Submission to the Government on the Essential Services Commission

Submission

SUMMARY

The review into the proposal for an Essential Services Commission is timely in view of the Office of the Regulator-General's (ORG) recent completion of the price re-set for the electricity distribution businesses.  Our Submission focuses on the price reset which has, quite properly, dominated the work of the ORG over the past two years.

THE ELECTRICITY DISTRIBUTION PRICE DETERMINATION

Share market transactions offer a "reality check" on regulators' decisions.  Though the evidence is not clear-cut, the Powercor sale, which took place after the ORG's draft determination in May 2000, offers the best guide.  Press reports indicate Powercor sold at a premium of 7% on its 1995 privatisation price.  However, that outcome must be considered in the light of Powercor having been well-managed over the five years and its value might therefore have been expected to increase in line with that of the ASX All Ordinaries (45%).  Indeed, such an outcome would probably be regarded as conservative, since:

• the business has been a successful retailer in the National Market;
• it won a lawsuit with a NSW generator shortly after its sale, an outcome thought to be worth about $300 million (with the settlement factored into the price).

THE ELECTRICITY PRICE SETTING APPROACH

An equally important outcome from the re-set stems from its adoption of profit control rather than the incentive based CPI-X price control which was originally intended.  Unless rectified quickly, this will at best smother the incentives to pursue efficiency.

The process has also brought an unparalleled increase in the paperburden placed on businesses.  Over 200 papers were produced, many of them running to hundreds of pages and requiring detailed analysis in their preparation.  This has required the creation of well-resourced regulatory functions within each of the businesses.  These and the resources required by the ORG itself need to be financed by consumers.

More simplified, automatic and transparent procedures need to be developed if the industry is not to be strangled in red tape and if it is to focus on profitably improving consumer satisfaction rather than meeting the needs of a regulatory agency.  If an efficient industry is to be encouraged, the present re-set must be taken as the foundation for future more predictable and less intrusive resets based on economy- or sector-wide productivity achievements.

In addition, Australian regulators, though affirming that competition is the best regulator, have been most reluctant to retract from their positions of control even when competition is evident.  The ESC Review presents an opportunity to re-affirm the need for the regulatory agency to remain focussed on areas of natural monopoly.  It should offer guidelines that require the regulator to cease regulating where there is evidence of meaningful actual competition in the regulated product or clear evidence of it being contestable.

STRUCTURAL ISSUES REGARDING THE ESSENTIAL SERVICES COMMISSION

We are not attracted to a multi-membered commission.  The composition of such commissions tends to reflect government patronage, which detracts from the best appointments.  Moreover commissioners are likely to be appointed because they represent some stakeholder body (consumers, suppliers, etc.) resulting in negotiated outcomes rather than those based on achieving greatest efficiency.

Similarly, we are not attracted to outside bodies being appointed to "represent" consumers.  Typically such representative bodies or individuals come to comprise political activists and serve parties other the consumer they purport to champion.  Often they fail to understand the need to trade off quality against price and other features, especially where costs entail considerable sunk assets.

INTRODUCTION

The Essential Services Commission review is part of the Government's pre-election commitment program.  The ALP energy strategy said,

Labor will establish an Essential Services Commission with powers to:

• Set performance standards matched by customer service guarantees;
• impose tough penalties including fines on utilities that cannot guarantee supply, quality services and environmentally safe practices;
• Increase penalties against any utility that causes injury, sickness or property damage to their customers or poor worker safety standards;  and,
• Establish an independent Essential Services Ombudsman to handle customer complaints and make rulings relating to compensation.

The ALP Policy to reform the Energy Ombudsman and place it within the Essential Services Commission have been superseded by the reforms announced by the Treasurer on September 6.  These created the Essential Services Ombudsman to replace and extend the responsibilities of the Energy Ombudsman.

The Consultation Paper for the ESC sees the ESC subsuming the role of the Office of the Regulator General in its current role as the economic regulator for electricity, gas, ports and grain handling and access to rail freight, and with responsibilities for economic regulation of the water and sewerage industry.

In the review, the Government is seeking:

• to identify how the ESC could contribute towards more reliable utility industries
• views on how the principle of community participation in regulatory decisions by the ESC and other regulators may be further enhanced and how the structure of the ESC and its decision making processes could reflect the views of Victorian consumers
• views on effective ways to improve coordination between regulators.

In this context, we seek to restrict its submission to some matters it considers to be at the heart of these issues.  Our submission is targeted at electricity reviews which have formed the largest component of the ORG's work to date.  These matters also have a bearing on the regulatory approaches to gas, water, ports and grain handling and other areas that the ORG/ESC may have jurisdiction.

OUTCOMES IN ENERGY SINCE PRIVATISATION

By any measure, the performance outcome of the Victorian energy industry has been impressive since privatisation and, indeed, since 1989 when the Victorian Government first commenced steps which combatted the waste and over-staffing then prevalent throughout the industry.

Not only have staffing levels been cut but, as the ORG has demonstrated, the reliability of the system has been markedly improved.

This improvement has been accompanied by considerable second round changes in ownership.  Of the fourteen major entities sold between 1995 and 1999, nine have undergone or have pending subsequent significant ownership transformations.  There have been several reasons for this:

• GPU first bought a half share of the smallest distributor, Solaris but was required to sell this (to its partner, AGL) when it bought the Victorian electricity transmission business, Powernet;  it subsequently bought the gas transmission business, Gasnet.  Due to other financial difficulties, it has decided to concentrate on the US market and has sold Powernet and is seeking a buyer for Gasnet
• Scottish Power's acquisition of Pacificorp, the original owner of Powercor and one fifth of the Hazelwood generator, has brought a wish to concentrate on the UK and US assets
• Entergy sold out of its Citipower acquisition for domestic US reasons
• Powergen has made a decision to sell its half share of the Yallourn generator to concentrate on UK and US assets
• CMS is seeking to exit its half share of the Loy Yang generator because of poor returns.

The pattern is illustrated in Table 1 below.

TABLE 1

Entity	Date sold	Sale Price	Original Purchaser	Subsequent Events
United Energy	August 1995	$1.553 billion	AMP/ Axiom/ Utilicorp	42% floated 1998; current value $2.5 billion (1)
Solaris	October 1995	$950 million	AGL/ GPU joint venture	GPU sold its share to AGL 1997
Eastern Energy	November 1995	$2.08 billion	Texas Utilities Australia
Powercor	November 1995	$2.15 billion	PacifiCorp bought by Scottish Power	Sold to Hutchison Whampoa for $2.3 billion
Citipower	December 1995	$1.575 billion	Entergy Corporation	Sold to AEP for $1.6 billion 1997
Yallourn Energy	March 1996	$2.426 billion	PowerGen (50%), ITOCHU, AMP, Axiom and Hastings Fund Management	Powergen considering selling non-UK assets
Hazelwood/ Energy Brix	August 1996	$2.357 billion	National Power, Destec, PacifiCorp and others	Pacificorp/Scottish Power share (20%) sold for $90 million
Loy Yang B	April 1997	$84 million (plus $1 billion. obligations)	Edison Mission Energy
Loy Yang A	April 1997	$4.746 billion	CMS 50% NRG 25% others 25%	CMS seeking to sell its 50% stake
PowerNet Victoria	October 1997	$2.555 billion	GPU	Sold in 2000 to Singapore Power for $2.1 billion
Southern Hydro	November 1997	$391 million	Infratil Australia/Contact Energy Consortium	1999 Consortium restructured with Contact exiting
GAS
Westar & Kinetik Energy	January 1999	$1.617 billion	Texas Utilities
Multinet / Ikon Energy	March 1999	$1.97 billion	Consortium -Utilicorp United Inc, AMP
Stratus / Energy 21	March 1999	$1.67 billion	Boral / Envestra
Transmission Pipelines Australia	May 1999	$1.025 billion	GPU Inc	For sale

REVIEWING THE REGULATORY APPROACH

THE REGULATORY RATIONALE

The consultation on the Essential Services Commission offers the Government an opportunity to review the operations of the ORG and whether it has fulfilled the expectations of it.  This will form the basis of any modifications that will be made whether the Government creates an Essential Services Commission or takes a different approach.

At the outset of the reform process under National Competition Policy, the concerns were to:

• place the regulatory body at arms length from the political process;
• ensure that regulatory oversight was restricted to areas of natural monopoly where competition was unable to provide the disciplines to efficient operations;  and
• apply an incentive form of regulatory control, CPI-X, which allowed the regulated business to profit from efficient operations.

The requirements stemming from these three basic concerns have only been totally fulfilled in the case of the first -- the ORG, like regulatory bodies at the Commonwealth level and in NSW -- is genuinely at arms length from the government.

OVERSIGHT OF NATURAL MONOPOLY

With respect to the second of the concerns, ensuring the regulatory oversight is restricted to natural monopoly, regulatory bodies have sought to extend their ambit into areas of competition.  Most notoriously this has taken place with the ACCC and NCC in gas transmission (especially in the decision to require regulated access to the competing Moomba to Sydney and Bass Strait to Sydney pipelines).  However it is also seen in rail with the NCC's decision to seek coverage of Rio Tinto's West Australian iron ore rail lines and in telecommunications with the ACCC oversight of Telstra business components that are open to competing suppliers.

