don't like the rate nor breadth of change.  Institutions that were bred under the old circumstances are having their reason for existence challenged.  People who had advantages in the old system are losing them.

What is surprising is both the severity of the backlash and where it is coming from -- the bush and regional Australia.  After all, was it not the National Farmers Federation with their fighting fund who led the push for reform?  Weren't many of the reforms specifically aimed at improving the exporting sector which is located overwhelmingly in the bush?

This is not just an academic issue.  The backlash is threatening good government.  Governments of all persuasions are chasing their tails to mollify rural constituents.  This is not only slowing reform but also encouraging politicians to waste scarce funds by building pyramids rather then productive assets.  Importantly, it is also feeding a culture of dependence in the bush.

While it is true that by almost any indicators, sections of the bush are falling behind socially and economically, the bush is far from a basket case -- though you would not reach this conclusion by reading the press.

These imperatives gave rise to the National Regional Summit held last October in Canberra.  Although the Summit didn't try to lay out a strategy, it did attempt to address "the vision thing" and did a good job at it.  First, the Summit concluded that, "a strong, resilient regional Australia has the resources, recognition and skills to play an important role".  What this means is that the bush is not a basket case and it has a role to play in the growth of Australia.

Secondly, and this is the important part, the Summit concluded that, "the task is to enable the bush to turn uncertainty and change into an opportunity and prosperity".  In other words, the Summit concluded that there is no going back on reform and that an openness to the global economy is essential to the bush.  Good stuff from Canberra!

Although the Regional Summit didn't lay out a plan, its various speakers did map out the essentials of a successful regional development strategy -- a strategy which I fully endorse.

First, they made it clear that to be a successful strategy it had to emanate from the local community.  Strategies handed down from on high -- from Canberra or Sydney or Melbourne or Perth -- do not work.

Second, local commitment to growth is the key.  Communities that are against growth or attempt to lock themselves away from the market, not surprisingly, do not grow and provide few opportunities for young and old, working and dependent people.

Third, the task is to understand the weaknesses and strengths of the local community;  to understand the forces driving change;  and to take advantage of opportunities and minimise the threats.

Fourth, the strategy must start with what one has rather than with a clean slate.  For many rural communities this means building on the existing agriculture, mining or resource base.

Fifth, communities must embrace new opportunities and technologies.

Sixth, government has a major role in providing key enabling infrastructure.  Importantly the infrastructure of today is fundamentally different from the infrastructure of the past -- trains and roads are not the priority they were.  Today's infrastructure priorities lie with telecommunications and biotechnology.

What I would like to do now is go through some of the drivers of change and then go on to look at some challenges and some opportunities.

There are four defining population trends.  First, people are looking for a slower pace of life down at the beach -- they are drifting to the coast.  Over the last ten years, 1.3 million people have moved to the northern New South Wales coast.  A similar trend is discernible in Victoria and Western Australia.  Retirement decisions and the search for a "Seachange" drive much of this.

The second trend is the expansion of sponge cities.  People are leaving the smaller inland country towns in droves and moving to regional centres like Dubbo, Bendigo and Bunbury.  These regional centres are growing rapidly and at the expense of their surrounding areas.  This trend has been in evidence for some time but has accelerated in recent years.

Third, there are regional places of opportunity.  There are a range of places that are growing very rapidly.  The classic examples are Karratha in northwest W.A. and Rutherglen on the Murray in Victoria.  Karratha is booming thanks to its abundant gas and oil reserves.  Rutherglen is booming thanks to wine and tourism.

Fourth, the growth of "global cities".  Leading industries are increasingly becoming concentrated in specific locations.  For example, if you are in the Internet start-up business you at least have to have a foothold in Silicon Valley.  If you are in the fashion business it is Paris or maybe Hong Kong.  In the motion picture business, it's Los Angeles or perhaps Bombay.  As these global cities grow, benefits flow from them to their hinterlands.  Although Australia has no dominant global cities, its capital cities do have potential to play a vital niche role in global markets, which, if achieved, will offer huge benefits for the bush.

Sponge cities are set to grow, and the fundamental reason is better roads, better cars and consumer choice.  Why are people abandoning local businesses in inland country towns?  The reason is simply:  cars are better, roads are better, and there is more choice for consumers in the regional cities.  In short, rural community members are voting with their feet and going to areas of greater choice.

Another thing causing the depopulation of smaller towns is the aging of the farming population.  The average age of farmer today is 52 years.  Their parents have already retired -- largely to the coast or city -- and many farmers will shortly join them.  The youth are also leaving rural Australia, mainly for the bright lights and universities in the capital cities.  Many do not return to regional Australia.  Those that do go overwhelmingly to sponge cities.

What these trends mean is that many small inland towns are going to continue to decline, particularly small rural towns based on broad acre agriculture and forestry.  The enemy is not globalisation, economic rationalism or Canberra but rather rural people voting with their feet to shop elsewhere.  More importantly, we haven't seen anything yet.  The Internet is going to offer a huge increase in shopping options and place enormous competitive pressure on local shops in rural areas.

Another factor driving change in rural Australia is the changing structure of world demand.  The world is changing, not by some grand plan, but rather by people pursuing their preferences through the market place.  We are getting wealthier.  We are spending more on services rather than goods.  Accordingly, the agricultural sector as a whole is declining steadily as a share of GDP, while specialist high price crops are booming, as is the demand for value-added agricultural products.

Although the primary industries -- agriculture, mining and forestry -- are declining as a share of GDP, they remain vitally important to the non-metropolitan regions.  The agriculture and resource sectors still account for about 58% of exports.  They still account for the bulk of businesses and economic activity in rural Australia.  These sectors account for 14.5% of the workforce in rural areas.  More importantly, many of the jobs in the services and manufacturing sector are driven by the agriculture and mining sector.

This brings us to the real cause of rural Australia's problem -- its dependence on declining industries.  As these charts show, the decline in employment in rural Australia has been driven primarily by the decline in agriculture and, to some extent, mining.

What is driving the decline in the primary sector?  Simply put, the terms of trade have been declining continually for decades.  Since most agriculture and mining commodities are necessarily exported, Australian governments have no real capacity to do like the Europeans and Americans and cuddle the bush in masses of protection and assistance.  As a result, Australian farmers and miners have, and must, continue to be internationally competitive by improving productivity, being innovative and keeping costs in check.

People have been hoping and praying for a new resources boom for decades, hoping that the world would run short of resources which in turn would yield huge windfall gains to Australia.  This has not happened and probably will not happen in our lifetime.

We have been trying to convince the Americans, Europeans and Japanese for years to jettison the madness of agricultural protection.  We must continue to do so, as nothing could be better for the bush than lower trade barriers for agricultural products -- it offers the potential of injecting $2 billion a year into the income of Australian farmers.  Nonetheless we can not rely on trade reform being a reality soon.

Therefore we must focus on improving productivity, lowering cost and adjusting to markets.  Which means more change in the bush.

The question is why is the bush in revolt?  The reason is that the bush is basically made up of two groups -- one made up of people and groups involved in the international competitive agricultural and mining sectors, and the other made up of people working in protected and inefficient government businesses and services.  The groups are, as it turns out, mutually exclusive.  The primary sector cannot flourish nor any longer afford a bloated, inefficient set of public trading enterprise.

