Food processing industry looking good

Amongst all the doom and gloom in rural Australia the food processing industry shines brightly.

As detailed in the State of the Country series in the Herald Sun this week, rural Australia, more specifically small, inland communities based on broad-acre agriculture are falling behind the rest of the country in almost every economic and social indicator.  Although this is not a new trend, the pace of the decline has arguable accelerated in recent years and for many rural communities the decline has been going on for so long it almost time to turn out the lights.

Couple this with increasing utterances of the big r-word here and aboard, the men and women on the land have a right to be a bit depressed.  After all, recessions usually hit commodity prices extra-ordinarily hard.  Moreover, commodity prices and farmers generally benefited little for the boom economy of recent years.

Trends in the food processing industry should, however, cheer them up.

Food processing is Australia's largest manufacturing sector with turnover of $47 billion and employing 165,000 people nation-wide and over 45,000 in Victoria.  It has also been one of the country's perennial under performers with low levels of productivity and poor export performance.  The industry has gone through radical changes over the last ten years including reductions in tariffs and other forms of government support, increased foreign ownership, rationalisation of plant and increased focus on exports.  It has also been effected by increased competition from abroad and globalisation of brands and sourcing of product.

The process of change while painful for some has been very promising to date.

Since 1991 turnover in the processed food industry has increased by just over 35 per cent;  exports have grown by over 70 per cent;  and employment has expanded by 15 per cent.  Victoria -- which has the largest concentration of food processing operations -- has been the main beneficiary amongst the states from the industry's reconstruction.

Importantly the rural and regional Australia has benefited more than metro areas.

Between the 1986 and 1996 census the number of people employed in food manufacturing increased by 51 per cent in non-metro, inland regions and by 4 per cent in remote regions.  In some regions such as the Murray River, growth in food processing has maintained the absolute number of people employed despite declining employment in farm and transport services.  Food processing industries have also helped rural areas by creating larger markets and sometimes new markets and higher prices for farm products.

Wine has been the stellar performer with a 28 per cent increase in the number of wineries and a doubling of exports in the three years between 1996 and 1999.  Milk, ice cream, biscuits, soft drinks, poultry and seafood processing have also shown double digit growth.

The food manufacturing industry, however, has plenty of work left to do.  Many areas of the industry still lag behind the international competition in terms of labour productivity and scale of production.  And unless these issues are addressed the industry could go into retreat with the exist of some global producers.

Nonetheless, the record of the industry to date offers a way forward for hard pressed rural folk.

ADVERTISEMENT

Submission to the Productivity Commission Review of Telecommunications Competition Policy

Submission

RE ADDITIONAL TERMS OF REFERENCE ARISING FROM THE
BESLEY INQUIRY INTO REGIONAL TELECOMMUNICATIONS

We would like to make some comments on the additional items under reference.

We should say, at the outset that we did not find that the Besley Report much advanced the state of knowledge or the solutions for telecommunications in regional areas.  It rehearsed a range of highly predictable complaints about deficiencies of service and then suggested that further forms of government intervention be considered to palliate the problems.

In general, we should expect both variations in service and in take up of services (sometimes hard to separate) across Australia.  We cannot expect to completely equalise these two matters across the whole nation.  It is a worthwhile objective to provide telecommunications access and the offer of diverse services to as many Australians as is feasible and to accept some cross-subsidisation as part of that.  But this cannot be at any cost.  The USO is already extremely broad and expensive.  We would argue against further incremental creep in the USO in what will be a vain attempt to stifle all complaints.  It will simply create new sets of complainants at the margin.

There is a point at which policy makers and governments have to draw a line on the demands made by one sector of the population or another for treatment that the market does not afford.  In this case we have a sector of the population pressing continually for compensation for their own locational decisions and achieving substantial offsets in this process.  We do not believe all these offsets have been fully measured.  At some point, fairness to the rest of society, which supplies those offsets, has to come into play.

Equally important, in a free society such as ours, is the principle that, so far as possible, people accept and internalise the costs and benefits of the personal economic and social decisions that they make.

If we accept the opposite principle of unlimited compensation for perceived inequity then we are contemplating a very different social and economic structure, one in which wealth transfers through government interventions become the rule and the fruits of individual enterprise and effort are increasingly appropriated.

We are also contemplating a stagnant society, as it is the concurrent existence of individual inequalities and opportunities that provides the dynamic for change and progress.  Regional policies the world over have always carried the risk of simply staving off the inevitable decline of one area/industry or another.

REGIONAL COMPETITION

We find the concept of regional competition policies quite bizarre.  However, unfortunately, this is not an entirely fanciful proposition.  We would draw the attention of the Commission to the interventions of the Government and the ACCC at the local level in the downstream petroleum market, which introduced substantial rigidities without having any apparent beneficial effect in lowering the overall level of prices or curbing the substantial fluctuations or regional variations in prices.

For example, we are not aware that the exclusion some years ago of major oil companies from bidding for a site in Canberra in favour of a new entrant has had any effect on the price which Canberrans pay for their petrol.

The ACCC also regularly prosecutes cases of local collusion by suppliers in products such as concrete and petrol where more distant supply is not practicable.

Regional competition policies therefore can already be applied if the ACCC defines the relevant market sufficiently narrowly, which it has not been reluctant to do.  If no distinct market can be identified, even under the restrictive ACCC test, then there seems little point in creating yet another overlapping and artificial category.  Appointing a Regional Competition Commissioner to deal specifically with such matters seems to us a waste of public money and likely to create yet another layer of intervention and potential rigidity in the telecommunications market.

More specifically, there are obviously bottleneck facilities in the regions by virtue of the fact that, despite all the interventions by government to encourage competition, it has not been worthwhile any operator duplicating the Telstra local loop.  Nor will it be while the main feature of that loop is that it gives rise to more obligations than profits.

The use of newly released wireless bandwidth may, in time, provide an alternative local network to the more densely populated parts of the regions but, in all areas, this will be dependent on the generation of profit.  The threat of declaration of such new technologies would be likely to be sufficient to guarantee their abortion.  Access holidays are not a solution.  They are always grace and favour acts of government and, as such, not to be regarded as binding, especially if they give rise to profits.

PAY TELEVISION

Exclusivity of programming is integral to television broadcasting, including pay television.  This is particularly the case with the important television products such as movies and live sport.  Exclusivity ensures that the broadcaster attracts sufficient viewers to generate subscriptions or advertising revenue.

The Australian pay TV market currently has several features relevant to the issues raised by the Commission:

• No pay TV operator is yet making any profit and total subscriber numbers are growing relatively slowly.
• We have cable, satellite and microwave delivery systems owned by different operators.
• Much of regional Australia is reached by microwave and most by satellite transmissions.
• The important programming is held mainly by Foxtel and OptusVision but is franchised out, particularly to regional operator Austar.
• The movie programming is mostly held by the Hollywood studios which are few in number, often negotiate as a bloc, favour exclusivity for the certainty of revenue it gives them and treat Australia as a small, residual market (which it is).
• The studios are extremely protective of their product and when and where it is shown as they make much of their profit from the geographical and temporal segmentation of its release.
• Pay TV movie product competes with the cinemas, video and, eventually, free-to-air television.
• Sports product is fiercely competed for by free-to-air stations, which have substantial government protection under the anti-siphoning rules.
• Sporting organizations now derive much of their revenue from the sale of exclusive television rights.  It is doubtful that Australia could have staged the 2000 Olympics without exclusivity.
• Free-to-air broadcasters still dominate Australian television viewing and have just been granted new competitive protections by the Government.  Contrary to the judgement of the ACCC, they are part of the same market as pay TV.
• The Australian pay TV market is small and geographically self-contained and likely to remain so.

Given the international nature of much programming it is therefore doubtful, in practice that a non-exclusivity law could operate successfully in Australia.