This discovery of reasons for continuing regulation when competing providers are present appears to be endemic among Australian regulatory bodies.  The ORG faced similar issues in the case of the Docklands development where two businesses both wished to install electricity lines.  The ORG's pre-determined view was that electricity lines are natural monopolies.  Its reaction to an outbreak of competition between two robust businesses was to refuse to modify its paradigm and to declare the competition either "wasteful" or highly imperfect.  Although it permitted both the two rivals to offer services to the area, it placed onerous conditions on the supply of services which have constrained the commercial rivalry.

This reluctance of regulatory bodies to exit a field of responsibility where the basic premise underlying regulation no longer operates may reflect a simple wish to avoid losing influence in economic management.  It may also reflect risk aversion on the part of the bodies -- if the outcome of the competition in the field where the regulators have rescinded responsibility is not in accord with forecasts, the regulator may incur some unwarranted stigma.

It would be important for the review to re-affirm the need for the regulator agency to remain focussed on areas of natural monopoly.  It should offer guidelines that require the regulator to cease regulating where there is evidence of meaningful actual competition in the regulated product or clear evidence of it being contestable.

PRICING OF SERVICES

The share transactions that have taken place since the privatisation process are one measure of the success or otherwise of the process.  It has been claimed that the buyers overpaid for the assets, and if so this would need to temper judgements.  However, for the lines businesses, information that has become available on the public record indicates that the underbidders valued most of the businesses sold at similar levels to the successful bidders.  This would indicate that on the material available to the bidders in the Information Memoranda and from other sources, the prices bid at the time were indicative of the fair market value.

In setting prices for the regulated businesses, two questions are particularly relevant:

• do the prices allowed accord with the levels expected at time of sale?
• does the price setting formula and the means of reaching a price accord with principles that encourage the firms to search for efficiencies and avoid expenditures that offer no societal gain?

Have prices for regulated services been in accord with expectations at time of sale?

The value of the distribution businesses is overwhelmingly dependent upon regulatory decisions.  If the value of the business at re-sale is considerably different from that set at initial sale, several questions are invited.  If the value at resale is considerably in excess of the original price, this might reflect initial under-valuations, perhaps because of insufficient competition among potential buyers.  None of the Victorian asset sales exhibited such deficiencies.

Where businesses have sold at sharp premiums in second round sales (or are valued far in excess of original sale prices at the times of privatisation) this then is a measure of management skills in unlocking previously under-performing assets or successfully developing the businesses.  Although some spectacular increases in value have taken place following some Australian privatisations (e.g. Tabcorp and CSL have increased in value over 400% and 1,600% respectively since their 1994 floats) there has been no such value increase in the energy industry.

Where prices have fallen to a discount of the original sale price, this may reflect unexpected market changes (as has been the case in the generation sector).  Lines businesses are, however, regulated monopolies and not greatly dependent on market changes.

Even after the asset sales have taken place, the Government cannot be oblivious to their subsequent valuation.  If the change in valuation is due to government as a regulator (or responsible for the regulator) shifting the goalposts, this will adversely reflect on general perceptions of the government and may have negative repercussions at a later stage.  In fact, such repercussions may never be identified -- business firms will often not trumpet loss of confidence but will instead quietly downgrade a jurisdiction's attractiveness.

There are subsequent market valuations of five Victorian energy business or groups of businesses that are best described as highly dependent on regulated price and service levels.  These are:

• Powernet
• Citipower
• United Energy
• Powercor, and
• the gas distributors.

The valuations of these businesses is set out in Table 1.

Powernet

In the case of Powernet, the second round price entailed a fall in value of $400 million (17%) over the three years 1997-2000.  Set against the average valuations in the ASX All Ordinaries, the reduction is even greater -- during the period of GPU's ownership the All Ordinaries index increased in value by 15% (while the Infrastructure and Utilities Index increased by 38%).  Hence, compared with the market, Powernet showed a value reduction of 32-55%.

There are no suggestions that the business was poorly managed.  Accordingly, the main reason for the decline in value is likely to have been the ACCC regulatory price re-sets for Victorian gas transmission and NSW electricity.

• Powernet's regulated income was set at 9.22% on a pre-tax real basis in 1997 at the time of privatisation (representing a reduction from 10.55%).  This is to be reviewed by 2002.
• The ACCC's decision on Victorian gas set a regulated return based on 7.75% real pre tax return in October 1998
• The ACCC's 2000 decision for NSW's Transgrid set the regulated return at 7.35% pre tax.

CitiPower

CitiPower's original owners resold the business for a similar amount to the price originally paid (though the transaction took place in 1997 prior to the re-set getting underway).

United Energy

United Energy has a stock market valuation of about $1.3 billion.  To place the business on a comparable basis to its original sale price would require the addition of $865 million of debt accompanying the sale, valuing it at $2.17 billion.

The business sold for $1.55 billion in 1995.  However several factors mitigate against using the comparison with $2.17 billion as an indication of regulatory driven valuation increases.  The first is that UE was the first Victorian asset sale and sold at a lower valuation than subsequent sales.  Secondly, the business has floated the telecommunications arm (UE Com) it developed post privatisation.  This newly developed line of business has a market valuation of about $735 million, 67% of which is retained by UE, in principle comprising some $500 million of the worth of the business.

Adjusting for the second factor alone would value the rest of the business at $1.67 billion or 7% above its original purchase price.  The All Ordinaries Index has increased by nearly 50% since United was sold ⁽²⁾, hence relative to the market as a whole the value of the energy business is down by 43%.

This said, the changes in company profile (including its recent divestment of the retail arm into Pulse) make it difficult to use United to establish more than a rough yardstick against which the regulatory performance can be judged.

Powercor

The recent sale of Powercor may present a clearer measure than the others of the impact of regulatory decisions on business values since it came after the ORG had made the draft determination.  This required an initial distribution charge price reduction for the business of 20.3% (reduced to 19.6% in the final determination) and a 6.7% post-tax real weighted average cost of capital (WACC).

The fact that the business reportedly sold at a premium of $150 million (7%) on its 1995 sale price is a prima facia indication that the draft decision has not resulted in regulatory "expropriation".  The ORG would take comfort in the headline measure of regulated price being approximately in line with market valuations.  On this basis, though the 6.7% post tax real WACC on the electricity businesses is similar to the 7.35% pre-tax real used by the ACCC, it does not appear to have detracted from the business's value.

However, a number of factors also need to be taken into consideration:

• First, over the period that Pacificorp owned the business the All Ordinaries Index increased in value by 45% hence the premium compared to the market average was -38%.
• Secondly, the business has been successful as a retailer and some premium would be warranted as a result.
• Thirdly, in addition to this success, the firm won a lawsuit against Pacific Power, estimated to be valued at over $300 million.  Although this was settled after the sale of the business, the settlement is thought to have involved "true ups" that factored in the anticipated legal win.

Gas businesses

As shown in Table 1, the gas distribution businesses were sold during the first half of 1999.  The sales attracted comparable premiums to those commanded by the electricity distributors three years previously.  Significantly, the sales were made after regulatory determinations not dissimilar to those of the ORG's May 2000 draft.  These privatisations would appear to indicate that the specific profit control determinations were in accord with market expectations.

There are some differences between gas and electricity, the importance of which are unclear.  Notably, the retail aspects of gas were thought to be relatively more important vis-a-vis distribution than is the case with electricity.  In addition, the buyers of the gas businesses were able to envision operational synergies with other parts of their businesses, which was not the case with the electricity sales.

Does the price setting formula encourage firms' search for efficiency?

In regulating the distribution businesses, the ORG has departed from the spirit, and possibly the letter, of its requirements to apply a form of CPI-X rate regulation. ⁽³⁾  Instead, it adopts a building block approach which seeks to establish an efficient capital, and operating and maintenance cost base for each distribution business and apply various cost of capital values to the latter.  Two of the businesses also have some 1995-2000 efficiency gains carried over.

All this calls for an immense quantity of information to be collected from the regulated businesses.  In some cases the information is not readily available even to the management of the businesses themselves and in all cases the outcome is unpredictable.  It is even difficult to determine why two but not the other three were adjudged to have merited efficiency bonuses -- and unless such rewards are well understood, they lack the incentive stimulus they are intended to offer.

The process used has a capacity to replace the search for efficiency on the part of the regulated businesses with a process that allocates resources to gaming the regulator.  Hence, unless the present price re-set can be explained as a means of establishing an even keel on which a more hands-off approach is used in future there will be damage to the industry's underlying productivity gain.