For most of this century governments have used their trading arms as rural job creation schemes.  As a result of these policies, public trading enterprises accounted for 40% of service employment in rural areas.

For years this was sustained by the huge wealth of the land.  As a result of the sustained decline in the terms of trade, the agriculture and mining sectors could no longer carry the burden of over-manned and slack support industries.  Changes were needed if the primary sector was to remain viable and these changes have been put into place over the last fifteen years.

The result was large reductions in the workforce in trading enterprises, particularly in rural Australia.  Over the last decade 33%, or 100,000 people, have been cut from the workforce of these organisations.  Roughly half of those were in rural and regional Australia.

There are some positives to the reform.  First, it has given the primary sector greater capacity to compete and, if not to grow, to remain viable.  The reforms have also aided the growth of private sector service providers.  Much of the decline in public sector employment -- even in the bush -- has been offset by growth in the private sector.  Some of the workforce was simply shifted over in full to the private sector via privatisation.  The reforms have also given rise to a new range of private sector providers which have filled niches opened up by deregulation and economic change.

For the nation as a whole, the growth in the private sector workforce has more than compensated for the reduction in the public sector work force in the telecommunications, rail, road, and electricity industries.  While there is hard data on the impact on the bush, my guess is that the growth in private sector service jobs in the old utility industries has not been enough to compensate for cuts in the public sector.

It isn't only the public trade enterprises, but also the banks and other private infrastructure providers that are going through radical change.  Up until the mid-1980s, banks were highly protected from competition, pricing decisions and the need to invest in technology.  As a result, banks maintained highly inefficient practices such as keeping a large under-utilised network of rural branches.  It was a happy cartel.  In the 1980s the cartel began to crack and the banks -- staffed more by bureaucrats than businessmen -- reacted with stupidity that nearly sent two of the four major banks into bankruptcy.

As a result, they entered the 1990s in a real hole -- with a huge load of non-performing loans, layers of inefficient practices and an excessive investment in bricks and mortar.  They also were hit by a technological revolution and a wave of new and agile competitors.  They had to change or they would be driven out of business.  They had no fat to live off, they were losing customers in droves and their customers where demanding new electronic services.

The cost imperative of adopting new technology for the banks was overwhelming.  Transactions at ABMs cost 66% less than the same transaction at branches.  Telephone and EFTPOS are even cheaper, while Internet banking is 99% cheaper than branch transactions.  Even so, the push toward electronic banking did not come primarily from the cost side.  Customers were increasingly demanding and adopting new forms of transactions.  Over 70% of bank transactions are now done outside branches via electronic routes.  The competition from new providers is fierce.  In the past people joined a bank for life and let the bank handle all of their financial transactions.  Now loyalty is gone.  People spread their business across a range of providers.  Importantly, the home loan -- formerly the most lucrative business for banks -- is increasingly going to Aussie Home Loans and other home loan providers who offer one service with no bricks and mortar at all.

Banks are starting to react.  What's driving this?  Profits, yes.  Banks have responsibilities to their shareholders.  But it's largely market driven.  Why is there a decline in banks' branches in small regional centres?  People are doing their shopping in the sponge cities and not in the rural areas -- and they are getting their money through EFTPOS rather than over the counter.

Simply put, the decline in rural bank branches is being driven by rural people.  And this is not going to change.  It is not going to be solved by declaring laws that force banks to continue to operate branches that nobody wants.

There is a new paradigm out there.  Things have changed.  There are new industries and opportunities and new policy priorities that have to be addressed.  First, the consumer is king.  In the end the ability or willingness of governments to limit technology and consumer choice is greatly limited.

Second, this is the age of the subcontractor;  not just in government, not just in big firms, but throughout business activity both here and abroad.  Organisations are increasingly focusing on what they do best and contracting out other things to other people.  This is creating huge opportunities buy also threats to rural and urban life.

During the 1950s, Australia had what is best called a "workfare" state.  The Government focused on providing jobs through public trade enterprises and nation-building facilities.  The policy was to ensure people had work -- workfare -- rather than providing passive assistance -- welfare.

In the 1970s things changed for a variety of reasons.  Whitlam created the welfare state.  The "workfare" state -- providing jobs through public trading enterprises -- began to cost too much in terms of taxpayer-funded subsidies and excessive charges on exporting industries.  Given limits to peoples' willingness to pay taxes, governments were forced to make a choice between workfare and welfare and they choose the latter.

This not only supported the move to improve the efficiency of trading enterprises but also led governments to focus less on institutions and more on individuals and less on inputs and more on outputs.  As a result, when people leave rural areas, governments tend to ensure that funding for services such as schools, hospitals and aged care follow them.

A priority of government is to fill the gaps left by the private sector and the reform process.  This is particularly important for the bush.  One area of concern is the gap in "network facilities" such as banking, the post, air transport and telecommunications.

One way to address the problem is to have regional community transaction centres that pool the various networks systems and providers.

Another important approach for regional Australia is in the provision of tele-medicine and tele-education services to overcome the loss of hospitals and schools.  One of the biggest problems in the bush is that GPs and teachers don't want to stay there.  It's not that the income is too low, it's just that they don't have the high-tech facility or colleagues to draw upon that they have in the cities.  Tele-medicine and tele-education facilities can help overcome these problems.

One potential solution to the decline in face-to-face contact is Bank Bendigo's innovative community banking solution.  Bank Bendigo has responded to community concern about the closure of bank branches by asking communities to put their actions and money where their mouths are.  It goes to communities that have lost bank branches and says, "We will provide you good, sound banking services through branches, if you take equity in the branch, patronise the bank and get a large number of customers to come on board".  It's a good community solution to a problem, and it is a model that is driven by commercial sense and by technology.  It's also been very profitable for Bank Bendigo.

The reforms and the changes in the bush have produced many success stories, most impressively in the food industry.  Few other industries have offered so much and delivered so little.  Study after study has found it to be an industry of huge potential, but also an industry that has failed to meet its potential.  It has been diagnosed as being too inward looking, fragmented, dominated by cooperatives, and having poor international linkages.  Well, banking, like many other industries, has been put through the wringer by the reform process and some sections, at least, are coming through in very good shape.  The are growing rapidly -- areas such as in the Goulburn Valley in Victoria -- and are creating burgeoning, sustainable growth.

Another success story is the wine industry.  Australia now exports over $1 billion in wine per year and has three of the top ten wine export companies in the world -- which is impressive given that Europe still accounts for 70% of the world's wine trade and Australia for less than 5%.  Australia also has the second highest average value of wine sold on the world market -- after New Zealand.

High-tech cotton and the tree farming business are also Australian success stories.  Australia is one of the few countries in the world that is actually increasing its standing stock of forest -- both native and otherwise.

Biotechnology offers great potential to rural Australia.  It offers the potential for lower costs and lower pesticides and herbicides use.  It offers more salt and drought resistant varieties.  It offers the potential for new crops and new crop rotation systems.  This potential is under threat from what I call the NIMPYs (Not in My Plate Yet) -- people who fear the technology on religious grounds or for competitive or social reasons.  Their campaign has gained the attention of the public and has the potential to stop the new technology altogether.

The Howard Government is doing an extremely good job at attempting to counter the scare and deal with the fear associated with the technology as well as promoting the development of the technology.

Another area that has grown dramatically in recent years, thanks to reform, is the call centre industry.  Two things are surprising about this industry:  its size and its potential.