It is worth recalling that the pay TV market in Australia started out with an entirely new operator, Galaxy, but the limited size of the market, the high cost of product, licences, facilities and marketing together with strong competition and regulatory restrictions forced Galaxy out of business within four years.  Two of the few competitive advantages it had were an exclusive programming deal with four Hollywood studios and exclusive access to the sports programming of Liberty.

The experience of the US does not seem entirely relevant to the Australian market.  Its history and market are different.

For decades, pay TV in the US was a pattern of local and regional cable monopolies, which had a virtual licence to print money.  This has begun to change with the introduction of digital satellite television and some other wireless broadcasters.  The US market, which is probably 20 times the size of ours overall and many times more in pay TV (with more than 60 % penetration and more than 50% of the television market), can sustain many operators and facilities profitably.

In contrast, we mandated digital satellite television from the beginning of pay TV and also had cable and wireless transmission available.  We have diverse facilities but not enough market to support diverse ownership.

Exclusive programming enables subscriber networks to be established.  Without the guarantee of exclusivity it is doubtful that we would have national pay TV at all in Australia, let alone any competition.  It would simply be too risky.  We wonder whether those complaining about the current situation simply want to substitute their own local exclusivity for that which now exists or to cherry pick the product now held exclusively by others.  Debate over the public interest in these circumstances, as suggested by the ACCC, would take place in a context of complete commercial uncertainty.

The proposal to prohibit exclusivity for areas not in the operator's service area seems unworkable.  How else does an operator establish or extend its service area?  Similarly, sub-licensing in unserved areas is no different from the sort of wholesaling that takes place in many industries.  Why should this be of concern, especially if it facilitates competition?  Galaxy's ability to extend into new service areas and to franchise and to on-sell its exclusive programming to Foxtel, Austar and East Coast Television, helped it to compete and survive far more effectively and longer than would have been the case under the regime proposed by the ACCC.  It also enabled the smaller franchisees to acquire wholesale product exclusive to their own regions.  The ACCC proposal would be no more than establishing a second licensing layer in the regions

Attempts to introduce such prohibitions now would dramatically affect the value of the businesses in this industry and would also affect the free-to-air stations, which would be seen to be the next in line.  It would be far better for the government to refrain from interfering in private contracting and competition (eg anti-siphoning) than to dream up new ways to micro-manage competition.  The fact is, this is a very imperfect market and attempts to create partial perfection may weaken rather than strengthen competition.

In short, we suggest that this is an area where less rather than more intervention would be beneficial to competition.

Cash for Certificates a Question of Degrees

Are Federal government funding policies forcing our universities to act like fly-by-night car salesmen?

Over the past fortnight the media have carried reports about an Australia Institute survey of nearly 1,000 academics, which found that some universities are giving full fee-paying students the kid gloves treatment.  Stories of academics being pressured to "dumb down" courses, reduce entry requirements, and pass incompetent students suggest that universities have jettisoned their standards for the extra cash that the full fee-payers bring.

Although the survey has yet to be published, opposition parties eagerly seized on the issue to attack the Howard Government's funding cuts and its support for the commercialisation of tertiary education.  Labor and Democrats politicians intend to refer the claims to the Senate's planned higher education inquiry, so we can expect further sensational accounts of government-induced misdeeds in the universities as this election year rolls on.

Allegations that universities are lowering standards for full fee-paying students are not new.  Nor are they confined to Australia.  Similar complaints have been made about universities in Britain and America, including claims that students who can barely speak English are being admitted to Ph.D. programs, where they pay graduates to "help" them write the assignments and theses that win them their degrees.

And six months ago a national business magazine published a lengthy article called "degrees for sale", which warned that some Australian universities were putting short-term funding requirements ahead of their long-term interests in maintaining academic excellence.  While the article focused mainly on post-graduate coursework degrees in economics and business, there was nothing to suggest that the problem was confined to these fields.

Nevertheless, I think that a little scepticism about the motives behind the current outcry is warranted.  For the problem of shoddy degrees did not begin under the present government, which at least has taken some initial steps to address the situation, through the introduction last year of the Australian Universities Quality Agency and the voluntary Graduate Skills Assessment test.  The latter will allow student performance in four crucial general skills to be compared across different universities and courses.

I spent many years teaching in a number of universities, covering the period when tertiary education was free, as well as when students were required to pay tuition fees.  I encountered a disturbingly wide range of views and practices regarding the maintenance of appropriate standards, to the extent that work which would be failed by one person might be awarded an honours grade by another.

But the overall culture and structure of incentives tended to favour a lenient approach in which standards were gradually, though inexorably, driven down.  Indeed, gloom about what universities were allowing some students to get away with played an important part in my decision to leave academia.

In some cases, ideological reasons led colleagues to pass almost everyone, as they were committed to the phoney egalitarianism that is so prevalent in university social science and humanities departments.  And as well as being "dumbed down", their courses were also being "politicised sideways", invariably to the left.

These "progressive" colleagues did not accept that ultimately their actions would do most damage to students from underprivileged backgrounds, for as academic qualifications became devalued, considerations such as family and old school networks would come to the fore.

In other cases, opportunism was the main motive.  Trendy courses with lax standards tended to attract larger numbers of students than those with demanding requirements, and more students usually meant increased staff and resources -- or at least made staff reductions less likely.

At one university, when I complained that the assessment in a major course was becoming a joke, the professor said he didn't care about ordinary undergraduates.  They were just necessary to maintain the numbers and keep the university administration happy.  The only students he was concerned about were those doing honours, who might go on to do post-graduate work and become anthropologists themselves -- and who, though he wouldn't admit it, would sit admiringly at his feet.

And some of my colleagues simply did not have the fortitude to resist the combination of threats, excuses and blandishments that we would encounter from students disappointed with their grades.  (A Papua New Guinean student once warned me, in vain, that he would use sorcery against me if I did not give him an "A").

This situation appears to have got much worse in the years since I left academia.  Writing in a southern newspaper a few days ago, Associate Professor Alison Elliott, from the University of Western Sydney, identified a number of ways in which students manage to get failing grades overturned, including one which I never experienced -- visits from students' lawyers.

I suspect that many academics are vulnerable to demands from disgruntled students because of a sense of insecurity and guilt about their own abilities as teachers.  Few possess appropriate teaching qualifications, and in any case, the reward structure in universities strongly favours those who develop a reputation for research, rather than for teaching.  Certainly, there are always some academics who take their pedagogical duties very seriously, but this is usually in spite of the incentives, rather than because of them.

So, while I have little doubt that some full fee-paying students are obtaining qualifications they do not deserve, the quality control problem is much more complex and deeply-rooted.  Even if governments were to pump billions into tertiary education and make all courses free again, universities would still be conferring some degrees that are not worth the paper they are printed on.

ADVERTISEMENT

Inquiry Into the Definition of Charities and Related Organisations

Submission

EXECUTIVE SUMMARY

• Charities and related organisations provide important social benefits to the Australian community.
• They are a part of a much larger system of transfers to the disadvantaged and less well off.
• Their definition is value based and should reflect a broad Australian consensus.
• The Inquiry into definitions cannot be divorced from their intended uses.
• The definitions should be tight and watertight.
• They should include both the nature and purpose of the organisations.
• Their activities should fall exclusively within the definition and otherwise not qualify.
• Charities should be narrowly defined with a strong emphasis on direct relief action.
• Their core definition should be simply stated with supporting elaboration.
• Religious organisations are virtually self-defining and should be considered for exclusion.
• Community service organisations should be included under the heading of charities.
• The ATO should have the responsibility to supervise the application of the definitions.
• A new statutory definition is necessary.

CHARITIES AND RELATED ORGANISATIONS IN CONTEXT

Although the statistics for this sector are not comprehensive and its boundaries are unclear, its importance to Australian society is undoubted.