There are three approaches that might be used to ensure regulation makes use of market outcomes to engender efficiency:

• use a genuine externally determined CPI-X measure so that the regulated business gets to keep the additional profit stemming from its management activities for an agreed period.  That profit is determined by economy wide (or industry wide factors) not the regulator's assessment of the firm's "normal" profit levels.
• Establish benchmarks for each of the businesses based on data envelops against good practice in a range of market situations
• Implement a form of profit sharing whereby a standard level of profit is established and the firm and its captive customers share the amount in excess of this

If an efficient industry is to be encouraged, the present re-set must be taken as the foundation for future more predictable and less intrusive resets based on economy- or sector-wide productivity achievements.

PAPERBURDEN COSTS

Between June 1998 and June 2000, the ORG itself issues 24 papers and consultation documents on the price re-set, held over a dozen public hearings and conferences at which it and other parties made presentations, and received 176 submissions.  This documentation varied from pieces a few pages long to those running into hundreds of pages.  Much of it covered previously arcane financial concepts as beta factors and WACC, concepts that are rarely understood even among directors of public companies and which are commonly used to value businesses rather than set prices.

The ORG has a budget of about $8 millions, probably half of which was spent on electricity.

It is difficult to place a cost on all that work to the businesses and others responding to requests and invitations for comment.  KPMG estimated a spend of $1-2 million per year per regulated business.  However, this is conservative since it does not count the sums spent in the non-regulatory affairs parts of the business -- asset management, business planning and even the CEO -- all of which incur costs or diverted effort to support the regulatory affairs role.  Nor does it count costs incurred by other respondants.

In addition to the 2001 price re-set, the ORG's work on electricity included Y2K, reports on comparative performance, retail contestability, and investigations like that into the Docklands provision.  In itself, the weight of the documentation may understate the resource load that the regulatory arrangements require.  Each distribution business has considered it essential to develop a regulatory affairs arm with highly skilled staff and a considerable consultancy budget.  Moreover, the regulatory issues are so critical to the profit of the businesses that they are a key focus for the CEO and other areas of each business.

The energies devoted to the regulatory environment are resources that are either diverted from improving business efficiency, or resources diverted from consumers via the prices charged by the businesses or through taxes in the case of the ORG and some other respondents.  In all cases the resources are a dead-weight cost.  Some means must be found of allowing this weight to be lightened and the key to this is by having a price re-set system that is more predictable and automatic.

THE STRUCTURE OF THE ORG

The Consultation Paper asks whether the ORG's system of a single regulator or a system with number of commissioners is preferable.  It goes on to ask whether consumer representation would be appropriate.

We are mindful in addressing this issue that governments often prefer to be able to make a number of appointments as this enables an extension of their patronage powers.  In NSW, the creation of different electricity businesses and other corporatised businesses has presented opportunities to reward loyal supporters or provide a means of supporting those who have had political office or may wish to seek it in future.  The appointment of Mr Unsworth and Ms Jennie George to different boards are cases in point.

Although politicians may welcome the ability to exercise such patronage (and possibly benefit from it at certain times in their careers) its abundance detracts from good government.  Accordingly, we would tend to oppose the creation of a commission.  This position also has a bearing on the integrity of the regulatory body -- it would be highly damaging for commissioners to be appointed that were beholden in some previous or prospective way to the government of the day.

We would be even more opposed to having a commission that sought to integrate specific interests.  The paper instanced the need for the ESC structure to reflect the important role of consumers.

It goes without saying that consumers have an important role, indeed the most important role.  Enfranchising individuals to represent them is a different matter.  More often than not those selected for that role tend to be activists, generally hostile to the productive process, particularly the private sector's role.  Sometimes consumer "representatives" see their role as ensuring the cheapest price and highest quality with little consideration for costs.  At other times they advocate a policy of ensuring that "disadvantaged" consumers (including those who consume less, are located in places where it is more expensive to serve, do not pay their bills, etc.) obtain equal service to all others.

Commissioners of that sort could be deleterious to the efficient operations of the ESC.  Indeed, it would be regrettable if the ESC were to be given a "balanced" representation since the "stakeholder" groups could range from consumers to workers to owners of capital to large customers, rural and urban customers, and so on.  Establishing a Commission that purported to represent all of these individually would lead to an unwieldy organisation and one that arrived at negotiated outcomes and lost the focus of ensuring the efficient operations of corporations.  We should not lose sight of the reason for a regulatory commission, i.e. the absence of the kind of disciplines that are part and parcel of competition in a true market.  A regulatory commission is there to replicate market forces and not to act as a welfare agency.  Any override of the sort of outcomes that might emerge from a market system are properly those of the Government.  To bury these within a regulatory agency would reduce the transparency of processes that are properly overseen by the Parliament.

These sorts of matters are recognised within the Government's paper (p. 18) when it says

Combining diverse regulatory functions and objectives within one organisation could lead to a loss of focus or even conflicts of interest.  It would also add a new layer of regulation of final product regulation and it is not clear how these considerations should be weighted for different types of regulatory decisions.

• some of the trade-offs between these objectives -- such as cost to consumers in relation to reliability of supply -- are more properly made by Government, rather than by an independent (unelected) regulator;
• the scale and scope of such an organisation would be large and difficult to manage as each regulatory responsibility requires specific knowledge and expertise.

CONSULTATION

The Consultation Paper asks:

• How could the existing public consultation processes undertaken by utility regulators -including the ESC -- be improved to ensure greater transparency, particularly where regulatory objectives involve trade-offs (for example, between price and levels of service)?
• Is sufficient financial and other information on the regulated businesses currently made available?
• How could existing public consultation processes be more accessible, particularly to groups that are disadvantaged and poorly resourced?
• What roles and mechanisms are required to ensure constructive consumer advocacy in regulatory processes?

The ORG in its road shows and in the considerable detail it requires from the regulated businesses is already requiring considerably more information be placed on the table than that sought of other businesses.  Indeed, the information is probably too comprehensive for the ORG to digest.

Doubtless some advocacy groups would like to draw from the public purse or from subventions required from regulated businesses in order to undertake increased analyses.  It is a matter for policy whether the government decides to fund or increase the funding of pressure groups from budgetary resources.  However, in the context of regulatory requirements on businesses, such claims should be resisted since they make it more difficult for the public and the government itself to determine overall tax and quasi tax measures it is imposing on the community generally.  It is, of course, another matter for the groups themselves to seek out voluntary funding, as we do.

ENDNOTES

1.  Planned partial float of UeComm values this part of the business at $1 billion.

2.  There is no comparable Infrastructure Index for 1995.

3.  KPMG puts this as follows.  "By interpreting the relevant elements of its statutory framework as providing it with "considerable flexibility about the detailed form of the price control to be adopted for distribution services", ORG has adopted a questionable interpretation of its mandate.  ORG's interpretation is questionable particularly where it considers that it has flexibility to set a cap on all or part of a distributor's total revenue for prescribed distribution services.

"The key elements of ORG's statutory framework, being clause 9.8.7 of the National Electricity Code and clause 5.10(a) of the Tariff Order, specify that the method of price control is to involve "explicit price capping" and "price based regulation" respectively.  That is, the price control regime is to relate to "price" not "revenue".  It is of course possible to interpret "price" as used in the statutory framework to encompass "revenue" where:

• quantity equals one (in which case price is revenue);  or
• a price control caps revenue solely by price cap formula,
• though such interpretation relates to extreme positions, which are:
• inconsistent with standard usage of the terms "price" and "revenue";  and
• not practical or realistic bases for economic regulation.

"We are concerned that ORG, in its discussion in Consultation Paper No. 3, or in relation to its final decision (if based on its Consultation Paper No. 3), may be open to challenge because it has chosen to adopt a questionable interpretation of its legal mandate." Response to Consultation Paper No. 3 2001 Electricity Distribution Price Review:  The Form of Price Control 15 March 1999

Supplementary Submission to Productivity Commission's Review of Telecommunications Specific Competition Regulation

Submission

INTRODUCTION

There had and have to be rules to ensure access to certain essential telecommunications facilities in parallel with the deregulation of the industry in Australia.

The deregulation has been a stunning success so far and the occurrence of this minor miracle in other developed economies should not blind us to that.  Moreover, the revolution is continuing.  The number and diversity of enterprises and products is multiplying and the result is more competition in all markets.  The prospects are good.

How we regulate the Australian telecommunications industry now will determine its future shape.  Competition regulation in this sector is matched in importance only by regulation of the radiocommunications spectrum.  Competition regulation should aim to break down the remaining monopoly structures.  In this, it will be powerfully aided by the convergence of transmission technologies which is taking place independently.

The strong growth in productivity in Australia in the last decade owes something to deregulation and improved competition (see "Microeconomic Reforms and Australian Productivity" – Productivity Commission Research Paper – November 1999).  The OECD has given Australia high marks for this, basing much of its judgement on the work done by the Commission ("A New Economy" – OECD – Paris -- 2000).  Telecommunications is no exception although it is accepted that there was a degree of catch up involved.

While we know that there have been benefits from deregulation of telecommunications and the associated increase in competition, we do not know whether the results have been optimal.  Nor do we know with certainty whether they will be improved or made worse by the application of existing policy in the period ahead.  The interaction of competition, planning and technology policies makes the equation even more than usually unstable.