Call centres are creatures of change, driven by advances in communication technology, globalisation and privatisation.  New technology offers companies scope to make huge savings in a wide range of communications with customers.  It offers the scope to centralise communication thereby reaping economies of scale and the benefit of specialisation.  It also offers the potential to accumulate a wider range of information about customers and have greater knowledge about their demands.

Globalisation and technology have allowed the task of communication to be separated not only from head office but also from the restriction of geography and nation-states.  This has given rise to the new global call centre business.  For example, centres located in New Zealand are currently providing customer communication services to electricity firms in California.

The call centre industry has been greatly assisted by reform and competition in the telecommunications industry.  As the price of phone calls has declined and the number of competitors increased, the scope for communication aggregators have grown.  This clearly has been the case in Australia.

Up until 1996, the call centre sector in Australia was small and limited to a few large firms.  In 1996, the Government reduced tariffs on imported equipment, allowed a greater range of suppliers to enter the market, allowed the entry of new telecommunications firms.  As a result, the call centre industry has grown more than ten-fold in three years.

Privatisation has also given call centres a large boost, as it has brought in new ways of operating and new ideas and standards of service.

The call centre industry is, not surprisingly, particularly strong in North America.  In 1998, the U.S. had 70,000 call centres with a total workforce of 2.5 million workers -- which is almost 2% of the total U.S. workforce -- and revenues of $24 billion.  The experts forecast that the number of centres in the U.S. will grow to over 100,000 by 2003, while employment will push 3% of the workforce, and revenues will approach nearly $50 billion.

In Australia, the experts estimate around 250,000 people currently work in call centres -- up from just 60,000 three years ago.  If true, this means that more people work in call centres than in the banking sector altogether.  Put differently, for every job lost in retail banking over the last decade, call centres have created nearly four new jobs.

Contrary to earlier concerns, the advent of the Internet is strengthening rather than undermining the growth of call centres.  Traditional call centres are based on voice communication via phones.  As people increasingly shift away from phones to the Internet -- as is already happening -- it was feared that call centres would lose their comparative advantage.  To date however, the growth of e-mail has increased the demand for call centres -- not as phone communication centres but as centres for processing of e-mail and other Internet communications and transactions.

In short, the Internet is creating a huge increase in communication flow that needs to be managed and call centres are filling this niche.

Call centres first started around 1985, providing a basic answering and bill paying service.  They have now advanced to providing a customer advisory and research service.  The next trend is expected to be into customer database management and profiling.  The centres have, like most industries, moved steadily up the valued-added chain, adding new, more advanced services, demanding higher skills and paying higher wages.

Importantly for rural Australia, call centres are a global business in which rural regional are highly competitive.  Call centres need good communication facilities, large amounts of good quality office space, articulate English-speaking people and people able to pick up technological skills -- attributes that many rural centres in Australia have in abundance.

Many such centres are attempting to exploit this advantage and some are doing so quite successfully.  For example, Bendigo, which is a major hub on the trunkline between Melbourne and Sydney, has more than 200 large call centres and a number of others on the drawing board.

Of course, the call centre industry is a highly competitive, global industry.  No region has an absolute advantage.  Moreover, the competition from overseas is increasing.  One of the main sources of competition is India.  India has 300,000 employees in the call centre industry, and this is expected to swell to more than one million in a few years time.  India, with its low cost but highly skilled software and engineering work force, is particular strong in advanced call centres providing advisory services.

One of the disappointments of the Regional Australia Summit, and much of the debate about infrastructure in rural Australia, is that it has focused on old technology -- trains and roads.  These are important but not as important as telecommunications infrastructure.  The fact is, most of rural Australia is already well served by a high quality road network.  Although the train system in Australia leaves much to be desired and is in need of improvement, it is not central to the renewal of rural Australia.

In contrast, telecommunications is the key to the renewal process.  It is the key to the new growth industries.  It is vital to keeping small towns in touch with the world.  It is crucial to the competitiveness of sponge cities.  It is crucial to improving or even maintaining community and network services to rural Australia.  It is also an industry going through massive change and innovation demanding new investment and experimentation.

Telecommunications, therefore, must be the key focus of rural renewal.  And there is a long way to go both in terms of quality and services to improve the services in the bush.

But we must jettison the approach of the past where the bush was treated as a welfare case, supplied and subsidised by a benevolent monopolist under the direction of governments.  This did not work in the past and certainly will not work in the future.  Telstra is a private firm struggling to remain viable in a highly competitive global industry.  It no longer has the incentives or capacity to be the best provider of services or technology to all of rural Australia.

The answer lies in using competition -- which has worked so well for the cities -- to the advantage of the bush.  Thus, instead of having Telstra provide and fund telecommunications services to the bush under its community service obligation -- valued by the Government at $280 million per year -- the provision of community service obligations should be put out to competitive tender.  This should be done not only as a means of getting more services per subsidy dollar but to get new ideas and technology into the bush.

Optus and AAPT have made it clear they could provide better and cheaper service to the bush than is currently provided by Telstra.  Moreover, new rural specialisation could spring up as it has in the U.S.  Given that Telstra's rural infrastructure is old and fully amortised, the subsidied rates are unlikely to be adequate for funding a new infrastructure.  As such, an additional source of funding will be required.  The obvious source is Telstra -- that is, the sale of its remaining 51%.  Once Telstra loses its last remaining monopoly -- services in rural Australia -- government ownership is simply unnecessary.

To sum up, the backlash from the bush is, to a large extent, a problem of the bush.  Sections of rural Australia lead the fight for reform and they have been one of the main beneficiaries of reform.  Other sections of rural Australia have been most adversely affected by reform.  This tension needs to be in a large part resolved within rural communities.

Second, economic development must be based on what we currently have and what opportunities are currently available -- and that means focusing on improving the prospects of the primary sector.

Third, we have to do away with the idea that the bush is buggered.  There are many examples of success stories and there are many opportunities created by reform.

Finally, we need to focus our infrastructure efforts not on the technologies of this last century but rather those of the 21st Century -- telecommunications and biotechnology.  We also need to use the institutional frameworks of today -- global firms, competing locally -- rather than the institutions of yesterday -- government monopolies acting slowing and poorly.

Thank you very much.

QUESTIONS

If you are a sponge city, you might be okay, but if you are in a non-sponge town, what is going to drive your survival in the future?

Sponge cities are basically driving the population and activity from the adjacent areas.  If you live in a small town that isn't on the coast and doesn't have a mine next to it, well, you are going to shrink to a large extent, mainly because people themselves in those communities are driving the sponge city.  So what do you do?  You make the best of your facilities, you make sure the towns are kept in touch with a variety of areas that I've explained and also, most importantly, you focus on developing the competitive advantages that lie in that area, whether it be tourism or value added processing.  The real question is do you stop this process of services flowing with the demand?  No, I think not.

What is this emphasis on call centres?  To me, call centres seem to be verging on sweat shops, and that is why they are being drawn to places like India where labour is cheap.

First of all, work is work.  It is valuable particularly in a dying town and in a sponge city.  Second, call centres are for low-income workers.  In the U.S. there are major changes in the fundamental nature of call centres -- instead of just answering services, they are into data processing and greater knowledge of the customer base, and wage rates are above the average.  That is, the average wage rate in American call centres is US$32,000 for a full time employee, and that is higher than the average weekly wage of a full-time employed male worker.