According to the 1999 report of the Australian Institute of Health and Welfare, non-government community service organisations dispose of some $6.4 billion, which they receive mainly from government ($3 billon), households ($2 billion) and fundraising ($1 billion).

In 2000/01 their activities will be supported by a significant proportion of the $400 million of tax expenditures available to not-for-profit organisations.

Almost half a million people work in the sector, a very substantial figure even in relation to a total workforce of 9.6 million.

These raw facts do not give an adequate impression of the range quality and volume of services provided by the sector as a whole.  While there are questions about the value of some of the activities of the sector, the provision of poverty and crisis relief, aged services and education facilities give direct benefits to a large segment of the population that might otherwise not receive them.

This effort should be set in the context of the broader system of transfers of income and wealth in Australia and the direct provision of services to the less well off through government (which are paid for by the taxpaying public) and other entities.

These include:

• the steeply progressive Australian income tax system, which begins to appropriate almost one half of marginal income at a level less than twice, average weekly earnings.  This both "levels down" most incomes and provides the wherewithal to effect transfers to the less well off;
• the social security and welfare payments made through Australian governments (including grants to the sector), estimated at $69.7 billion in 2000/01.  These cover a wide variety of circumstances including unemployment, age, youth, childhood, disability, carer responsibilities, housing, injury, ethnicity, aboriginality, single motherhood, regions, emergency and many others;
• significant elements of government expenditure on health ($38.1 billion), education ($32.3 billion), housing and community amenities ($8 billion) and a proportion of the spending on general public services ($19.5 billion);
• total tax expenditures of $19.7 billion, of which two-thirds falls under the heading Social Security and Welfare;
• an unmeasured range of discounts available to those with pensioner cards of various kinds including cheap travel and access to other goods and services;  and
• direct individual and corporate sponsorship of activities and facilities such as hospitals, local events, blood, environmental upgrades, scholarships etc.

Even allowing for some overlap and churn this is a truly massive array of intra-society transfers.

It is worth setting down these figures not only to put the sector into perspective but also as a corrective to the regular criticism by some politicians, charities and journalists of the charitable contributions of the Australian public and the corporate sector.  Our governments, which jointly appropriate well over a third of national income in a way that dramatically redistributes most individual and corporate incomes, are poorly placed to criticise the considerable charitable efforts of individuals and corporations.

Australia is a society in which huge income transfers take place with little credit given to those from whom they are made.  More recognition of this sacrifice might help to explain and diminish the "donor fatigue" that many charitable, religious and community service organisations are facing.

SOME CONCEPTUAL POINTS

There has been discussion of the reasons for the existence of charitable and related organisations;  particularly those engaged in social welfare activities.  Such organisations have a very long history, often commencing with religious bodies and incidental to their spiritual mission.  It is sometimes suggested that their genesis lies in the failure of the market and the government to provide directly for unmet needs.  Attribution of failure to one mechanism or another and the consequent assignment of blame ignore the history and miss the point.  Rather the respective sectors should be seen as having distinct and valid tasks.

There is overlap.  Both government and charities draw resources from the private sector.  There is extensive government intervention for what can be described as charitable purposes and the private sector makes a major charitable effort.  But not the government nor the market nor any other mechanism, individually or jointly, is capable of meeting all needs, even all "basic needs" which are both enormous and ever expanding as our society grows more prosperous and the definition of needs expands.  Our definition of poverty would seem like affluence to most of the world's population and for most of history.  Even so, social welfare cannot be subsidised indefinitely much less some of the other activities undertaken by charities.

This relates to another point, whether the charities are the product of altruistic impulses or whether self interest plays some part.  No doubt the organisations provide the vehicle for individuals to exercise their own preferences in terms of employment and vocation.  How one looks at this is in part determined by personal values.  But it is not irrelevant to the definition of such bodies.  This should reflect some broader community summation of their place in and value to society.  We maintain that the summation is likely to be more favourable to those activities, which are closer to the older versions of charity with direct relief of distress rather than some more modern variants with their emphasis on words rather than action.

The Committee has indicated that the Inquiry will not provide comment on the taxation or legislative and administrative treatment of the charitable and related organisations.  Its work will be restricted to definition.

It is possible though difficult to describe the main characteristics of these bodies and thus define them.  It is difficult because the definition is partly subjective and therefore potentially so wide as to become meaningless in practice.  Moreover it is not possible to provide a value-free definition.  The exercise must be at least partially normative rather than simply objective.  The task of the Committee is therefore complex.  Even if they ignore their own inclinations they will be reflecting the values of others.

THE MATTER OF PRIVILEGE

The foregoing has a practical implication for the Inquiry.  The impetus for the Inquiry does not arise purely from a wish for greater knowledge of these bodies and clarity in their definition.  It stems from the facts that they undertake functions which governments see as useful to the community and, consequent upon this, they have the privilege of direct government grants, numerous and substantial tax concessions and licences to raise funds from the public.

In many cases the existing definitions determine the level and nature of the privileges enjoyed.  These privileges are not available to other sectors of the community and are largely paid for by them.

Therefore, these are not simply definitions of themselves but definitions with a purpose.

This freights the exercise with much greater significance than is immediately apparent.  This is not merely an exercise in semantics.  Its outcome may affect the fortunes of many organisations and individuals.  While the Committee must avoid comment on the structure of these privileges, it cannot ignore their existence, which gives such point to the debate on definition.

There are implications of this.

First, the Government is specifically and apparently primarily seeking advice on definition from organisations in the sector.  It is essential to have such advice as it draws on the combined experience and expertise of the practitioners themselves.  But we must recognise the massive conflict of interest here.  Many organisations are heavily dependent on government favours and are continuously seeking more government support as essential to their work and even their continued existence.  The ongoing struggle for wider GST exemptions illustrates the continuity of this pressure.  Although there will be diverse views from the sector, it can be expected that there will be a strong tendency towards definitions of extended ambit to comprehend a larger number of organisations and activities within the existing circle of privilege.

Until now the definition has been largely in the hands of the courts interpreting the common law.  In this process the definition has embraced a steadily increasing number of organisations over decades of cases.  This Inquiry opens the way for a more or less constrained set of definitions, which makes self-definition inappropriate.

This then leads to a second counterpoint that the Inquiry ought to give at least equal weight to the advice it receives from people outside the sector.  They bear the cost of the privileges granted by government to some of which they may strongly object.  In our system of government, the general public can only infrequently express its views directly on identifiable expenditure policies.  Furthermore, to the degree that definition determines the level of support for different types of organisation then there is a case for the public to have a say in that level.  If, as is the case, this is a sector that has not been much studied, there is an even stronger case for a more open debate.

This is linked to a third question, whether the sector and its clients exist and draw on the public purse by right.  Jesus said, "The poor ye always have with you", but did not comment on their rights.  It has been argued that the sector ought not to be regarded as within the tax net in the first place.  It does not seem either sensible or logical to allow segments of the population the right to relocate outside the tax system on the basis of their own judgement.  The corollary of this is to regard the direct grants as received by right, a process already well underway in the lobbying for multi-year subventions from government budgets.

In a way this is no more than an aspect of underlying cultural shifts in Western societies towards diminished personal responsibility and the treatment of social security payments as a right without any balancing responsibility.  The efforts of this Commonwealth government to confine such payments to those entitled to them and to establish a principle of mutual obligation at the level of the individual are laudable.  We contend that neither the organisations nor their clients have a right to financial privileges;  rather they are granted by the population at large through governments.

Finally, the reason for the privilege is that the organisations serve the public interest.  This is the key to all the definitions, which we discuss below.  In serving the public interest they are able to act more flexibly and creatively than governments and derive part of their unique value there from.  However, there is a tension, sharpened by their financial privileges, between their independence and the requirement for some sort of public scrutiny and accountability.  This accountability is important in the formulation of definitions as it signifies the quality of the activity.  Special status can too easily lead to abuse and loss of public support.  Henry VIII's dissolution of the monasteries was made easier by their abuse of their privileged status in wealth and before the law.