The challenge now is to refashion regulation to encourage further gains without building a system that is so intrusive that it amounts to command and control.  There is a risk that the eagerness to reallocate market shares in our local market will lead to regulation that is inward-looking and not in our long term interests.

POLICY CONSTRAINTS

The reform of competition regulation is heavily constrained by policies which impact on the operations and finances of carriers and carriage service providers, particularly Telstra:

• Price capped local calls without time limit
• Universal service obligations
• Any to any connectivity
• Limitations on the use of the radiocommunications spectrum
• Government control of Telstra
• No structural reform of Telstra

Reform of competition regulation in this sector is well into the realm of the second best for as long as these constraints persist.  The net financial and economic costs they impose are subject to very wide disagreement although it is agreed that they are substantial.  Through their direct effects on the operators' costs and prices, they also constrain the volume and direction of new investment.

There is a very strong case for relaxing some of these policies to reduce the distortions to private decision they induce and to transfer social provision directly to government.  For example, there is no reason why the universal service obligations could not be better costed and charged directly to the Commonwealth Budget.

THE ROLE OF THE ACCC

The telecommunications specific competition regulation confers great powers on the ACCC.  It can, inter alia:

• endorse or make the industry codes that facilitate access
• accept or reject undertakings (generally the latter) relating to the charges and terms and conditions for access
• declare services under the Act and establish principles for pricing and other terms and conditions of access
• arbitrate disputes over the terms and conditions for declared services and also access to information and facilities
• direct the conduct of disputes
• direct the ACA on matters such as number portability and technical standards

There are numerous proposals (including from the ACCC) to extend these powers significantly, including:

• to direct relevant firms to give detailed access undertakings which may be drafted by the ACCC
• to vary declared services without the inconvenience of a public inquiry
• to remove certain review powers of the Australian Competition Tribunal

The ACCC is also looking forward to the stage where it will not only regulate physical bottlenecks but also content bottlenecks.  There is also the potential for greater ACCC involvement in the market for internet services.

It is worth recalling the stated aim of the ACCC, which is to "facilitate rather than prescriptively determine the operation of competitive markets".

What has actually happened is that the ACCC now exercises far greater market power in the telecommunications market than any other player and it does so with legislative backing and without any penalty for its abuse.

If there was a need five years ago for the current highly intrusive level of regulation then the operation of the regulation should have led by now to a point where some of it could be dismantled.  The call for further regulation now is disturbing and suggests that the existing structure may be, perversely, generating its own amplification.  The structure now needs reform to ensure its automatic demise in a reasonable timeframe.

THE COMPETITION CRITERION

The working criterion for ACCC intervention within its legislated powers is the "long term interests of the end users".  This gives first priority to the consumer.  The drawback is that this tends to focus attention on the short term impacts on prices and the quality of services away from the longer term needs to invest in change.  This will always be the case for an agency such as the ACCC with a strong consumer mandate and a high political and media profile.  What we have is not a competition criterion but a consumer criterion, which can only be a partial guide to optimal policy.

This is exacerbated by reliance on best practice pricing models.  They leave the margin for investment in the hands of the regulator who will have neither the detailed knowledge of the investment equation nor the responsibility for the outcome and will be under constant pressure to mortgage the future for the present.  Also, the best practice firm tends to be measured by the level of pricing for specified services which may tell us little about its prospects for long term health.

The regulator is likely to have little sympathy for the phenomenon of creative destruction both within and between firms as they strive to innovate and inevitably "waste" capital in the process.  Innovation often proceeds by way of a series of trials, a proportion of which will fail.  With best practice hindsight, these will simply be regarded as mistakes.  Such fruitful "mistakes" are not easily accommodated in pricing that is based on an international best practice model.  They require a model that would allow for temporary market imperfections which accommodate a degree of experimentation.

This process, which is a form of research and development, requires a pool of capital and a willingness to spend it without too much detailed direction.  This is difficult to model and virtually impossible to implement within the time frames of the regulatory process.  Yet this is just the sort of investment we need to participate fully in this industry while it is in the growth phase.  The alternative is to be relegated to colonial status, entirely reliant on overseas technology.

All this has considerable relevance for our technological future.  Telstra is perhaps the only major corporation in Australia with any incentive to go beyond the mere provision of telecommunications services to research and development in Australia.  Prices that allow for this role will not in themselves guarantee the fruitful use of resources but best practice models are likely to result in prices that have little margin to even make that opportunity available.

DOMINANCE

The market power of Telstra in the telecommunications market is at the heart of competition policy.  There is no doubt that Telstra retains considerable market power (particularly in the customer access network) and that the watchdog role of the ACCC will still be required in the future.

Nevertheless, the competitive landscape has changed dramatically in the last decade and the complete dominance previously exercised by Telstra has been significantly eroded by strong new competitors.  This erosion will continue.  It should be facilitated by competition policy.

However, what seems to be happening is that the new entrants are happy to see parts of the status quo maintained.  This is a de facto structural separation of Telstra brought about by the ACCC managing key aspects of the local loop.

This clearly has implications for the value of those assets involved in the local loop and for the Telstra share price.  The new entrants and the ACCC now propose that this structural separation be enhanced and entrenched by additional powers for the ACCC.

The result would be that Telstra's formal dominance would be perpetuated (together with the justification for the regulatory regime) but crucial operational and financial decisions for Telstra would be made by the ACCC.

The new entrants (who are often not really new any more) are then able to "cherry pick" the profitable long distance and high density local business using the administered physical access and access price as a firm base.  There is little incentive for them to invest in independent capacity and new technologies to enable them to compete with Telstra's local system.

This policy encourages cannibalism rather than creation.

It is competition of a kind but it does not appear to embody any dynamic that will lead to a fully fledged market with well developed facilities based competition.  Nor, as noted, will the regulation itself stand still because the defects of the regime have and will lead to pressure for more detailed intervention.

We can only hope that the sheer weight of innovation from overseas will force change in these heavily regulated areas, perhaps through convergence and use of over the air channels.  Otherwise there is the risk of a persistent cosy "live and let live" arrangement, supervised by the ACCC, with high levels of churn based on relatively small product differentiations.

THE LOCAL LOOP AND NETWORK EFFECTS

The new telecommunications competitors are not duplicating the local telephone loop in any significant way.  Nor, apparently do they intend to do so.  Our competition policy has signally failed to introduce meaningful facilities based competition in this most important area.

The reason appears to be that the access terms provided to new entrants by the ACCC as compared with the costs of investing in new networks make new investment unprofitable.

The public interest may not be served by expensive duplication of the local loop -- especially as the capacity of the existing loop is being upgraded and convergence may offer alternatives.  In that case we should ensure that this network, put in place at great expense to the Australian people over decades, should earn a return from new entrants closer to what it would cost them to provide their own facilities.  It might also more effectively test the proposition that duplication is uneconomic.

This would leave the monopoly characteristics in place for a while and a continued (but diminishing) need for an access regime.

Much has been said about the leverage granted to Telstra by network effects and it has been asserted that this leverage will increase with the upgrading of the local network.  In theory, an effective access regime ought to give new entrants the same possibilities on the network as the incumbent, taking as given that they will in any case have to undertake ancillary investment to enter the market at all.  The incumbent will have the normal first mover advantage but this should not confer permanent leverage if the new entrants use their advantages of more recent technology, greater flexibility, fewer CSO obligations and no government ownership.

Short of imposing bans upon normal competitive behaviour by Telstra, which would be difficult to define and administer, the only course is to rely on the enterprise of the new entrants.  Many of them are backed by large overseas corporations and could be expected to have the knowledge and resources to compete in a relatively small market such as Australia.  In a sense they have their own critical mass.  And the history of recent years does seem to support the conclusion that they can survive and prosper.

Smaller new entrants would face greater challenges (as is always the case) and would have to rely on the competition watchdog to assist them when they encounter unfair practices.  Their case is no different from start up in other sectors where large incumbents deploy the advantages of large networks.

Of course, structural separation of Telstra might help here.

PART XIB

Part XIB of the Act was intended to be a transition measure.  It contains elements that were enacted to meet the special needs of the telecommunications market in its then undeveloped state several years ago.  Some of these elements, such as the reversal of the evidentiary burden, the escalation of penalties and the "likely effects" test, if applied to individuals, would give rise to grave public disquiet as unfair and as being an excessive assumption of state power.  They should not be maintained beyond the point of absolute necessity.

Only two competition notices have been issued under Part XIB and these were eventually revoked after negotiation.  It is not clear that the settlement could not have taken place under the more general competition rules.

The ACCC has proposed that its power under XIB now be augmented to allow it to direct persons to do what it thinks would conform to competitive behaviour – conduct that would be expected (by the ACCC) in a competitive market.  An example might be a direction to enhance or replace technology.  This would considerably extend the power that the ACCC currently has to forbid certain conduct and its powers in the setting of standards.