We are getting changes in growth in the nature of call centres.  India is not only a call centre haven, but also much of Microsoft Window 2000 code was written in India.  Back to the point, call centres are the processing plants of the future, and as they did with other processing plants, they will add technology and improve productivity and wage rates.  But they are entry-level jobs, and that is exactly what is required in the bush if you look at the demographics.  A job is a job.

How do you entice companies to move or expand their operations into regional areas?

One of the issues that I didn't deal with was regional development policies -- how do you entice firms to locations and the issue of subsidies.  My firm belief after 20 years is that subsidies are best.  If you don't have your fundamentals right in certain areas, they won't go, or they will go for a while until the subsidy dries up and then they will move off.

You also have to draw on the competitive advantage of the areas.  Goulburn Valley did not have to entice firms to its area or provide subsidies of any sorts because it had competitive advantages.  Subsidies can be a benefit and a necessity, but they are also a pollution of the process.  Take call centres -- one of the biggest problems in the Goulburn Valley is that state governments have poured their largesse -- millions and millions of dollars -- into bringing call centres into the area, otherwise they would have located in places like Bendigo and Ballarat.  So regional assistance is a necessity.

One of the beneficial effects of the Regional Summit was that for too long we've looked at regional development as a top-down, government-led process -- a planning process of industrial development.  But it isn't, it is basically a community driven, locally driven and organic process, and too often regional development processes stop that from happening.

IAN PENMAN, COMPAQ COMPUTER AUSTRALIA

I would like to thank Richard for certainly giving us a real insight into some of the issues, some of the opportunities and some of the imperatives for regional development within Australia.

On behalf of Compaq, I would like to thank all of you for taking the time to attend today.  I hope you found it as interesting and as fun as I did, and of course we would be delighted with any feedback you can give us from today's session.  I hope to see you all again at our next in the series of Compaq Opportunities in Excellence luncheons here in Canberra.

Licensing Policy Created Cash-for-Comment Climate

Letter to the Editor:

C (Media 10/2).

Not only did the report display an acute sense of media tactics, particularly those of Alan Jones, and of the difficult issues -- such as cash for no comment, or sins of omission -- it also showed an understanding of the genuine difficulties that regulators face.

Legislation encouraging lots of QCs at 20 paces is not the way to go.  Heavy regulation typically discourages entry to industries, and favours large players over small ones, by raising cost thresholds.  There are already too many direct and unnecessary restrictions on entry to broadcasting without adding indirect ones.

As Day points out, the current arrangements have exposed bad practices and provide levers which stand a good chance of stopping them.

The ABA is not, however, guiltless in the affair.  Its "magic number" approach to commercial FM radio licences, where Sydney has the same number as Perth even though it has five times the population, and the failure to add a single commercial radio station in Sydney since 1981, despite a 75 per cent real growth in advertising revenue since 1981, creates a premium value to radio stations in Sydney which is an incitement to abuse.

The ABA's disclosure requirements represent an attempt to empower the consumers by making them more informed.  Giving them wider choice would empower them even more by making it easier to switch to a similar product, so increasing the constraints on media players -- see my forthcoming policy paper Broadcasting Planning and Entrenched Protection of Incumbent Broadcasters to be published by the Canberra University's Communication and Media Policy Institute.

I am not surprised that, as Day points out, there has not been a big drop in ratings for John Laws and Alan Jones.  The effects of these things generally take time to work through, as people discuss it among themselves, and have more time to think about it.  It will indeed be interesting to see how the ratings go.

Given that rather too much Australian journalism and media has a tone that might be best described as "undergraduate", measured good sense in journalism such as Mark Day's is to be particularly respected.

Correction:

Mike Byrne (Media, letters, 24/2) is quite correct, I miswrote when I said that Perth has the same number of commercial FM stations as Sydney.  What I should have said is "The ABA[s] ... 'magic number' approach to wide-coverage FM radio licences, where Sydney is to be allcoated the same number as Perth".  My error.

Here's Humpty, Dressed in Green

"When I use a word", said Humpty Dumpty to Alice, in Lewis Carroll's classic children's story, Through the Looking Glass, "it means just what I choose it to mean".  It was, suggested Humpty, really a question of power.  He would have loved "the precautionary principle", which has become the favoured mantra among environmentalists.

The basic idea sounds sensible -- if scientists are unsure whether something might damage the environment, authorities should act to prevent harm from occurring.  The Humpty Dumptyish aspects stem from the impossibility of agreeing what this means in actual practice, which allows environmentalists to invoke the precautionary principle to justify any anti-development campaign they fancy.

Over the past two decades increasingly expansive versions of the principle have been formulated and introduced into international agreements.  The Rio Earth Summit in 1992 adopted the phrasing "where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation".

But the "cost-effective" qualification upsets the greens, who believe that their ideas of what is good for the environment must be given first priority, irrespective of the costs or consequences.  So Greenpeace documents usually omit this qualification, even when they supposedly quote the Rio agreement.

And the most recent international recourse to the precautionary principle, the Biosafety Protocol concluded in Montreal last month by over 130 countries, says nothing about cost-effectiveness.  Environmentalists were delighted, hailing the document as providing the strongest formulation of the principle to date.

Many people may think that if environmentalists are happy, we should all rejoice.  If the precautionary principle helps to save the planet, surely there can be nothing to complain about.

But following the greens' lead on this matter is most unwise.  Part of the reason is to be found in one of the most important insights that environmentalists themselves have promoted -- the need to see our world as an intricately related whole, rather than as a collection of largely unconnected parts.

The physical, biological and social components of our environment form an extraordinarily complex and dynamic system, which means that there will always be uncertainty about the effects of any actions, no matter how seemingly innocuous or benign.  The fundamental question is how best to deal with this uncertainty, which applies to all aspects of our life, and not just the natural environment.

In arguing for the precautionary principle, the greens urge us to take a "risk-averse" approach to nature, which they portray as "fragile" and potentially threatened by any technological changes.  On the other hand, they are cavalier about the dangers their utopian political programs might pose to social order, despite indications that human social arrangements are at least as "fragile" -- if not more so -- as natural environments, and evidence that social breakdown in modern nations quickly leads to ecological disaster as well.

One way of understanding the dangers of a "risk averse" approach is to consider the harm that overprotective -- or "risk-averse" -- parents can do.

By preventing their children from playing any demanding sports, or by forbidding them from ever going on unsupervised outings with their friends, parents may save their offspring from some hazards, but usually at the cost of stunting their long-term physical and emotional growth.  Children from families who take a more balanced approach might run the risk of suffering the odd broken limb or brush with authority, but they will probably be better equipped to cope with the unpredictable crises they will encounter later in life.

The late Aaron Wildavsky, a social scientist who wrote much good sense about risk, liked to point out that we live in a world in which safety and danger are inextricably intertwined.  Under certain conditions things which benefit our lives can also destroy them -- the electricity which powers our homes and workplaces can electrocute, and the fire which cooks our food or warms our bodies can also incinerate.

Had our distant forebears taken the precautionary principle to heart we would have walked away from every technological advance starting with the domestication of fire, and we would still be living like our primate cousins.

Greens invoke the precautionary principle in order to shift the burden of proof onto the proponents of new technology, who are told they must demonstrate that their projects will not cause any harm before they are allowed to go ahead.