DEFINITION

Definition of the organisations comprehended in the Inquiry is complicated by their differing nature and activities.

LOOSE OR TIGHT

Consistent with our thinking above, we would argue for relatively tight and watertight definitions for each of the three categories where this can be achieved.  Generally accepted definitions of charity etc may well be broad and divergent but the definitions arising from this inquiry will have a purpose and should be clearly circumscribed by the function they are intended to describe.  Loose definitions will widen the application of financial privileges, which ought to be confined to cases, which would stand comparison with other priorities in public expenditure.

Nor should we accept that there are classes of individuals or organisations, which are, by right, outside the normal obligations of society.  We would prefer the definition to be limited to organisations that provide direct relief for poverty, sickness or like distress -- in other words, the traditionally accepted meaning of charity, which is direct giving to those in need.  This is similar to the definition of public benefit institution used by the Australian Tax Office.  Such a definition would have the merits of confining privileges to organisations that most clearly and directly provide public benefit.  They would be easier to administer, as the test would be fairly simple.

It follows that we would prefer the definition to be the only test and that there be no list of special cases that do not fit the definition, as is now the practice.  Such a list is not only unfair in the broad but gives rise to personal favouritism by Ministers, which is no more than a form of corruption.

NATURE OR PURPOSE

The question has been asked whether the definition should rest on the nature or purpose of the organisation.  This seems like a non-question.  For the definition to be effective it should cover both nature and purpose.

To take purpose;  if this is not consistent with the underlying intent of the definition then the organisation should not qualify.  If it has some other purpose but, for example, undertakes charitable work, then it should change its purpose.  Otherwise, given the almost inevitable weakness of the monitoring of the privileged institutions, it will be too easy for them to change course and cease charitable activities without any internal check.  Moreover one might accommodate all sorts of activities which turn out to be largely charitable, such as the Darwin to Alice Springs railway, but are clearly not charities in the accepted sense.

Likewise, the nature or behaviour of the organisation must be inherent in the definition or we will accommodate the Pharisees who loudly profess but don't act.  For example, if its purpose is religious but its activities are primarily commercial or the provision of a fleet of Rolls Royce's for its leader then a definition that rested solely on purpose would be insufficient to disqualify it.

In short, the definition should rest on both what the organisation purports to be and what it actually is which, in turn, must reflect what it does.

This raises other questions.

An organisation may do many things, some qualifying and some not.  We would argue that, to satisfy the definition, an organisation should be wholly engaged in the activity that defines the charity, religion or community service organisation.  The focus is then on the qualifying activity rather than the organisation.  It overcomes the potential problem of gradual change of the complexion of an organisation.  It should not be impossible for multi-purpose organisations to arrange division of their activities to limit any privileges to those activities that qualify.  Ancillary commercial, social, or recreational activities would therefore need to be hived off.

THE WORDING OF THE DEFINITION

It will be apparent that the definitions, to have practical value, cannot consist of a few simple words although the general intent may be expressed in this way.  There will need to be some supporting material, which both elaborates and restricts the definition.  Drawing on case law, this is what the ATO has done in TR1999/D21 for charities but that is a very lengthy document.

1. Charities.  The Oxford Dictionary supplies a good starting point and perhaps a core definition.  Any diffidence at using an English definition ought to be dispelled when we appreciate the basic definition for tax purposes has been the Statute of Elizabeth 1601.  The definition reads "Giving voluntarily to those in need".  This combines a number of useful features.  "Giving" implies a direct act of beneficence rather than a wider set of activities that provide benefits indirectly.  We believe that unless there is a strong link to direct relief action then the definition will become so vague as to admit a wide class of organisations whose purposes and activities would be only loosely targeted at the common good.  This should not preclude the provision of benefits from one organisation through another that provides them direct.  Nor would it preclude benefits such as direct advice or counselling to those in distress.  The term "voluntarily" indicates activities undertaken mainly by private entities and excludes anything done under statutory obligation.  It also implies an element of self-sacrifice.  "To those in need" defines the recipient group as those who cannot help themselves.  Ideally, it would exclude those that can but won't.  It also implies universality so that the benefits cannot be confined to individuals of the donor's choice.

   Such a definition is close to that of the public benefit institution used in determining the deductibility of gifts.  It focuses on the relief of distress arising from poverty, sickness, and age or like direct needs.  It also makes it easier to ensure that the benefits of the organisation go to the intended recipients rather than to the donors or administrators.  The risks of this not happening were starkly illustrated recently by the behaviour of certain office holders in the Olympic movement who appeared to treat it as a private club both before and during the Games.

   The definition would exclude a wide range of organisations currently regarded as charitable under the common law.  For example, environmental, cultural, sporting, education or research bodies and many peak groups would cease to be defined as charities.  This would have the advantage of removing anomalies whereby, for example, arts societies have status and cinema clubs do not and some environmental bodies appear to have a preferred status over others.  If this course were thought to be too drastic then this non-charitable group of not-for-profit entities could perhaps be classified in a separate heading with income tax exemption but no more.

   Elaboration of the definition should certainly require proper and regular accountability of organisations or the definition would become meaningless.

   Other criteria might cover requirements for not-for-profit, apolitical/non-lobbying, payout rates and the quality of outputs and management.  This would exclude a number of what are, in reality, political action groups falling under environmental and ethical and other headings.

2. Religious Organisations.  In the past it has been accepted that a religion will attempt to convey a profound spiritual message and will involve observances and practices.  This ought to be sufficient to suggest the wording for a simple definition.

   It will be apparent that this approach will make it difficult to exclude from this category almost any self-professed group.  The retreat of the established and other major churches, the entry of other faiths with substantial followings in the immigrant communities, the proliferation of new faiths or variants of the old, the general decline in religious observance together with the strong anti-discrimination laws all reinforce the trend towards religious free-for-all.

   The difficulty of placing meaningful limits on access to the defined category and the increasing secularism of Australian society make a strong case for looking closely at the question whether this is a category that can be meaningfully defined or has any special need either for definition or the privileges that go with it.  Its purely religious purposes and activities are quite dissimilar to those of a charitable kind and it would be interesting to know what is the level of support for them in the community at large and whether that support extended to continuation of their privileged status.

3. Community Service Not-for-profit Organisations.  Given the discussion above we doubt whether this category has continuing relevance, as we would define charities in a way that comprehended all the organisations that ought to have special status.  The nature and purpose of the community service organisation would then determine its status vis a vis the definition.

More generally, if there is to be modification of the definitions from their present courts-based and rather confused state then there seems little alternative to a new statutory definition.  Without this the courts will continue to apply the common law definition in cases that come before them.

INSTITUTIONAL ARRANGEMENTS FOR APPLYING THE DEFINITIONS

Until now, given the privileged tax status of this sector, much of the work of supervising the definitions administratively has rested on the ATO with the guidance of the case law.  Other government agencies have borrowed the definitions for the purpose of determining entitlement to grants.  At the State level attempts have been made to apply their own definitions.

It is essential that a definition that confers privileges not available generally be properly and tightly supervised.  It is desirable that there be some consistency in the definitions.

Employing the ATO to supervise does have several advantages:

• Focus in one agency ensures greater consistency of treatment of individual organisations although there is some criticism even of the ATO in this respect.
• The ATO is experienced in dealing with exemptions and generally takes a hardheaded approach to sloppy or dodgy claims.  It can thus also be effective in declassifying an organisation.
• The ATO is used to dealing with annual returns and applying tests to purpose and to levels and nature of activity.