This would be a quite breathtaking increase in the power of a non- expert government agency to direct a central component of our new economy.  The ACCC would become even more the controller of operations and investment planning for this sector.  We do not think these proposals should be countenanced.  Indeed, as we argued in our earlier submission to the Commission, we believe it is time to repeal Part XIB not to entrench it.

PART XIC

It was reported on 28 August that the ACCC had demanded detailed weekly reports from Telstra on how it would open up its network to its competitors as it rolls out ADSL.  The Chairman of the ACCC was also reported as saying that he would be monitoring those competitors to ensure that they improved their performance in lodging their orders for access.

This perfectly illustrates the tendency of prescriptive economic regulation to lead to the aggrandisement of powers by the agency involved, all in the name of the public interest.  Here we have an official agency requiring a level of reporting that the executive of most firms would not consider necessary for efficient management – indeed it might be considered conducive to bad management both in the use of resources (which are costly) and the focus on the insistent focus on the concerns of a single overbearing manager.  Why would reporting quarterly not suffice?

Even more strange is the jollying along of competitors to do what it is either in their own interest to do or, if not in their own interest, is unlikely to be sound either as a private or a public proposition.

Moreover, without being chauvinistic about this, what we have is an Australian government agency effectively forcing the partial appropriation at administered prices of a vital Australian owned and built asset by a group of large, generally foreign-owned enterprises that will invest no more than is necessary to their own ends.  Those ends may well be legitimate but we can safely leave them to be pursued without official pressure.

The question is whether the current level of highly detailed and prescriptive government intervention in Part XIC will give the optimum outcome in the years ahead.  Some are proposing even more interference.  On the other hand, the OECD has stressed the principle of carriers managing their own tariff structures.  We have suggested that XIC could be repealed.

The record in some respects supports the current regime.  Both the OECD and the IMF (reported on 20 September) have commented favourably on the take up of telecommunications technology in Australia in the past decade.  The opening of the market to competition has undoubtedly contributed to this result and the role of the ACCC has been vital.

However as competition has improved there has been no indication that the watchdog is ready to hand over to the market.  On the contrary, the watchdog has turned into a sheepdog and clearly has ambitions to be the shepherd for this sector.

There is a risk that we are sliding towards an administered industry policy or state planning for telecommunications.  When the ACCC asserts that its pricing decisions take account of the long term investment needs of the industry it should give pause to policy makers.  Not only is the ACCC not equipped to undertake investment planning but it has an institutional bias towards lower prices and short term consumer gain and a propensity to allow no margin for error.  Perhaps more telling, the ACCC will bear no responsibility for the success or otherwise of its investment planning activities.

It is time for the ACCC to step back a little from its engagement with this industry, exciting though it is.  It is time to test the counterfactual.  There is no evidence to suggest that reliance on Part IIIA of the Act and the tests it contains would not lead to lower prices, better services and more choice.  There is now considerable weight to competition.

The ACCC has noted that it was never intended that it become the price setter for the industry but the drafting of the existing regulation ensures that it does.  The structure of XIC leads inexorably to ACCC arbitration in almost every case.  We do not have a negotiate/arbitrate model, we have an arbitrate model.

Reversion to IIIA would oblige the ACCC to take a step back and encourage the industry to seek more vigorously for commercial agreements and undertakings.  The loss of the more detailed powers for the ACCC in terms of declarations and standard access obligations can be countenanced.

At the same time the Government should require the development of a sequential program of deregulation of services, starting with the easiest to enter.  This would oblige all parties to contemplate the end of administered access and pricing and encourage the development of effective, rather than protected, competition.

The option of trying to speed up the Part XIC processes by enhancing the power of the ACCC will only confer greater market power on the ACCC without any real prospect of quicker decisions.  More and more detailed powers will slow progress and create uncertainty in an industry whose lifeblood is rapid response to change.

Part XIC should be repealed.

CONCLUSION

The question is – where do we go from here?  Or more precisely – which direction do we go and how far?

There is evidence that competition regulation has provided substantial benefits in the transition to a more competitive telecommunications market.  This does not imply that more of the same will produce the same benefits.  Competition regulation is not per se beneficial.

There are many proposals before the Commission to extend the level of government intervention and remove review mechanisms.  These proposals are generally justified by the need to make the regulation more effective.  Past experience suggests the inevitability of this trend and the entrenched nature of the multitude of special interests it creates and protects.  The unavoidably lengthy processes involved are extremely inefficient means of economic decision making.  We believe the effects of the regulation are already anti-competitive in some respects and will become more so.

We believe that it is time to reverse this trend and return the industry to the more general protection of competition law which was strengthened only a few years ago.  If we do not take this course now the opportunity will be lost and the regulation will be with us indefinitely.

The telecommunications industry will restructure repeatedly in the next decade as technological advance and convergence take place.  There is an opportunity for Australia not only to let that happen to us as part of a world wide development but to participate more actively.  It is unlikely that we will attract or generate the interest of those at the cutting edge or the sort of investment and innovation required if we retain the existing, detailed, inward looking regulatory set.

The Bankruptcy of the Protest Vote

To the dismay of the true believers, the triumph of capitalism has left the radical Enlightenment tradition of Rousseau homeless and bereft

If there is one thing the anti-globalisation activists clearly believe above all else, it is that their moral concerns are worthy of great respect.  Indeed, they tell us that nothing but moral concern drives their protest and their anguish.  That they are driven by horror at what is, and will, happen, and by a desperate desire for a better world.

With very few, if any, exceptions, none of this is true.  I do not mean to say that globalisation does not raise interesting moral issues, or that there are not matters that governments should be concerned about (though I think the concern on both counts is greatly exaggerated).  What I do mean to say is that the campaign of the anti-globalisation activists is not worthy of moral respect.

Their campaign is not worthy of respect because they are clearly not concerned with either truth or with predictable consequences:  the truth of what is happening or the predictable consequences of the policies they typically espouse.

We have to be clear about what globalisation is not doing.  It is not abolishing national sovereignty.  It is not creating mass poverty.  It is not happening regardless of the wishes of ordinary folk.  On the contrary, it is occurring because of deliberate acts by governments of sovereign nations, it is in the process of creating the greatest mass uplift from poverty in human history and it is happening precisely because of the preferences of ordinary people.

As commentators are saying more and more, we are not living in the first age of globalisation.  On the contrary, the period prior to the First World War was at least as great an age of globalisation as the current one.  Indeed, the Deakinite Settlement of white Australia, trade protection, wage arbitration, state paternalism and imperial benevolence -- which was the basis of Australian public policy from the 1905-08 Deakin Government onwards until it was fatally undermined by the Whitlam Government (leading to the Settlement's evolving replacement by the Hawke, Keating and Howard Governments) -- was, in many ways, an attempt to opt out from globalisation.

What is globalisation and why has it become such a strong force?  Globalisation is the development and deepening of world markets in capital, in goods and in services by the increasing occurrence of commercial exchanges across international boundaries.

It is to be distinguished from internationalisation, which is the increase in number, range and extent of international treaties and standards having, in countries with genuinely legalistic polities, import for domestic policies and politics.

They are very different, if related, phenomena which generate very different responses:  many of those most favourable to globalisation are deeply dubious about internationalisation and vice versa.  This is not surprising -- globalisation increases consumer sovereignty by widening choice and increasing competitive pressure on producers.  Internationalisation (if governments permit it to) removes political decision-making to a far less accountable locus, thereby reducing the political sovereignty of the citizen-voter.

Globalisation is occurring because governments are letting, even encouraging it, to occur and because people want the things globalisation delivers.  If ordinary consumers did not want to engage, directly or indirectly, in exchanges across national boundaries, they would not happen.  If they did not want to participate in international popular culture, travel to other countries, buy foreign goods, have the widest choice of products, have cheaper products, have better products, sell the products of their labour to anyone who is willing to buy them, then globalisation would not occur.

Even more to the point, if governments did not believe that choosing globalisation did not enable them to more effectively deliver, directly or indirectly, what their citizens want, they would not choose it either.  Engaging in international trade is not compulsory.  Even today there are sovereign nations which attempt to stay out of the international trading economy to a greater or less degree (North Korea being perhaps the most extreme case).

The claim that globalisation is something imposed on people is nonsense.  People sometimes do not want to face the consequences of their own preferences, but that is a different matter.

It is perfectly true that globalisation does increase Schumpeterian processes of creative destruction.  This openness to other lands, other ideas, other products, changes us and the culture and society around us.  But it remains a change driven by the myriad choices of individuals, households and firms.

Which is, of course, why the anti-globalisation activists hate the whole thing so much.  Because it makes a complete mockery of the idea of social change as something they direct and they can control.  It is not that they hate the idea of people being treated as consumers:  it is they hate the idea of people not being subject to their ideological direction.  People-as-consumers are people choosing on the basis of complete indifference to the visions of the activists:  it is the activists being reduced to trivial nonentities.