This is an impossible demand, which ensures that any developer who proposes something that greens don't like can invariably be stymied, just as Humpty Dumpty continually wrong-footed Alice.  Ronald Bailey, an American commentator on environmental issues, recently wrote about his conversation with a prominent bioethicist and supporter of the precautionary principle who gleefully told him "whoever has the burden of proof loses".

There is only one sensible way of dealing with the unavoidable environmental and other uncertainties that we will always have to confront.  We should take a hint from nature, and realise that a species' ability to survive unexpected crises stems from its resilience.

Human resilience is strengthened by strategies which encourage a reasonable amount of trial and error and by developments which increase our wealth.  Third World countries clearly demonstrate that wealthy societies are in a far better position than poor societies to promote human and environmental health.

Yes, we will make some mistakes, as we have in the past.  But the lessons we learn from these mistakes expand our knowledge, ingenuity and control over resources.  This increases our chances of coping successfully with the really dangerous, but unknowable threats to the environment that humans are certain to face in the future.  Following the precautionary principle would be the greatest risk of all.

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Age Care

The recent scandal at the Riverside Nursing Home is everybody's nightmare.

Aged and helpless loved-one being first subjected to kero baths and then being threatened with evacuation to an unknown -- and probably far away -- place with little warning and virtually no choice.

Contrary to popular opinion the problem does not arise from lack of adequate standards or the failure of government supervision or inadequate government funding.

Rather the problem lies with too much control and responsibility being placed in governments and not enough on the nursing home owners and the consumers.

The Nursing home industry is one of the most tightly regulated industries in the country.  Through its control over licensing and funding, the Commonwealth has imposed detailed regulations governing every aspect of the industry including minimal level of services, staffing ratios, medical procedures and conditions facilities.

The Howard Government has mandated a new, more rigorous set of standards which all homes must meet by the end of this year.  The process includes regular audits and supervision by the government.

The Commonwealth outlays on nursing homes are high and growing.  The average government subsidy stood at $32,167 per nursing home place in 1997-98 and grew by 20 per cent over the previous three years.  Government spending on all aged care services grew by 8 per cent a year after adjusting for inflations over the 1990s.

However, the governments micro-management the industry is having perverse effect.

In effort to ensure standard are meet, control use and avoid disruptions, the government tightly controls the number of nursing homes.  This has the perverse effect of dulling the incentive to consumers and owners to maintain standards.  Because entry is restricted, rooms in nursing home are as scare-as-hens-teeth with waiting list in access on averaging of more than a month.  Residents or their carer are, therefore, willing to overlook poor standards to ensure that at least they have a room.  Some owners are willing to maintain low standards, in the knowledge that they will not be closed because of the absence of alternative facilities.

In an effort to insure equity, the Commonwealth tightly controls what the nursing home can charge so that the charges bear no relationship to costs.  As a result the Commonwealth meets 78 per cent of nursing home costs.  The Government also limits the provision of "above standard services" to ensure that all have access to the same standard of care.  These restrictions greatly limit the amount of money available to the industry.  They also has the perverse effect of removing the incentive to providers to do more and limit the ability of the customers or their carers to determine the pattern and mix of services.

The funding constraint will become acute over the next decade.  Demand for services is set to grow rapidly and the cost associated with adopting the new standard is estimated at be around $1 billion.

Although the ability of nursing home residents to affect choice is limited as most are frail and incapacitated, most have active carers who can act on their behalf.  Although most nursing home residents are pensioners and therefore have limited income, many have assets or families that can and should contribute more financially to the cost aged care.

In short, we are going to have to be given and to take more responsibility if avoid the nightmare of poor aged care.

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Price and Access Regulation of Gas Transmission Pipelines

A Submission Regarding the Regulatory Considerations of

• the NCC and ACCC on the Eastern Gas Pipeline and
• the ACCC on the Central West Pipeline

SUMMARY

This submission is designed to address issues that have been brought to a head by two new pipelines.  These pipelines are:

• the major new Bass Strait to Sydney (Eastern Gas) pipeline now owned by Duke Energy and nearing completion;  this is subject to regulatory reviews through separate ACCC and NCC processes
• AGL's Central West Pipeline, for which an access undertaking approved from the ACCC is required under the Gas Code and has been sought.

Ostensibly, the NCC decides if non-owners should have rights to access specific infrastructure, while the ACCC determines the price and conditions of that access.  Regulation of prices and access reduces the incentives to build private new infrastructure through the uncertainty it introduces -- and more so where asset builders have a certainty that the regulators will place downward pressure on prices.  Business regulation -- even where it simply seeks to reproduce the outcomes of a competitive market -- is now generally accepted as having detrimental effects on innovation and economic activity in general.  Hence, regulation of price and access, rather than underpinning the normal commercial environment for pipelines, should be in place only when there is a monopoly.

Regulation ostensibly mimics competitive outcomes and it follows that there is no place for regulation where there are two significant sources of supply.  From September 2000 when the Eastern Gas Pipeline is commissioned, there will be two major gas pipelines serving the NSW market and two effective gas supply sources.  This leads to our first recommendation:

• Revoke price and access regulation of the Moomba to Sydney Pipeline and place no regulatory requirement on the Eastern Gas Pipeline either by way of ACCC "undertaking" or NCC "Access Arrangement".

Relaxation of regulatory controls need to go beyond this.  The legitimate role for regulation is where infrastructure was put in place under a franchise that prevented rival supply or by government either as an exclusive or subsidised provider.  There are now no exclusive franchises and all opportunities are open to any entrepreneur.  Hence, new infrastructure can only be built where there is both a willing seller and a willing buyer and rivalry to supply the infrastructure ensures prices are competitive.  Regulators can always force lower prices but in doing so they blunt the incentive to build or reduce the quality of service.

This is particularly relevant with the Central West Pipeline, which is already covered to Dubbo by the Gas Code.  The ACCC in its Draft Decision required a lower tariff than AGL sought.  Our further recommendations seek a diminished regulatory role:

• The tariff for the Central West link to Dubbo be set on the basis of the AGL expectations at the time of committing to it.
• For any extensions of the existing line, since there is no franchise, there should be no requirement to provide a price undertaking to the ACCC nor should any party have a right to seek coverage from the NCC.

REFORMS, REGULATION AND PRODUCTIVITY

REFORM AND PRODUCTIVITY

In the early 1980s, according to Lawrence B. Lindsey the seeds were sown for the present 17-year boom of the US economy.  Lindsey argues that, "A new view of the economy came to dominate public policy -- a view that differed from the old in major ways:

• Successful deregulatory experiments in transportation served as a model for deregulation of other industries -- including finance and energy.
• Capital gains tax rates were reduced in 1978, and ordinary income tax rates were cut in 1981 and 1986.
• Economists came to see "supply side" management of both inflation expectations and the supply of labor and capital as at least as important as "demand side" management of spending power." ⁽¹⁾

Many of these same reforms took place in Australia.  The reforms to infrastructure services included corporatisation and restructuring integrated systems into separate and competing parts.  These structural changes were accelerated from 1995 with the National Competition Policy Agreements.  The outcome of the process has been spectacular productivity gains -- both when previous government owned monopolies were not divided into different competing units (as with Telstra) and when there was a full separation (as in gas and electricity).  The greatest gains have been in those firms that have been privatised -- telecommunications and Victoria's electricity and gas.