The alternative would be to set up a separate supervisory body such as exists in the United Kingdom.  This would have the advantage of a special purpose agency with powers to research and perhaps licence organisations for both tax and other purposes.  It might promote greater national consistency, which is highly desirable on equity grounds;  although it is doubtful that the States would cede any of the powers they wield to favour particular institutions at the State level.  There are some disadvantages:

• The cost of setting up such an agency would undoubtedly exceed that of the equivalent resources applied in the ATO.
• It would be more subject to political jobbery and special pleading.  In present circumstances, appointments to such offices are often on the basis of political allegiance, which increases the exertion of influence and the risk of special favours.
• This also increases the potential for regular turnover of office holders with the risk of inconsistency and general weakening of the definition.

CONCLUSION

We believe that the accumulation of centuries of statute and cases and the growing financial privileges attaching to the defined categories has led to a wide extension of the definitions.  The Inquiry represents a unique opportunity to produce a more robust and focussed definition of these entities.  We believe that this should be based upon those organisations that provide direct relief to those in distress.

---

REFERENCES

1. Australia's Welfare Services and Assistance 1999 -- The Australian Institute of Health and Welfare.
2. Tax Expenditures Statement 1997-98 -- The Commonwealth Treasury.
3. Charitable Organisations in Australia -- Report No. 45 -- Industry Commission 16 June 1995.
4. Budget Strategy and Outlook -- 2000-01 -- Budget Paper No. 1 -- The Commonwealth Treasurer.
5. Government Financial Estimates -- 2000-01 -- Australian Bureau of Statistics.
6. Draft Taxation Ruling -- TR1999/D21 -- Income tax and fringe benefits tax:  charities -- The Australian Tax Office.

End-User Advocacy in the National Electricity Market

Submission to a review by the ACCC of proposals by the National
Electricity Code Administrator to fund advocacy groups to
represent consumer views to the electricity regulatory authorities

1 SUMMARY

1.1 THE PROPOSALS

NECA proposes to ensure greater consultation with bodies claiming to represent end-users in administering the National Electricity Code.  It proposes to do so by increasing the scope for consultation and by levying suppliers, and hence consumers, so that bodies claiming to represent the latter can be funded.

1.2 INCREASED CONSULTATION

There is much in the NECA proposal with which few could find reason to object.  More consultation, the use of draft reports and having these reports specifically address matters raised is a useful discipline on regulatory agencies.  Such disciplines in one sense amount to homilies -- consultation can not be legitimately opposed.  On the other hand if consultations are allowed to spin out over indefinite, or even long, periods they prevent rapid decision taking.  Often, proposals to increase consultation are euphemisms to afford increased influence to the parties seeking it.

Limits on who may be afforded "standing" were traditional means by which the judicial process has avoided excessive delays and interference in decision making processes by busybodies.  Some of these limitations have been markedly eroded over recent decades -- in a process that has coincided with the growth of social activism, advocacy groups seek to use judicial and quasi-judicial avenues to promote their goals, (see Huber ⁽¹⁾).

There is presently considerable opportunity for almost any organisation or individual to comment on proposals regarding the National Electricity Code.  Several of the bodies that were originally behind the initiative are particularly vocal in this process.  Accordingly, we do not support the proposal that the bodies claiming to represent consumers be afforded rights, in excess of those they already have, to be involved in the decision making process.

The National Market is a means by which rules are set to allow the efficient production, dispatch and sale of electricity within a rivalrous framework.  Regulatory agencies are the arbiters of price and service levels for monopoly components.  There is a danger that increased consultation will amount to shifting the market rules in favour of "social equity" or to prevent "excessive" profits.  Such shifts would degrade that market, ultimately to the disadvantage of consumers.

1.3 IMPLEMENTING A TAX OR LEVY ON CONSUMERS TO FUND CONSULTATIVE BODIES

We oppose the proposals to tax the market participants (in the final analysis, the consumers) and allocate the sums raised to groups that claim to represent consumers.  It considers that:

• It is improper for a regulatory agency to assume taxation rights, rights that were not specified by jurisdictions in the adoption of the National Electricity Law and which are properly only available to Parliaments.
• Any residual responsibilities for ensuring markets meet consumer needs fall to agencies of government like departments of consumer affairs, the ACCC and the Productivity Commission.  Within the limits of their budgets and legislative and ministerial guidelines, such agencies may seek advice from any bodies they consider to be useful.  The proposal to fund outside bodies would, de facto, increase the funding to these bodies including the ACCC and other members of the Utility Regulators Forum.  It would be egregious for a regulatory body to supplement its own funding in this way.
• There will be any number of bodies claiming to represent consumers, most of which represent only their sponsors and are keen to obtain revenue through compulsion rather than by demonstrating their ability to provide value.
• It will not be easy to control the cost, and the coalition of interests necessary to agree a budget is likely to ensure a progressive increase year by year.
• In well-functioning markets, like the emerging national electricity market, it is retailers that represent the interests of consumers;  they do so not out of benevolence but out of necessity, since the retailer failing to supply goods and services that meet consumers' needs will lose market share and eventually be forced out of business.
• Many bodies claiming to represent consumer interests do not do so.  They do not have the appropriate accountability or governance structure and are often dominated by and express the views of a small clique.  If those groups are given preferred access, this could undermine consumer interests.

2 BACKGROUND

In its 22 December 1999 authorisation, the ACCC required that

C6.2 NECA is to provide a report by 30 June 2000 into the feasibility and resourcing of an end-user advocacy group to participate in NEM decision making, with a view to making recommendations for consideration in the next NEM budget cycle.  The report is to include a review of 8.3.4(c) and related clauses with a view to improving the involvement of non-Code Participants in NEM decision making.

C6.3 NECA is to establish a committee made up of market participants and end-users, or their representatives, to assist it in undertaking the review specified in condition C6.2.  End-users and end-user representatives are to comprise at least 50% of the membership of the committee.

This followed intensive lobbying by advocacy groups, lobbying to which the ACCC to its discredit gave apparent comfort ⁽²⁾.  Indeed the second part of the decision appears calculated to ensure that the advocacy groups were assured a majority.

The NECA report argues:

"Small and medium end users, in particular, currently generally do not have access to sufficient human and financial resources to ensure adequate representation whatever those arrangements.  They should not be left out of the decision-making process solely because of lack of resources."

This, and the lack of overseas precedent, leads NECA to the view that a voluntary process would not work.

NECA argues that "the case for end-use customers to be appropriately involved in national market decision-making is unarguable."  And so it is.  The issue is how to ensure that participation.  In this respect we oppose the views set out by NECA.

3 CONSIDERATION OF THE FUNDING ISSUES

3.1 REGULATORS ASSUMING A TAXATION ROLE

The ACCC's funding is determined by the Commonwealth Parliament.  NECA (and NEMMCO) have funding levels determined by provisions in the Code.  These provisions can be modified in the light of changing circumstances.  However, the introduction of the end-user advocacy function is, in effect, a major new body.  Its recommended funding level on the proposal that the ACCC addressed is almost half that of NECA.  Had the jurisdictions who agreed to the Code wished, they could have created such a body from the outset.

We note that only one Government agency, the NSW Department of Minerals and Energy, appears to have acquiesced in the proposed course.  That position was registered in a very brief email.  No other jurisdiction has given similar support.

It is our view that imposts like the ones proposed are not the prerogative of agencies independent of the Parliament.  Should governments wish to fund an activity by hypothecating a tax to it, they are at liberty to do so and are answerable to the electorate.  A regulatory agency can never be answerable in such ways.

It has been said that levies to fund consumer representation are common.  According to NECA, such funding is available in the UK and in 46 of the 50 US states.  However, these arrangements pre-date the existence of electricity markets.  Where monopolies are in place it is not unreasonable that the monopolist funds some voice from the users (though this would not obviate the normal problems of capture either by radical consumerists or by sectional user groups).

We are now in the process of shifting to a full market where all customers are contestable and where retailers will be anxious to win sales by acting in the customers' interests.