After all, what is the core ideological vision of the central organisers of the sII demonstrations against the World Economic Forum in Melbourne?  It is of a society directed by a revolutionary elite who control all aspects of social life in order to create a transformed humanity and a transformed society.  These people claim they are so concerned about poverty, yet there is nothing more predictable than that the policies they espouse will create, extend and entrench mass poverty.  Anyone who doubts that need only examine the record of command economies -- presently being exemplified by that weird Stalinist survival, the arch example of Socialism in One Family, North Korea.

The protestors hate globalisation as the expression of the success of capitalism, and of the collapse of socialism.  Globalisation is simply the application of liberal capitalism on a global stage.  And liberal capitalism is the only form of society which has sustainably delivered mass prosperity, mass longevity, mass freedom and mass democracy.  It does so because it allows a myriad of economic agents to make their own choices, through property rights, the rule of law and free and open political processes.

Liberal capitalism is the most dynamic social system humanity has ever created.  That dynamism creates its own costs and difficulties:  it is not a costless boon.  But it remains a boon.  One has only to contemplate the fact that human life expectancy has gone up more in the last 100 years than in the previous 200,000 -- or contemplate the opportunities and prosperity that the average Australian child has today compared to that of a child of, say, 1750, 1850 or even 1950 to see its virtues.

The increase in mass prosperity and longevity, the creation of mass freedom and mass democracy, is such a stunning achievement that no-one who does not seek to understand the nature of that achievement, who does not acknowledge that achievement, can be said to be seriously concerned with human welfare.

We are so used to seeing people accept uncritically that opposition to capitalism and all its works is the only possible sign of moral virtue that we do not stop often enough and consider the bankruptcy of such a position.  It is contemptible that people who proclaim themselves deeply concerned with human welfare to pay no heed to such unparalleled achievement.  Even the claim that political action is necessary to civilise capitalism is subject to the elementary response that political action without capitalism -- under Lenin, Stalin, Mao, Pol Pot -- has been responsible for some of the greatest barbarisms of human history.  For all its, at times apparently relentless, banality, capitalism, at its core, is based on the mass application of individual choice, of institutions which protect and foster mutually beneficial exchanges which have proved to be a profound force for human liberation.

After all, poverty is the normal human condition.  Most people in history have lived and died in poverty, often grinding poverty.  Most human societies produce mass poverty.  It is the development of societies which achieve mass prosperity which is startling.  But now we know how the trick is done.  More to the point, people in societies where mass poverty remains know that the trick can be done.  The success of the Asian tigers in moving from mass poverty to developed world status in a generation has set the benchmark for governments around the world.  They want in because their people demand in.

They also know how the trick is not done.  China is now the largest source of foreign students in the United States -- over 100,000 of them.  They are the children of the elite.  Chinese President Jiang Zemin's own son is studying in the US.  The Chinese elite is becoming American-educated.  They have seen Maoism fail, they have seen the Soviet Empire collapse, they have seen Japan stagnate and they have seen the Americans go from strength to strength.  It is not merely a matter of the current economic boom (which has more than a little of the bubble economy about it) -- in the past 80 years, the US has seen off imperial Germany, imperial Japan, Nazi Germany, the Soviet Union and the Japanese economic challenge.  The Chinese know a working model when they see one and they want in.  They have even acquired a striking version of it in Hong Kong.  The effort they have put in to join the WTO is evidence of that.

What the Chinese are seeking to do is not an easy process:  a system which creates "government-owned non-government organisations" or GONGOs has some adjustment problems yet.  In fact, they have huge adjustment problems which may yet see the whole thing go bust.  But they know what they want -- they want mass prosperity.

What this represents is not only the triumph of capitalism as the superior model, as the path of mass prosperity, it is also the abandonment of politics as a source of transcendental belief and aspiration.  It is work-a-day, practical politics.  In its own way, it is deeply inspiring, but it is not a substitute for religious belief and does not pretend to be.  It does not promise a transformation of human nature or a society without tensions and problems.  Instead, it takes human nature as a given and works with that.  It is the triumph of the ideas of the sceptical Enlightenment, the Enlightenment of Hume, Smith, Montesquieu, Burke and Madison.

The radical Enlightenment, the tradition which sees human nature as plastic to the ambitions of the visionaries, the tradition of Rousseau, is left homeless and bereft and utterly defeated.  Their rage is great, because their aspirations as the history-bestriding visionaries of a transformed humanity are empty ashes in their mouth.  Trashing Starbucks café's in Seattle and McDonald's in London are apposite expressions of this rage.  Both chains represent the power and popularity of ordinary consumer choice.  (That McDonalds had to take over the whole food production process in order to supply its first Moscow store with food of sufficient quality to meet McDonalds' standards was a nice display of the failure of socialism).  As anyone who has tried to launch a new product knows, it is nonsense to portray consumers as helpless pawns of marketing:  but such a myth expresses well the ambition of Rousseau's heirs to be moulders of others.  Accepting the power and reality of consumer choice naturally buttresses the validity of what they choose.

At Seattle and London we saw rage, but it was not the rage of the downtrodden, it was not even rage for the downtrodden, it was a rage of frustration, the frustration of the true believers in their own enormous moral importance being left with no place to go, no stage on which to strut with any seriousness except that of vacuous street theatre.

And that is a rage worth not a scintilla of anyone's moral respect.

This is an edited version of an address given to Free Trade Youth on Saturday September 9.

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"Experts" far from Stolen Truth

Many people are dismayed by the Howard government's attacks on United Nations human rights committees.  But why should we take any notice of criticisms of our record coming from supposed "experts" from oppressive regimes such as Pakistan, China or Cuba?  After all, even our own human rights "experts" seem unable to tell the truth about Australia.

Since the Human Rights and Equal Opportunity Commission released Bringing Them Home in 1997, it has become increasingly clear that this report on the removal of part-Aboriginal children from their families is a most unreliable document.  Instead of a rigorous and honest account of the injustices that Aborigines certainly suffered, HREOC set out to make the worst possible case against Australia.

And when the failings of Bringing Them Home are brought to its attention, HREOC ignores them, obviously confident that its friends in the media and the opposition parties will ensure that it suffers no harm as a result.

Two recent events have illustrated the effrontery of the people associated with HREOC.  In its submission to the Senate Inquiry into the "stolen generations" the Howard government pointed out that Bringing Them Home had grossly misrepresented a 1970s study in Bourke NSW to suggest that as many as one in three Aboriginal children had been forcibly removed from their families.

The Bourke survey actually found that around one in sixteen children had been separated from their parents, and this also included children who had been hospitalised for long periods.  Only less than one in thirty cases could conceivably be presented as falling within the "stolen generations" definition, and even these involved children who had been declared neglected because their parents were chronic alcoholics.

Nevertheless, when it prepared its own submission to the Senate in response to the government's criticisms, HREOC simply repeated the one in three figure, making no acknowledgement that this had now been shown to be bogus.

Even more brazen is the response of Bringing Them Home co-author and former HREOC president Sir Ronald Wilson to Justice O'Loughlin's Federal Court judgement in the Cubillo and Gunner "stolen generations" case in the Northern Territory.  Sir Ronald claimed that the judgement "stands as an independent and informed confirmation of the history revealed in Bringing Them Home".

This is laughable.  In fact, Justice O'Loughlin's findings demonstrate just how dubious a history Bringing Them Home presented.  Unfortunately, few media commentators appear to have read the whole judgement, relying instead on a brief twelve paragraph summary.

In contrast to wild claims in Bringing Them Home of "wholesale removals" from the 1940s onwards, and the statement that by the 1950s, "most, if not all of the mixed descent children" in the Northern Territory had been placed in institutions, Justice O'Loughlin examined the actual figures.  He concluded that the number of part-Aboriginal children in the Territory at any given date "far exceeded the ability of the Commonwealth to implement a policy of indiscriminate removal".

One of the reasons officials in the Territory removed part-Aboriginal children from their communities was the belief that they were not accepted by "full-bloods".  This was strongly rejected by Bringing Them Home, which stated that all part-Aboriginal children "were recognised as 'children of the group', that is as Indigenous children" and "Aboriginal society regards any child of Aboriginal descent as Aboriginal".

Justice O'Loughlin came to a different conclusion.  Even one of Peter Gunner's own part-Aboriginal witnesses conceded that he believed that "his life, as a small child had been at risk".  The judge found that there was evidence of a wide range of situations in different communities -- "warmth and loving care for the children on the one hand:  evidence of death and rejection on the other".

The Federal Court decision also demonstrates that Sir Ronald Wilson and HREOC were credulous and irresponsible in not raising any questions about the stories told by witnesses to their inquiry and refusing to ask for corroboration.

Justice O'Loughlin identified a number of situations where Cubillo or Gunner were either deliberately misleading the court or "very unreliable" witnesses.  He also noted his concern that they were engaged, even if not intentionally, in "exercises of reconstruction, based, not on what they knew at the time, but on what they have convinced themselves must have happened or what others may have told them".

It appears that even Cubillo and Gunner's lawyers did not think much of the evidentiary value of Bringing Them Home, for as Justice O'Loughlin himself noted, they made no reference to it during the trial.