THE GENERAL ARRANGEMENTS FOR AUSTRALIAN COMPETITION POLICY

Under Part IIIA of the Trade Practices Act, owners of monopoly infrastructure services like gas pipelines were required to grant access to allow third parties to transport their own product over the network.  Access to infrastructure facilities can be brought about in three ways.

First by having "the Designated Minister, or any other person" apply to the NCC to have a service "declared", requiring the owner to allow third parties to use the facility.  The terms and conditions of that access can then be negotiated and, in the absence of a negotiated outcome, these are determined by the Australian Competition and Consumer Commission (ACCC).

Secondly, a provider or intending provider may approach the ACCC and offer an "undertaking" specifying terms and conditions of operations.  This grants immunity from legal challenge under the Trade Practices Act.

Thirdly, by a State based regime that the NCC has recommended is an "effective" access regime to the Commonwealth Treasurer and where the Commonwealth Treasurer has accepted that recommendation.  Eventually the State based regimes, at least in the Eastern States' reticulated energy industries, are likely to fall under the ACCC.

The ACCC cannot accept an undertaking if the service is already "declared".  Nor may the NCC recommend a service be declared if it is subject to an access undertaking.

COMPETITION POLICY ARRANGEMENTS FOR ELECTRICITY AND GAS TRANSMISSION

The approach for electricity under the National Electricity Market follows the general approach.  The first line of regulation in the system is the National Electricity Code Administrator, Code change decisions in which need to be ratified by the ACCC.

The ubiquity of electricity in interconnected systems has meant there is little at issue with access, except for the newly discovered element of "entrepreneurial interconnects".  These are essentially private lines that trade electricity between markets that are not fully connected and which therefore have price differentials.  The interconnects are to be regulated as de facto generators and need not offer open access to all users.  For these and other lines, the NCC and Ministers cannot seek to control price and access conditions of the service provider when it has had an undertaking accepted by the ACCC.  (This is known as the "effective undertaking approach").

In the case of gas, there is no economic regulation covering the overall production and distribution chain.  Rather, there is the National Gas Code, which is an "effective access regime".  On one interpretation, this requires access to conform with a comprehensive series of steps with price based solidly on costs that are defined in some detail. On this interpretation, which is the one adopted by the NCC, undertakings are largely irrelevant and do not prevent a party seeking "coverage".

Duke Energy, the owner of the Bass Strait to Sydney Eastern Gas Pipeline has put an undertaking proposal the ACCC based on the Trade Practices Act (s.44ZZA).  The ACCC has undertaken to pursue the Duke proposed undertaking indicating it does not share the view that the rigid Gas Code approach is the only route that must be followed.

This indicates a regulatory demarcation dispute in which the two parties:  the ACCC and the NCC, may have little in the way of substantive disagreement.  Indeed, it is worth noting that the Gas Code itself likens the process of obtaining an Access Arrangement to that of an Undertaking under Part IIIA.  It states

Under the Code, the owner or operator of a Pipeline that is Covered under the Code is required to lodge an Access Arrangement with the Relevant Regulator.  The Access Arrangement is similar in many respects to an undertaking under Part§IIIA of the Trade Practices Act and is designed to allow the owner or operator of the Covered Pipeline to develop its own Tariffs and other terms and conditions under which access will be made available, subject to the requirements of the Code.

Regulatory agencies can lose their influence if circumvented by rival agencies.  But unlike the demarcation disputes involving trade unions, those concerning turf battles by regulators are totally indefensible since regulators have no claim to represent any of the parties -- the regulators are purely a construct of governments.

REGULATION AND THE ENTREPRENEUR:  KILLING THE GOOSE

Successful though the competition reforms have been, they remain vulnerable to some of the same features that detracted from efficient management when the infrastructure industries were firmly under political control.  Chief among these is the intercession of a regulatory entity in many firms' crucial business decisions.  That intercession concerns price and access to facilities that are said by regulatory authorities to be natural monopolies.

Firms operating under regulatory supervision automatically incur additional costs.  These include management and other resources directed at pleasing and persuading the regulator rather than the customer.  And when, as normally occurs, the regulator seeks to become a champion of the customer, longer-term benefits of a robust and dynamic industry are often sacrificed for short-term gains in lower prices.

The major regulatory agency in Australia, the ACCC, now has powers that are arguably greater than those rescinded by governments under the National Competition Policy Agreements.  These derive from the ACCC's ability to grant immunity from court challenge where it makes a determination of the correctness of a particular course.  This and its corollary, an ability to prevent a development of which it disapproves, is tempered only by an appeal avenue to the Trade Practices Tribunal.  Such an appeal process is normally impracticable in the business world where deals must be struck quickly or not at all;  moreover, the Tribunal is composed of individuals who increasingly share a common philosophy with the ACCC.

That ACCC philosophy has a strong focus on the detrimental effects of monopoly which is seen to be able to charge excessive prices from customers.  In fact most such monopolies are short-lived since if they extract high prices this rapidly attracts competition.

In addressing the prices that firms it regards as monopolies may charge, possibly because of the frameworks set for the industries it regulates, the ACCC tends to adopt arithmetical and highly formulaic price-setting arrangements.  These centre on a form of profit control based on the Weighted Average Cost of Capital.

Any modern regulator's pricing decision can only work in one direction.  Since no regulator is in a position to restrict supply, its price decisions can never have the effect of raising prices above the market level. ⁽²⁾  The only effect can be to reduce prices.  Yet, forced price reductions also make it difficult for competitive rivals to enter the market.  Thus regulators' decisions tend to prevent competition, the very process they were created to enhance.  Forced price reductions have two other detrimental effects:

• they reduce the incentive of the owner to maintain the facility at its peak service levels, and,
• they deter new investment both by the owner and others in similar circumstances.

In short, a forced price reduction acts against the longer term interests of all consumers by discouraging investment in new facilities, preventing rivals contending the regulated facility and reducing the incentives of the regulated facility's owners to optimise service levels.

The National Competition Council's regulatory powers overlap those of the ACCC where the issue is access to essential facilities.  However, for gas pipelines the NCC can merely determine that the facility in question is "covered", that is its operations are subject to regulatory oversight on price and access.  The NCC having determined that the facility is covered leaves the subsequent price and access arrangements to be ultimately determined by the ACCC.

Regulatory agencies have a self-preservation interest in discovering the need to make judgements.  Both the ACCC and the NCC have defined roles for themselves where there is no monopoly in the sense that the facility cannot be duplicated.  The NCC, for example, has sought, with Rio Tinto's Western Australian rail facilities (which are readily duplicable), to require an infrastructure to carry its rival's products -- ultimately on terms that a regulator will determine.  Such requirements will lead businesses to defer expenditure on new facilities in the hope that a rival will undertake the expenditure and a regulator can be prevailed upon to grant access on terms more favourable than those that would emerge from negotiation.  The price expectations of regulators can be gauged by the outcome of reviews set out in Attachment 1.

The profit regulation and subsequent price sets are likely to lead to sub-optimal infrastructural development so that the owner can deny access because of capacity constraints rather than leave the process to well-meaning but short-sighted regulatory decisions.