Some suggest that the levy will be funded out of profits.  This is not possible.  If it were to occur resources would leave the industry to seek out better avenues for income.  In effect, such activity would take place in the electricity industry through retailers reducing the resources they allocate to the industry.  This would frustrate the development of the efficiency the industry is capable of achieving.  Hence, the levy is quite clearly a tax on the retailers, the effects of which must be passed back onto the customer.

One Australian industry which is in an analogous situation is telecommunications.  Under the previous monopoly Telecom used to fund independent representation and research.  An Australian Democrat initiative led to the introduction of and Parliamentary agreement to section 593(1) of the Telecommunications Act (1997).  This makes provision for Parliament to appropriate and the Minister to disburse funds for consumer representation and research.  The funds are recouped from carrier licence fees.

The telecommunications model has a number of differences from the present proposal:

• an annual appropriation is made by the Parliament and the Minister determines how much of this shall be actually spent;
• the final decision on each disbursement is made by the responsible Minister, assisted by advisory panels;
• there is a strict requirement for any consumer funded representation to demonstrate its consumer ties (and for this reason the Communications Law Centre is not significantly funded).

Most of the funding, around $800,000 last year, actually goes to three organisations:  the Consumers' Telecommunications Network, the Small Enterprise Telecommunications Centre and the National Federation of the Blind Citizens of Australia.

3.2 GOVERNMENT AGENCIES AS CONSUMERS' REPRESENTATIVES

It is our view that the proposed consumer advocacy body would assume functions which are already being undertaken.  NECA itself and the ACCC are bodies charged with ensuring efficient outcomes and taking into consideration all interests.  Consumer interests are paramount in this process.  In other words, the regulatory bodies act as honest brokers between conflicting interests and must necessarily provide their own input where they consider a party is insufficiently represented.

The deemed existence of monopoly elements in the electricity supply industry (the poles and wires) gives rise to the need for regulatory oversight and regulatory bodies at the state and national levels.  The price and service controls that the regulatory bodies possess are designed precisely to prevent monopoly elements exploiting their positions in the marketplace.  To the degree these bodies with the designated responsibilities consider they need to solicit additional views that canvas a consumer perspective, they are funded to do so.  In fact NECA itself has announced funding to ensure it is fully appraised of views that take this perspective.

These matters add a further complicating element in the decision making role the ACCC may assume on this matter.  If the ACCC requires the market to furnish additional funding for this purpose, it is, in effect, legislating to increase budgets, including the budget of itself and its sister organisations in the Utility Regulators Forum.  The regulatory agency would therefore not only be assuming a taxation power but it would be doing so for its own direct benefit.  For this reason alone, it would be quite improper for the ACCC to support the proposal.

3.3 CONTROLLING THE COSTS AND DETERMINING WHO SHOULD BE THE FUNDED BENEFICIARIES

The proposals incorporate rather vague disciplines to ensure the costs are closely controlled and justified by need.  As the foregoing explains, the only rationale for any funding or regulatory control is the existence of natural monopoly.  Already we are seeing entrepreneurial interconnects undermining monopoly in transmission and developments like Powercor's Docklands grid impacting on the monopoly of local distribution.  Distributed energy in the form of co-generation will further diminish the need for regulation.

In these circumstances, even if there were a justification to do so, it is not advisable to introduce yet another rate-payer funded body into the electricity supply industry.

In addition, deciding the aggregate level of funding for the group will be difficult.  As footnote 2 indicates, the starting bid for those seeking funding was $2.7 million per annum, most of which was to be spent on their own remuneration and travel (the Pareto Economics report sought per diem remuneration levels similar to those of the NECA Board).  The Energy Users Group, while not requiring that it determine for itself the quantum of funds available, said in its submission on the matter "Determining funding priorities is a matter best left to end-users themselves through the National End-User Council, which end users have already moved to establish".

The Public Interest Advocacy Centre (PIAC) has drawn attention to the likelihood of a coalition of advocates carving up the bird between themselves (and presumably leaving too little for PIAC).  Indeed, the balanced panel that NECA advocates (an independent Chairman, two retailers, one business user and one residential end-user) is certain to result in coalitions emerging to divide the spoils.

PIAC argues that there is nothing to be gained from research financed by a levy that simply benefits business and other large users who should be capable of funding their own research.

We see merit in the arguments PIAC raises.  We also maintain that if an organisation is to have claims on public funding it should demonstrate it is truly representative.  We know of no organisation that purports to represent consumers that has a mass support base of consumers.  The most widely known of those signing the "Joint Consumer Submission" is the Australian Consumers Association (ACA).  This organisation, with which former ACCC Deputy Chairperson Allan Asher had a strong association, has just 650 members.  ACA claims it does not accept money from governments at least on an "on-going" basis.

In fact, we have better credentials for public funding than those seeking the funding.  People claiming to speak for consumers without having a mandate from them may no more represent their views and interests than did East European socialist parties who made a similar claim on behalf of workers.  Assertions that a group is the "vanguard of the consumer" may be as baseless as other agitators' declarations that they were the "vanguard of the proletariat".

3.4 RETAILERS AS CONSUMER REPRESENTATIVES

The rationale for the proposed levy is sweeping.  The analysis used to justify the proposal is that consumers are diffuse, inclined to "free ride" and individually gain little to make it worthwhile for them to fund a lobby organisation.  On this basis, it would be possible to argue for a levy to finance such bodies for almost every activity.  After all, do not the same issues arise with motor cars and houses, to say nothing of small item and "impulse" purchases?  We do not have such bodies generally because markets that comprise many buyers and many sellers ensure adequate disciplines on suppliers, who are required to give good value and respond to consumers' needs.

The retailer becomes the customers' agent in most markets, discovering consumer needs, matching these with the producers' offerings and in the process bringing about revisions to these needs and offerings.  Competition and the wish of all parties to maximise their welfare brings efficient outcomes from this interaction.

Some have argued that retailing activity in electricity adds so little to the final value that it could be dispensed with and a spot pass through could be used.  Such a line of reasoning (which has surely been deflated by the Californian outcomes) could apply equally to many areas of retailing.  Most lines in supermarkets have margins of only a few percentage points of the final price, yet are major interpreters of the consumer needs and hence value-drivers.

Littlechild ⁽³⁾ identifies and describes the valuable functions that electricity retailers undertake.  Once the retail function ceased to be regulated, retailers asked their customers what price system they wanted:  uniform time of day, interruptible and so on.  At the same time they asked generators what could be supplied and went about matching these requirements and offerings.  Customers for their own part shopped around to get the best deals and they, retailers and generators can make better informed decisions about what is available, in the process raising the performance of suppliers and re-shaping the demands of users.

Littlechild stressed the similarities in electricity and other retailing, noting that a monopolist will be far less concerned to ensure prices and supplies sculpted to the producer and customer needs.  Indeed, in a footnote he criticises Joskow's use of the word "peculiar" to describe electricity saying,

Conceding too much to "peculiar" attributes of an industry can unnecessarily open the door to special pleading.  After half a century of nationalisation and/or regulation because electricity is said to be different, there are advantages in stressing the similarities between electricity and other products, rather than the differences.

4. CONCLUDING COMMENTS

As far as supporting the consumer is concerned, we subscribe to Adam Smith's view "Consumption is the sole end and purpose of all production, and the interests of producers ought to be attended to, only insofar as it may be necessary for promoting that of the consumer."

Some of the bodies campaigning most vigorously for this funding are represented by experienced people with useful analytical perspectives on the electricity industry.  We question whether any of them have any legitimate representational claims.  Some may draw attention to a high readership of their literature, but on that basis the Sydney Daily Telegraph could mount much more powerful claims to be representative.

We have no objection to regulatory and quasi-regulatory bodies, consistent with their charters, financing the provision of advice from able people.  However to introduce a new charge for this would be an unjustified impost on the consumer.  And to set up a body at arms length from the accountability process is not acceptable.