Clearly, it is only through the courts that we can get an honest account of the "stolen generations" issue.  Our academics are no better than HREOC, and those who privately admit that the history presented in Bringing Them Home is highly suspect are unwilling to condemn the report in public.

Indeed, some academics go further, and actively suppress anything that might cast doubt on the received wisdom about the "stolen generations".  Last week I spoke with a Ph.D. student from a southern university who had been doing part-time tutoring to support his studies.  After he told a class that what had happened to the Aborigines was not the same as what happened to the Jews in the Holocaust, some students complained about his "insensitivity" on Aboriginal issues, and he was taken off the course.

And on the day the Cubillo judgement was announced, a friend who is studying a Human Services unit at QUT Carseldine asked if I would be willing to address his class to present an alternative to what he thought were very one-sided accounts of the "stolen generations".  But his lecturer sent him a memo stating that this would not be countenanced.  My views, it appears, are "racist in the extreme".

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Wasted trainload of dollars

The Premier's "historic boost to revive Victoria's rail network" pushes the State back into the wasteful Government spending era.  Mr Bracks' ability to spend big on upgrading rail lines to Ballarat, Bendigo, Geelong and Traralgon is due to the windfall inherited from the previous Government.  The Treasury has coffers full of taxpayers money seeking the flimsiest of excuses to be spent.  At the same time, a highly politicised rural electorate that believes Melbourne owes it hand-outs defines how to obtain most votes per buck.  The ghosts of Kennett and Stockdale are pacing the corridors of Parliament House in the unexpected role of the Bracks re-election team.

The Labor Party went to last year's polls promising to spend $80 million on rail upgrades to the regions.  Last week the Premier announced this promise is to be kept with an $800 million spend.  As usual the government maintained they didn't know how bad the situation was when they estimated only $80 million would be required.  This has as even hollower ring than the normal outraged claims incoming Governments make about being misled about how bad things really were -- after all railway lines and rolling stock are visible to all and an articulate lobby is there to reveal and magnify any deficiencies.

To justify its extravagance the Government has produced a bevy of analysis to "prove" that spending $800 million on rural rail will actually leave us all better off.  Of course the analysis is fraudulent:

• it contains "multipliers" that make every dollar spent worth $1.20;
• it is based on a small survey that suggests some people might prefer to live away from Melbourne if the government throws enough money at them;
• it estimates how much those and the existing residents would spend for faster journeys to Melbourne (without, of course seeking that they actually pay the premium);  and
• it throws in "savings" in congestion costs, emissions, car parking.

In addition to these lily-gilding devices the interest rate it uses for the capital cost is probably half the rate necessary for a commercial business.  And this assumes such a business could actually get its hands on the mythical dollars the study claims to be there for the taking.  Indeed, the Government has Buckley's chance of even getting $270 million it hopes National Express will chip in.  In fact, National Express is more likely to ask for an additional subsidy if the Government requires it to run more services to supply the phantom demand.

However, throwing money at rural Australia looks to be a smart political move.  It has pole-axed the Opposition, which is embroiled every bit as much as the Government in the give-away game to the bush.  And most of the press is equally seduced by the thought of puffer-trains to placate sleepy hollow.

Smart politics aside, we soon forget Labor's promises, including to:

• Ensure tight control over spending to produce better services and cut waste
• Commit to "whole-of-government" reporting through a Financial Disclosures Bill
• Ensure the Auditor-General is provided with sufficient resources to fulfil the audit function that will be incorporated in the State Constitution

Whatever happened to these and other promises?  Where is the Auditor-General in ensuring that public money is not wasted?

The former Government's over-cautious approach to tax reductions has left an irresistible budget honey pot for vote buying.  However, let's not forget, the surplus came from the taxpayer.  Rather than spending it on unneeded trains, it is far better to give it back to its rightful owners -- you and me.  Not only does this return it to those the Government milked in the first instance but it offers a far surer means of getting increased employment.  Tax cuts mean reduced charges for government services with all this entails in allowing the State to compete for new jobs with other places within Australia and overseas.

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The Bankruptcy of the Protest Vote

An Address to Free Trade Youth
on Saturday 9 September, 2000

If there is one thing the anti-globalisation activists clearly believe above all else, it is that their moral concerns are worthy of great respect.

Indeed, they tell us that nothing but moral concern drives their protest and their anguish.  That they are driven by horror at what is, and will, happen, and by a desperate desire for a better world.

With very few, if any, exceptions, none of this is true.

I do not mean to say that globalisation does not raise interesting moral issues, or that there are not matters that governments should be concerned about (though I think the concern on both counts is greatly exaggerated).  What I do mean to say is that the campaign of the anti-globalisation activists is not worthy of moral respect.

Their campaign is not worthy of respect because they are clearly not concerned with either truth or with predictable consequences:  the truth of what is happening or the predictable consequences of the policies they typically espouse.

We have to be clear about what globalisation is not doing.  It is not abolishing national sovereignty.  It is not creating mass poverty.  It is not happening regardless of the wishes of ordinary folk.  On the contrary, it is occurring because of deliberate acts by governments of sovereign nations, it is in the process of creating the greatest mass uplift from poverty in human history and it is happening precisely because of the preferences of ordinary people.

As commentators are saying more and more, we are not living in the first age of globalisation.  On the contrary, the period prior to the First World War was at least as great an age of globalisation as the current one.  Indeed, the Deakinite Settlement of White Australia, Trade Protection, Wage Arbitration, State Paternalism and Imperial Benevolence which was the basis of Australian public policy from the 1905-08 Deakin Government onwards until it was fatally undermined by the Whitlam Government (leading to the Settlement's evolving replacement by the Hawke, Keating and Howard Governments), was, in many ways, an attempt to opt out from globalisation.

What is globalisation and why has it become such a strong force?

Globalisation is the development and deepening of world markets in capital, in goods and in services by the increasing occurrence of commercial exchanges across international boundaries.

It is to be distinguished from internationalisation

Internationalisation is the increase in number, range and extent of international treaties and standards having, in countries with genuinely legalistic polities, import for domestic policies and politics.

They are very different, if related, phenomena which generate very different responses:  many of those most favourable to globalisation are deeply dubious about internationalisation and vice versa.  This is not surprising -- globalisation increases consumer sovereignty by widening choice and increasing competitive pressure on producers.  Internationalisation (if governments permit it to) removes political decision-making to a far less accountable locus, thereby reducing the political sovereignty of the citizen-voter.

Globalisation is occurring because governments are letting, even encouraging it, to occur and because people want the things globalisation delivers.  If ordinary consumers did not want to engage, directly or indirectly, in exchanges across national boundaries, they would not happen.  If they did not want to participate in international popular culture, travel to other countries, buy foreign goods, have the widest choice of products, have cheaper products, have better products, sell the products of their labour to anyone who is willing to buy them, then globalisation would not occur.

Even more to the point, if governments did not believe that choosing globalisation did not enable them to more effectively deliver, directly or indirectly, what their citizens want, they would not choose it either.

Engaging in international trade is not compulsory.  Even today there are sovereign nations which attempt to stay out of the international trading economy to a greater or less degree -- North Korea being perhaps the most extreme case.

The claim that globalisation is something imposed on people is nonsense.  People sometimes do not want to face the consequences of their own preferences, but that is a different matter.

It is perfectly true that globalisation does increase Schumpeterian processes of creative destruction.  This openness to other lands, other ideas, other products, changes us and the culture and society around us.  But it remains a change driven by the myriad choices of individuals, households and firms.

Which is, of course, why the anti-globalisation activists hate the whole thing so much.  Because it makes a complete mockery of the idea of social change as something they direct and they can control.  It is not that they hate the idea of people being treated as consumers:  it is they hate the idea of people not being subject to their ideological direction.  People-as-consumers are people choosing on the basis of complete indifference to the visions of the activists:  it is the activists being reduced to trivial nonentities.

After all, what is the core ideological vision of the central organisers of SII?  It is of a society directed by a revolutionary elite who control all aspects of social life in order to create a transformed humanity and a transformed society.

These people claim they are so concerned about poverty, yet there is nothing more predictable than that the policies they espouse will create, extend and entrench mass poverty.  Anyone who doubts that need only examine the record of command economies -- presently being exemplified by that weird Stalinist survival, the arch example of Socialism in One Family, North Korea.

They hate globalisation as the expression of the success of capitalism, and of the collapse of socialism.

Globalisation is simply the application of liberal capitalism on a global stage.  And liberal capitalism is the only form of society which has sustainably delivered mass prosperity, mass longevity, mass freedom and mass democracy.  It delivers these things because it allows a myriad of economic agents to make their own choices, through property rights, the rule of law and free and open political processes.  Globalisation is just the logical extension of this.

Liberal capitalism is the most dynamic social system humanity has ever created.  That dynamism creates its own costs and difficulties:  it is not a costless boon.  But it remains a boon.  One has only to contemplate the fact that human life expectancy has gone up more in the last 100 years than in the previous 200,000 or contemplate the opportunities and prosperity that the average Australian child has today compared to that of a child of, say, 1750, 1850 or even 1950 to see its virtues.