The Achilles Heel of the Australian regulation reforms is the possibility that zeal to lower prices or prevent "wasteful" duplication of facilities will deter or distort new investment.  The performance of both our regulatory bodies demonstrates an over-willingness to intervene to set prices where such intervention is unnecessary.  Where, as with gas, there is also a demarcation dispute with both bodies seeking to assume control of the regulatory arrangements, there is a dual potential for unnecessary costs to be incurred.

THE NEED FOR REGULATION OF THE EASTERN GAS AND CENTRAL WEST PIPELINES

COMPETITION INTRODUCED BY NEW GAS PIPELINE

An additional pipeline brings new competition.  This means the basic premises on which the competition policy arrangements are set for infrastructure do not apply.  The regulatory arrangements are posited on natural monopoly, an oxymoron where new competition actually emerges.  Regulation in those cases contains all the inevitable downside costs but no upside benefits.

In principle, this is acknowledged by regulators.  Thus, the NCC said in one of its own publications, ⁽³⁾ "Against these benefits (of increasing competition by giving a business a right to use another business's infrastructure), access regulation can also entail costs if it is applied inappropriately or too widely."  Although such wording leaves the agency with maximum scope not to interpret its own activities as "inappropriate" or "too wide" this is a useful acknowledgement.  The NCC notes that such regulatory actions would be detrimental for a number of reasons but most importantly by reducing incentives to invest in infrastructure, rather than free-ride on others, thereby reducing overall competition.

REVOCATION OF "DECLARATIONS"

In its Assessment of the National Gas Access Regime, the NCC noted, "Three submissions [PG&E, Chevron and ours] argue that regulation of access to a pipeline becomes unnecessary when there is competition in providing services.  The Council concurs with this view, in the sense that regulation of a monopoly service seeks to replicate, as much as possible, outcomes in competitive markets." ⁽⁴⁾

Subsequently, procedures for seeking revocation were published.  These follow the same format as those seeking coverage and state, "Any person (including the regulator) may apply to the Council for revocation of coverage of a pipeline".

GAS TRANSMISSION IN NSW AND VICTORIA

The NCC has not made any public utterance suggesting that there is a case in view of the Eastern Gas Pipeline for revocation of the regulations covering gas pipelines into NSW.

We seek such revocation in this submission.  As the Eastern Gas pipeline squarely competes with the existing Moomba to Sydney EAPL line no regulation of either is warranted.  Regulation should be removed.  In practical terms this should proceed by:

• the draft undertaking being sought by Duke Energy for the Eastern Gas pipeline should be simply accepted without demurral,
• the now redundant coverage of the Moomba to Sydney EAPL line should be withdrawn (as it can be under s.44 ZZA(7) of the Trade Practices Act).

We make this application on the grounds provided for by the Council. ⁽⁵⁾  The procedures for revocation mirror those in the Code with regard to applications for coverage.  They provide that the Council must recommend that coverage be revoked if it is not satisfied that the pipeline meets one or more of the following matters:

1. that access (or increased access) to Services provided by means of the Pipeline would promote competition in at least one market (whether or not in Australia), other than the market for the Services provided by means of the Pipeline;
2. that it would be uneconomic for anyone to develop another Pipeline to provide the Services provided by means of the Pipeline;
3. that access (or increased access) to the Services provided by means of the Pipeline can be provided without undue risk to human health or safety;  and
4. that access (or increased access) to the Services provided by means of the Pipeline would not be contrary to the public interest.

Clearly, there is a rival pipeline system serving at least the NSW market.  It might be claimed that the pipelines do not fully compete and that only parallel pipelines meet this criteria.  Such a view of competition defines away the very concept.  If Ford can only be regarded as competition with Honda when it builds identical cars, the role for regulators usurps all competitive processes.

It might also be argued that the reserves in the Cooper Basin are less than those in Bass Strait and longer term the EAPL may face a disadvantage over the Eastern Gas pipeline in its source of supply.  This line of argument is intrinsically flawed -- no two fields are identical -- and is weakened by the time spans under consideration.  Thus it will be a decade from now before the Cooper Basin may be facing reduced reserves, and if it were facing reduced reserves there is little the authorities could or should do -- it makes no sense (and is anti-consumer) to hobble one competitor because of its rival's weaknesses.  Moreover, unless prevented by regulatory actions, there are likely to be new sources of gas entering NSW from Queensland, and the Connor dream of piping gas across the continent from WA may even be commercially possible.

The Eastern Gas Pipeline means the NSW market is open to the full gales of competition.  We have Coke versus Pepsi in pipelines to Sydney and the case for their regulation has disappeared.  With the construction of the Eastern Gas pipeline, the conditions that could warrant either an undertaking or any other form of regulated price and access conditions disappear.  The two pipelines themselves have considerable over-capacity and they will be engaged in a price war.  In short, the issue is not whether the ACCC or the NCC should have jurisdiction but why should either have a regulatory role.  With two pipelines supplying an area, as long as there is no collusion, the case for regulation rests solely on the benefits to the regulators themselves.

THE DIFFERENT MARKETING AND COST RECOVERY APPROACHES OF THE GAS CODE AND DUKE

The competitive pipeline process also allows competition in marketing approaches as a result of the different strategies of laid out in the Gas Code (which EAPL may follow) those of Duke.  Duke favours setting prices openly so that all possible users know what the price is and that they are assured of obtaining the lowest possible price.  This single price, which also finds favour with the consumerist inclinations of the ACCC, according to Duke offers customers more confidence in choosing to use gas since they know that they will automatically benefit from improved prices negotiated by a rival or any other similarly placed business.  The Gas Code takes a more individualistic line, one that focuses heavily on a business to business negotiating philosophy.  Although regulator sanctioned "reference" prices are likely to be the norm, the Gas Code envisages prices being set to meet individual customer circumstances and lower prices to a single customer being negotiated if the alternative is to loss of a sale

Ostensibly the Code and Duke also adopt a different approach to setting the overall amalgam of prices.  Duke has developed vectors of possible market outcomes based on different prices and volumes, has set its required rate of return and, competitive conditions permitting, intends to hold the same maximum real price over the course of twenty years.  The Code envisages the possibility of low start prices to bring new users into the market and capitalisation of early year losses which can be recouped later.  Prices are based on an explicit target rate of return rather than the Duke approach of an implicit target.

GAS-ON GAS COMPETITION

The benefits of deregulation also encompass Victoria since the Eastern Gas pipeline is to link with the Victorian system at Sale.  Already with the Albury interconnect EAPL and Duke have negotiated prices to allow the latter to service customers in the Sydney area with Bass Strait gas.  Some modest competitive pressure is evident in the NSW market.  With full-blooded competitive capacity, this pressure will also impact on Victoria.  Duke has already signaled the backhaul rate it intends to offer for gas from Sydney to Sale.

The ACCC has been campaigning to try to have the partners in the Moomba Basin and in Bass Strait market their gas separately rather than as joint ventures.  This would clearly reduce the price.  It is not however possible for the Commission to dissolve the contractual arrangements that permit joint marketing arrangements to continue, which is just as well since the damage done to property rights from such an intervention would be considerable.  However, the Eastern Gas Pipeline allows robust competition in the NSW market -- and probably the Victorian market -- for the first time.

The ability to pipe gas from either Bass Strait or Moomba means the owners of the fields themselves must be forced to reduce prices.  Although this is already evident in the limited trade that can take place through the Albury interconnect, the capacity of the link is such that the full pressure of the Bass Strait reserves cannot be imposed on the Moomba fields.