We are conscious of the ability of taxpayer funded advocacy groups to obtain influence out of all proportion to their representation and, once established, to perpetuate themselves indefinitely.  We therefore urge the ACCC to reject this application to change the Code.

---

ENDNOTES

1.  Huber, P. Liability, the Legal Revolution and its Consequences (Basic Books 1988)

2.  In addressing the issue, the ACCC said,

The Australian Consumers' Association, EUG and ACA have jointly submitted a proposal for demand side participation in the NEM.  The proposal contends that, at present, participation in the NEM is dominated by the supply side and that consequently it is arguable that the benefits of introduction of the NEM have flowed through to major participants at the expense of end-users.  The proposal further contends that supply side participants are able to marshal significant resources to argue for market outcomes to suit them with little countervailing demand side participation.  The joint submission argues that adequate resourcing is necessary in order to facilitate effective demand side participation in the market.

The joint submission proposes that a research and advocacy function be established, to be supervised and directed by an advisory board representative of consumers, end-users and new entrants.  It is proposed that the new body would conduct market research and analysis, participate in the debates on market arrangements and outcomes and play an advocacy role for the demand side where appropriate.  The aim of the body would be to provide a better balance in regulatory and market outcomes.

The proposal estimates that $2.7 million per year would be required to fund such a body and propose that the body be funded via a levy of 0.15 percent on contestable market electricity sales.  The association contend that such a levy would amount to total cost to end-users of between 20c and 40c per household and that savings to households from effective demand side participation would amount

3.  Stephen C Littlechild Why we need electricity retailers:  A reply to Joskow on wholesale spot price pass-through, The Judge Institute of Management Studies, University of Cambridge, 22 August 2000

Hey, big spender!

In the real Australia, Prime Minister John Howard presides over a higher level of Commonwealth expenditure per Australian than any previous PM:  twice that under the last McMahon budget, more than 50 per cent higher than the last Whitlam budget, a third higher than the last Fraser budget, 16 per cent higher than the last Hawke budget, though a mere 3 per cent higher than the last Keating budget.

The increase in revenues per head has been even more striking, being also twice that of the last McMahon budget, but 70 per cent higher than the last Whitlam budget, almost 50 per cent higher than the last Fraser budget, more than a third higher than the last Hawke budget and 16 per cent higher than the last Keating budget.

The fiscal rectitude of the Howard Government has been primarily purchased, not through expenditure cuts, but via revenue increases and reductions in the growth of spending, with expenditure per head dropping in only one year (1997-98).  Even then, the 2.9 per cent drop per head was more than wiped out by the 5.5 per cent increase in expenditure per head the following year ...

the real Australia is a more regulated society now than it was at the beginning of the reform period.  As a rough indication, the eight years 1990 to 1997, a period marked by no great national emergency, saw the Commonwealth Parliament pass more pages of legislation than the period from 1901 to 1980 ... The intrusive ambit of regulation expanded across a range of fields:  notably environmental law, health regulation, corporation law, tax law and the aforementioned areas of ancillary employment law.

ADVERTISEMENT

A "Grey" Area in Our Race Relations

The call could have come from Pauline Hanson.  Instead, the demands for an inquiry into people fraudulently saying they are Aborigines so as to get special benefits came from indigenous leaders, such as Senator Aden Ridgeway and ATSIC deputy chairman, Ray Robinson.

The calls were triggered by articles in The Courier-Mail last month about the Appo family, who are Queenslanders of Sri Lankan descent.  Although most members of this family are said to have no indigenous ancestry, by claiming to be Aborigines they have received millions of dollars worth of benefits, including concessional housing and business loans, educational grants and preferences, and legal assistance.

Ray Robinson suggested that the Appo family were merely the tip of a very large iceberg, estimating that up to 15 per cent of people who said they were Aborigines had no Aboriginal or Torres Strait Islander blood.  This makes the apparent unwillingness of Mr Robinson and ATSIC to publicise the problem in the past all the more scandalous.  Indeed, less than three years ago ATSIC tried to meet misgivings about people unjustifiably receiving special assistance by releasing a booklet claiming that applicants for benefits such as concessional loans had to "prove their Aboriginality" by meeting strict documentary requirements.

Of course, attacks on the right of particular individuals or families to identify themselves as Aborigines are not uncommon.  In recent years media stories have reported allegations that supposed Aboriginal writers and artists such as Bobby Sykes, Mudrooroo, Eric Willmot and Sakshi Anmatyerre have no indigenous ancestors.

Similar claims about other well-known Aborigines circulate in private, with varying degrees of plausibility.  Sometimes the perpetrators are other Aborigines;  sometimes they are whites with an axe to grind.

A few years ago, for instance, someone hostile to Tasmanian Aboriginal activist Michael Mansell sent me an article called "The Halfcastes of the Furneaux Group" (islands in the Bass Strait), published in an obscure scholarly journal in 1947.  The sender drew my attention to a statement that all the Mansell family had descended from the son of a white sealer from Sydney and an American black woman.

But despite my correspondent's belief, this did not show that Mansell is an impostor, as later statements in the article indicated that his family almost certainly has Aboriginal blood through other forebears.  And perhaps more importantly, the article itself was evidence that the Mansells were identifying themselves as being of Aboriginal descent long before there were any particular benefits in doing so.

Indeed, by focusing simply on biological descent, the furore over the Appo family has raised only part of a problem that is almost inevitable when a category of people who cannot be unambiguously defined are offered benefits unavailable to others.

Three requirements must be met for someone to qualify as Aboriginal -- as well as having an ancestor who was one of the pre-European inhabitants of Australia, an eligible person must identify as an Aborigine and be recognised as such by his or her community.  In practice these requirements -- particularly the latter two -- allow considerable scope for opportunists.  Individuals can readily affirm a non-existent or previously denied Aboriginal identity, and some community organisations are pretty lax about their responsibilities regarding recognition.

Until a few decades ago, of course, all the economic and social advantages went to non-Aborigines, and many mixed race people with Aboriginal ancestry escaped onerous restrictions and prejudice by "passing", either as whites, or if their complexion was dark, as Indians or other non-Europeans.  But from the 1970s the balance of incentives changed, with a more positive approach to Australia's Aboriginal heritage and the introduction of programs designed to compensate for past mistreatment and end current disadvantage.

This largely explains the substantial growth in the numbers of people identifying themselves as indigenous over the past few decades, a growth which is considerably larger than the natural rate of increase.

In the 25 years from 1971 -- when Aborigines were first officially included in the Census -- to the latest count in 1996, Australia's indigenous population grew from 116,000 to 386,000.  In Tasmania, the growth has been extraordinary, increasing from around 670 indigenous people in 1971 to over 15,000 in the same period.  As a consequence, Tasmania now has a higher percentage of its population identifying as Aboriginal than any other Australian state.

Given the legal and other burdens that Aborigines previously faced, the motives of those who once "passed" are understandable, though perhaps not praiseworthy.  Nevertheless, while they or their descendants may now meet all the official requirements of Aboriginality, their moral right to benefit from special programs designed to overcome Aboriginal disadvantage is another matter.

There is honest disagreement about whether such programs can really achieve their intended goals.  But irrespective of one's views on this question, it is hard to see why the benefits should be freely available to people who only affirmed an indigenous identity in recent decades, whether these people where ignorant of their Aboriginal ancestry or whether they deliberately denied it.  In most, if not all cases, these recent Aborigines are almost indistinguishable from their non-Aboriginal neighbours, socially, economically and culturally.

I do not know how long those members of the Appo family without any indigenous ancestry have been saying they are Aborigines.  I do not condone fraud, but if the Appos were identifying as Aborigines and stood with them during the hard times of the past, they have more of my sympathy than people who denied their Aboriginality until things started to come good in the 1970s and 80s.

ADVERTISEMENT

What Makes a Third World Country?