The increase in mass prosperity and longevity, the creation of mass freedom and mass democracy, is such a stunning achievement that no-one who does not seek to understand the nature of that achievement, who does not acknowledge that achievement, can be said to be seriously concerned with human welfare.

We are so used to seeing people accept uncritically that opposition to capitalism and all its works is the only possible sign of moral virtue that we do not stop often enough and consider the bankruptcy of such a position.  It is contemptible than people who proclaim themselves deeply concerned with human welfare to pay no heed to such unparalleled achievement.  Even the claim that political action is necessary to civilise capitalism is subject to the elementary response that political action without capitalism -- under Lenin, Stalin, Mao, Pol Pot -- has been responsible for some of the greatest barbarisms of human history.  For all its, at times apparently relentless, banality, capitalism, at its core, is based on the mass application of individual choice, of institutions which protect and foster mutually beneficial exchanges which have proved to be a profound force for human liberation.

After all, poverty is the normal human condition.  Most people in history have lived and died in poverty, often grinding poverty.  Most human societies produce mass poverty.  It is the development of societies which achieve mass prosperity which is startling.

But now we know how the trick is done.  More to the point, people in societies where mass poverty remains know that the trick can be done.  The success of the Asian tigers in moving from mass poverty to developed world status in a generation has set the benchmark for governments around the world.  They want in because their people demand in.

They also know how the trick is not done.  China is now the largest source of foreign students in the United States -- over 100,000 of them.  They are the children of the elite.  Chinese President Jiang Zemin's own son is studying in the US.  The Chinese elite is becoming American-educated.  They have seen Maoism fail, they have seen the Soviet Empire collapse, they have seen Japan stagnate and they have seen the Americans go from strength to strength.  It is not merely a matter of the current economic boom (which has more than a little of the bubble economy about it) -- in the last 80 years, the US has seen off Imperial Germany, Imperial Japan, Nazi Germany, the Soviet Union and the Japanese economic challenge.  The Chinese know a working model when they see one and they want in.  The effort they have put in to join the WTO is evidence of that.

What the Chinese are seeking to do is not an easy process:  a system which creates "government-owned non-government organisations" or GONGOs has some adjustment problems yet.  In fact, they have huge adjustment problems which may yet see the whole thing go bust.  But they know what they want, they want mass prosperity.  And they know what the working model is.  They have even acquired a striking version of it in Hong Kong.

What this represents is not only the triumph of capitalism as the superior model, as the path of mass prosperity, it is also the abandonment of politics as a source of transcendental belief and aspiration.  It is workday, practical politics.  In its own way, it is deeply inspiring, but it is not a substitute for religious belief and does not pretend to be.  It does not promise a transformation of human nature or a society without tensions and problems.  Instead, it takes human nature as a given and works with that.  It is the triumph of the ideas of the sceptical Enlightenment, the Enlightenment of Hume, Smith, Montesquieu, Burke and Madison.

The radical Enlightenment, the tradition which sees human nature as plastic to the ambitions of the visionaries, the tradition of Rousseau, is left homeless and bereft and utterly defeated.  Their rage is great, because their aspirations as the history-bestriding visionaries of a transformed humanity are empty ashes in their mouth.  Trashing Starbucks café's in Seattle and McDonalds in London are apposite expressions of this rage.  Both chains represent the power and popularity of ordinary consumer choice.  (That McDonalds had to take over the whole food production process in order to supply its first Moscow store with food of sufficient quality to meet McDonalds' standards was a nice display of the failure of socialism).  As anyone who has tried to launch a new product knows, it is nonsense to portray consumers as helpless pawns of marketing:  but such a myth expresses well the ambition of Rousseau"s heirs to be moulders of others.  Accepting the power and reality of consumer choice naturally buttresses the validity of what they choose.

At Seattle and London we saw rage, but it was not the rage of the downtrodden, it was not even rage for the downtrodden, it was a rage of frustration, the frustration of the true believers in their own enormous moral importance being left with no place to go, no stage on which to strut with any seriousness except that of vacuous street theatre.

And that is a rage worth not a scintilla of anyone's moral respect.

Fraser Shows He Has Lost The Plot

Poor Malcolm Fraser.  He cannot bring himself to apologise for the long term damage he inflicted on the nation by his ruthless opportunism in engineering the fall of the Whitlam Labor Government in 1975.  So he tries to redeem himself by adopting the favoured tactic of the posturing classes -- demanding that others apologise for things they did not do.

In Darwin last week, the former prime minister gave the annual Vincent Lingiari Memorial Lecture, named for the renowned Gurindji stockman who led a major strike for land rights and better conditions at Wave Hill in the Northern Territory in the mid-1960s.  Someone who really wished to honour the memory of Lingiari would have tried to inject some fresh and rigorous thinking into the discussion of Aboriginal issues.

Unfortunately, this was absent from Fraser's address.  He confined himself to repeating progressive platitudes of the kind that have proved so detrimental to Aborigines over the past three decades.  He would have done well to consider the bitter comment that Noel Pearson recently made in a memorial lecture for another former prime minister, Ben Chifley -- "A rule of thumb in relation to most of the programs and policies that pose as progressive thinking in indigenous affairs is that if we did the opposite we would have the chance of making progress".

Mr Fraser said that his remarks were primarily directed at non-indigenous Australians.  But he demonstrated just how little he understands the many Australians who have strong reservations about the "progressive" consensus on Aboriginal issues -- the "unbelievers", as he calls us.

He seemed to be suggesting that there are two kinds of people in this country.  There are those who are generous and good, "who believe an honest apology on behalf of the nation is necessary and that we should follow Canada's example".  Then there are the others, those ignoble souls "who prefer to forget" the terrible past that Aborigines suffered "and almost pretend it never happened".

Like much else in his lecture, this is a caricature.  There are sound intellectual and moral reasons for refusing to go along with the notions favoured by Malcolm Fraser and his ilk.  These reasons have nothing to do with denying or forgetting the past, and everything to do with insisting that it be presented truthfully, in all its complexity.

Accepting the distortions and falsehoods promoted by sections of the "Aboriginal industry" is not a mark of goodness or generosity, particularly as these misrepresentations are often used to entice Aborigines into the destructive temptations of victimhood.  If Mr Fraser really wished to influence those who disagree with his position on indigenous issues he should not have been so careless with his facts.

He stated, for instance, that the assimilation policies pursued by the Federal government in the 1950s "were designed to breed out Aboriginals".  But this slur against Mr Fraser's own former colleagues was specifically considered and totally rejected by Federal Court judge Maurice O'Loughlin in his recent decision in the Cubillo and Gunner "stolen generations" case.

Although the plaintiffs claimed that "breeding out half-castes" was one of the reasons they were removed from their families, Justice O'Loughlin stated that none of the evidence presented to the court suggested that any such purpose had existed in the post-World War II period.

Mr Fraser's talk also illustrated -- though no doubt unintentionally -- some of the silliness surrounding the "stolen generations" issue.  He applauded J.W. Bleakley, Queensland's Chief Protector of Aborigines in the years before World War II, as a man who demonstrated concern for "the well being of Aboriginals".  Clearly, Fraser is oblivious to the fact that in a recent Senate submission, the Human Rights and Equal Opportunity Commission cited Bleakley's views as evidence of Australia's "genocide"!

Mr Fraser offered Canada as a model for Australia.  He praised the Canadian government's apology for its past, its willingness to negotiate compensation for the victims of the "residential schools" (Canada's "stolen generations") and the $C350 million "healing fund" it established, as well as its preparedness to discuss self-government and sign treaties with indigenous people.

But Canada's approach has not produced the harmony he pretends.  Most of its indigenous leaders spurned the apology when it was offered in 1998, and the "healing fund" has not prevented thousands of "residential schools" lawsuits from clogging up the courts.  Furthermore, the newly elected Grand Chief of Canada's Assembly of First Nations (their ATSIC) said that he did not consider himself a Canadian, and that the whole country was really his people's land.

Mr Fraser assured his audience that Aboriginal "self-government", "doesn't relate to establishing a separate sovereignty", and that Aboriginal leaders "have not spoken of separation".  Fraser must not have been listening, but they have, as the historian Keith Windschuttle documents in the current issue of Quadrant.

Windschuttle notes, for instance, that the current chairman of ATSIC, Geoff Clark, was previously the deputy chairman of Michael Mansell's secessionist Aboriginal Provisional Government.  And Mick Dodson, the former Aboriginal and Torres Strait Islander Social Justice Commissioner, has claimed that indigenous people have never accepted that they should be governed by the Australian state.

But the Liberals can't really complain about Mr Fraser's suggestion that Australians should vote against them.  After all, only four months ago, they rewarded him with life membership of their party.  People foolish enough to honour a man as vain and destructive as Malcolm Fraser should not be surprised when he turns around and kicks them in the teeth.

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