With Eastern Gas's 110 petajoules pipeline coming onto stream in September of this year adding to the 152 petajoules available on the Moomba line, this position will change dramatically.  Suddenly, there is some 60 per cent of the combined capacity of the pipelines under-utilised.  And the two fields' owners will see opportunities to win competitive shares.  This will occur despite the common ownership of ESSO with a 20 per cent share in the Cooper Basin (the ownership of which is dominated by Santos) and as the operator with 50 per cent in the Bass Strait Joint Venture.  That cross ownership is unlikely to prevent considerable rivalry from the two fields putting downward pressure on prices.  The different composition of the two joint ventures will force each field to seek to undercut the other's prices in order to win market share.  The general provisions of competition policy thwart collusion to prevent rivalry.

Ironically, by the regulators placing impediments in the way of full frontal competition, the process of dissolving the regional monopolies that have long exercised price controlling strangleholds in all the Eastern States is deferred.  The uncertainty over permitted pricing levels and access regimes means delays in the marketing programs of both Duke and EAPL and defers the ability of customers to benefit from the lower prices.

THE CENTRAL WEST PIPELINE

The ACCC has published a draft decision on the Access Arrangement proposed by AGL for its new Central West Pipeline.  In doing so its decisions typify the shortcomings of the highly intrusive regulatory arrangements that have been put in place.  The Gas Code is inflexible in its provisions for coverage.  It is bureaucratic in design, requiring a five-year re-set, and tariffs structured to costs.  It sets prices based on a regulated return.

The Central West pipeline is a marginal project which required a Commonwealth grant in order for AGL to justify its go-ahead.  Under the ACCC's Draft Decision, AGL is required to lower its prices based on a rate of return on capital of 7.5% compared to a rate it sought of 10%.  On the face of it such an outcome is beneficial.  After all, it reduces prices to the customers in the area.  But price setting by a regulator will undermine entrepreneurship.  It has no place in a situation where there is no monopoly.  AGL had no franchise to supply gas to the area in question.  It has many rivals in Australia seeking opportunities to find new markets.  The outlet is from the Moomba to Sydney pipeline, largely owned by AGL but operated by EAPL as a totally independent entity -- had an AGL rival approached EAPL they would have secured the same conditions as those gained by AGL.

AGL had determined that the customers for the pipeline would be willing to pay $2.78 per gigajoule in 2004 but the ACCC has determined they must pay no more than $2.32.  Intervention to reduce a price sought by an enterprise in this way is a sure route to economic stagnation.  At best it will lead to the entrepreneur engaging in wasteful deception to try to persuade the regulator that his costs are really higher or his market weaker than he has said they are.  Most likely, it also sends a message to all businesses looking at expanding networks under the ACCC's oversight that they must please more than the target customers.  Hence, the decision of the ACCC to cut the price of the pipeline in this way will have a sobering effect on other worthwhile ventures.

One approach favoured by the Gas Code to try to introduce some market orientation into the price setting process was to allow tariffs in new areas to be determined through a market tendering process for a pipeline that is yet to be built.  This has merit, especially if the galaxy of different prices and qualities can be reduced to a single number.  And the linking up of the northern Victorian towns in 1996 was accomplished using such an auction system with the consumers in those areas accepting that their tariffs would be above those of the rest of the State.

However, the Victorian initiative occurred in a situation where no market outcome had previously been permitted:  there was only one permissible supplier and the Government insisted that all consumers in the State were covered by the same tariff schedule.  These conditions should not apply in the future and it should be far more open to suppliers (or indeed customers) to take action to build new pipelines.  It is seldom the case that there will be several suitors for a particular line.  And if there are it would be because one firm, observing the keenness of a rival to supply an area will offer an alternative bid.  This ability to free ride on other firms greatly diminishes the value of searching out information on market needs and will reduce producer responsiveness to consumer needs.

A subsequent decision under similar circumstances to the gas extensions to the northern Victorian towns was made in June 1999 to supply Mildura. ⁽⁶⁾  This followed a competitive tender in which Envestra was successful and was granted the access arrangement by the Office of the Regulator-General with a pre-tax real rate of return of 9 per cent.  That rate provides a benchmark for a market based rate of return for a new pipeline to a rural area, though interest rates may have fallen slightly since 1997 when the Mildura competitive tender was conducted.

Unlike the regulatory turf battle with the Eastern Gas pipeline, the matter of jurisdiction over the Central West Pipeline has not arisen.  The NCC has apparently acquiesced in the ACCC taking the decisions on Central West.  Doubtless, the NCC will argue that this is because there was an application for coverage with regard to the Eastern Gas Pipeline under the Gas Code.  But if it must act on such applications then all rivals will seek to frustrate new competitors within the regulatory tribunals.  This will hamper the ability of new businesses to win customers since they will be unable to offer firm tariffs.  And the regulatory arrangements agreed by CoAG were designed to facilitate competition not hamper it.

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Attachment 1
Regulators' Price Decisions

ISSUE	REGULATOR	Applicant charge	Determined charge	Date
AGL gas contract market	IPART	Annual revenue reduction from $140m to $128m	Annual revenue reduction to $99m	May 1997
Vic gas	ACCC/ORG	9.7-10.2 return real pre tax	7.75% return real post tax	Oct 1998
Wagga gas (GSN)	IPART	Original 11.1% later offer 9.0%	7.75%	March 1999
Telstra Interconnect	ACCC	4.7c/minute	2.0c/minute with 1.6c suggested Sept 1999	June 1999
Adelaide Airport	ACCC	8.89% real pre-tax or $3.66/passenger	8.25% real pre-tax or $3.45/passenger	June 1999
Mildura gas	ORG	Tender at 9% real pre-tax	9% real pre-tax	June 1999
Albury gas	IPART	9.6%	7.75%	July 1999
NSW vesting contracts	ACCC	43.64 cents	no more than 40 cents	Sept 1999
NSW distribution prices	IPART		16% real price reduction 1999- 2004 7.5% (7.75% AIE, AE) 15% O&M reductions (10% AE, 5% AIE)	Sept 1999 Draft Determination
AGL Pipelines for the Central West Pipeline	ACCC	Real pre-tax WACC of 10% tariff increasing after 2001 at CPI+1.36%	Real pre-tax WACC at 7.5% meaning prices are frozen in real terms post 2001	Sept 1999 Draft Decision

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ENDNOTES

1.  Lawrence B. Lindsey (American Enterprise Institute), "The 17-Year Boom," Wall Street Journal, January 27, 2000.

2.  Although in some of their earlier speeches, ACCC Commissioners were under the impression that the prices they could set might be above market levels, thereby attracting wasteful competition.

3.  The National Access Regime A Draft Guide to Part IIIA of the Trade Practices Act, NCC, August 1996 p.7

4.  National Gas Access Regime, Recommendation to Gas Reform Implementation Group on the National Third Party Access Regime for Natural Gas Pipeline Systems, September 1997, Assessment against the Competition Principles Agreement National Competition Council.

5.  Application for Revocation of Coverage of Pipeline -- National Gas Access Code

6.  Access arrangement for Envestra Limited in respect of the proposed Mildura Natural gas distribution system, Final decision,, Office of the Regulator General, 3 June 1999