We now know it is possible to move from the third-world to the developed world in a generation:  Hong Kong, Singapore, Taiwan, South Korea have done it.  We also know that it is possible to move from the developed world to the third-world in the same time frame -- Argentina has done it.  In 1950, its GDP per head was equal to 90 per cent of the developed world average, and was, as it had been in 1900, comparable to that of France.  By 1992, its GDP per head was, at 45 per cent of the developed world average, well below that of any developed country.

Thanks to the work of a range of scholars such as Eric Jones, Jack Powellson, the late Mancur Olson, Lord Bauer and Peruvian thinker Hernando de Soto and his international band of researchers, there is no great mystery to all of this either.

Mancur Olson -- author of The Logic of Collective Action and The Rise and Decline of Nations -- posed a revealing question.  Why does the income of illiterate Mexican peasants go up, and go up substantially, when they cross the Rio Grande from Mexico to the US?  (Which is why, of course, they continually seek to so cross).  Their skills do not improve:  in fact, they move from a Spanish-speaking country to an English-speaking one.  The answer is:  American institutions work much better than Mexican ones.

P.J. O'Rourke expressed it in a joke.

American:  "why do you hate us?"
Mexican:  "because you stole half our country and, what's more, you stole the half with all the paved roads".

In a sense, the answer is obvious.  Mexico was settled by Europeans a century before North America:  most of the great Latin American cities are a century or more older as European settlements than the great North American ones.  If North America is so much more prosperous than Latin America -- and Hispanic immigrants to the US achieve American average incomes within a generation -- then the answer has to lie in institutional differences.

Hernando de Soto got some researchers to conduct a famous experiment:  to attempt to get all the legal approvals needed to set up a small textile concern in Lima, Peru.  It took 289 days of dealing with the bureaucracy, just to get the legal approvals.  The same exercise in Miami, Florida (also a largely Hispanic city nowadays) took less than a day.  It is perfectly obvious where there will be more economic activity, and where people will be more prosperous.

De Soto's teams of researchers conducted similar examinations elsewhere and got similar results.  In Haiti, for example, one can expect the process of acquiring legal title to land to take 19 years -- and even then, retaining title is not certain.  How does economic activity take place in such circumstances?  The answer is, extra-legally.  People trade, but, apart from small items, they only trade within small networks who can enforce good behaviour on each other.  This allows people to survive, but is crippling as far as aspiring to a wider prosperity is concerned.

Just think how limited your economic existence would be if you could only engage in major purchases with people known to you, or immediate friends and family, personally.  And if you had no legal title to anything, so could not use the processes of formal credit:  no bank loans, no mortgages, no credit cards.  If everything you had was fundamentally insecure, at the mercy of any corrupt official who came along.

That is what it means to live in the third world.

It is not that the poor lack assets.  De Soto estimates that, if the United States raised its foreign aid budget to 0.7 per cent of national income, it would take it 150 years to transfer to the poor of the world income equal to the value of assets they already hold.

What the poor lack, de Soto points out, is capital;  specifically the institutions which give them the ability to turn assets into capital.  In his new book The Mystery of Capital, de Soto identifies six principles a well-ordered system of property law possesses:  it fixes the economic potential of assets, integrates dispersed information, makes people accountable, makes assets fungible, networks people;  and protects transactions.  By defining and protecting property rights under a clear and open system, the institutions of developed countries allow people completely unknown to each other to trade securely.  It creates huge interlocking networks which raise the wealth and income of everyone in them.

And the Mexican peasant swimming across the Rio Grande is trying to plug into those networks.

All this is particularly interesting to Australians and New Zealanders.  Why?  Looking at long-run economic growth since 1870, New Zealand is the developed country most likely to drop out of the ranks of developed countries and we are not far behind.  From 1870 to 1997, New Zealand's economic growth rate per head was a mere 39 per cent of the developed world average.  Australia's was the next lowest at 45 per cent, followed by the UK at 50 per cent.  Then there is a jump to Belgium and the Netherlands at 71 per cent and then the US at 88 per cent.  (All those immigrating peasants don't do great things for American averages, for lots of indicators).

This is very much a twentieth century phenomena.  Australia had above average economic growth per head in the nineteenth century.  We achieved the highest average income in the world.  Australia and New Zealand took a major wrong policy turn around the beginning of the twentieth century.

Mancur Olson advanced the theory that the accumulation of interest groups could retard economic efficiency and that this could get worse over time.  One way to look at this is that all social systems produce barnacles:  interest groups which take in more resources than they produce and which actively retard the operation of the society.  The question is:  how well does a polity's institutional structure frustrate the creation of such barnacles or eliminate them if they do begin to grow?

Market economies with well-ordered property laws have barnacle elimination mechanisms:  they are called profit, loss and free contracts.  The state can provide protection from such mechanisms, allowing the barnacles to thrive.  In the extreme case -- socialism -- the society entirely lacks barnacle-removal mechanisms;  so barnacles pile up until the polity sinks.  In third-world countries, barnacles are the rulers, not the exception.

It is not hard to see why Britian's long-run growth record has been so mediocre.  The UK paid for two World Wars (the losers welshed on their debts), had the interlocking network of social cartels -- including its union structure -- we call "the class system" (again, the losers had their interest groups broken up), had become highly protectionist prior to entry into the EU and had the complacency that came from its remarkable success over the nineteenth century.

All very well, but why did we and New Zealand do even worse?  Did Australia and New Zealand inflict barnacle-generation and protection systems on themselves?  Yes they did:  they are called trade protection and wage arbitration.  Being small economies, Australia and New Zealand suffered particularly badly from trade protection restricting our ability to access economies of scale and scope in world markets and which made us more vulnerable to exploitative cartels and monopolies:  a process that wage arbitration actively encourages.  Wage arbitration represents arbitrary interference by unaccountable officials in private contracts.  It violates all of de Soto's principles.  Attacking the value of the most common asset (people's labour) by restricting its use is a great way to retard economic growth.  (If Australia had maintained equivalent American standards of living -- and we were wealthier throughout the nineteenth century -- the average Australian family would now be about $40,000 a year richer).

Further support for the barnacle thesis can be garnered from looking at the improved growth performers since 1980.  The Celtic Tiger is the star improver:  from 1870 to 1980, Ireland's per head economic growth was 62 per cent of the developed world average, since 1980 it has been 328 per cent.  Next best is the UK (from 48 per cent to 114 per cent), followed by Australia (from 46 to 97) and then New Zealand (from 44 to 61).  Thatcherism shook up the UK class system, while all four countries have moved to free trade and liberalised their internal markets.  (Ireland also massively cut company tax rates and government's share of GDP)!  Labour market reform occurred earlier in the UK and went much further than in the antipodes (given that New Zealand has recently re-regulated its labour market).

Australia has managed to catch up to average developed world growth rates (even be a star performer in the 1990s), but New Zealand has merely achieved falling behind more slowly.  Showing we have learnt nothing from a century of mediocrity, Australia is now in the process of re-regulating its labour market State by State to protect the interests of a union officialdom whose own members are deserting in droves (union membership has dropped 29 per cent since 1990) in ways which greatly extend arbitrary intervention by officials in private contracts.  New Zealand has banned forestry in Department of Conservation land (30 per cent of the country), the push is on to ban mining also.  It, a country dependant on biological production, may ban the use of bio-technology, crucial for increased productivity.  The same technology is under threat here.  We have placed 15 per cent of our land area under "indigenous title" -- a form of title which violates most of de Soto's principles -- and made property rights insecure across another 65 per cent.

Most of this nonsense is done on the basis of posturing by status-seeking elites -- also a very third-world phenomena -- supporting policies very poorly designed to achieve their alleged intentions.  If we keep this up, New Zealand really will become the only third-world country where you can drink the water, and we will not be far behind.

ADVERTISEMENT