Bush Loosens up on Protection

The Bush Administration has produced a circuit-breaker for world trade reform at a critical time for global markets.  Securing congressional approval for negotiating trade agreements, together with the US offer of massive cuts in farm subsidies, has stopped the rot that appeared to be hurtling the US into a new protectionist era.  President Bush's authority to negotiate trade agreements covers both bilateral negotiations like those with Australia and the WTO multilateral Doha Round.  The Administration has shifted the focus back onto agricultural protectionism and away from measures like "fair trade" and environmental add-ons that would constrain trade.  More importantly, it has propelled the debate towards finding means of overcoming rather than excusing the wealth-sapping policy of farm subsidies.

The years since World War II have seen a remarkable freeing up of trade among nations.  Trade restraint measures accumulated in almost every country over the century to 1945, have been dismantled over the past fifty years.  With the important stand-out of agriculture, all but a handful of countries have reduced their trade barriers on goods to the equivalent of just a few percentage points.

The outcome has been massive benefits to consumers and widening growth opportunities to the Third World.

On top of the obvious advantages of cheaper goods displacing higher cost suppliers, lower trade barriers have brought on-going gains.  Global competition and specialisation has brought to the world the economic stimulus of rival suppliers, each being forced on a global basis continuously to examine costs and hone their offerings to shifting customer needs.

With manufactures increasingly free of trade barriers, ensuring open markets for services has been a major agenda in more recent trade negotiations.  And the signs are that services will also enjoy a relative lack of trade barriers.

Agriculture has been the main deviation from the trade liberalisation trend.

The European Union's Common Agricultural Policy is almost the EU's defining feature, and is certainly its most important cost.  Indeed, the Europeans are making a virtue out of their agricultural morbidity:  they are rejecting new technology like GM crops, and are toying with the idea of farmer subsidies to convert agricultural lands into environmental museums.

Japan has even greater problems with agricultural efficiency and also faces policy paralysis that prevents agricultural trade liberalisation.

These bulwarks to progress have long threatened to derail the trade liberalisation process.  But it was US backsliding that was most menacing to progress, largely because the US has been philosophically, and not just pragmatically, a vocal supporter of free trade.

Because of this, the introduction of protectionist measures by the US over recent years has threatened to take us forward into the pre-1945 past.  US measures have included a steady increase in anti-dumping actions, invariably a thinly veiled means of taxing low cost imports.  US anti-dumping actions have risen from 40 per year during the 1980s to 300 per year.

Fuel to this apparent trend had been added by the Clinton-Gore flirtation with the anti-globalisation movement.

America's recent temporary protection measures on steel provided another indicator of the nation's backsliding.  But it was the 67 per cent increase in most US crop subsidies built into the recent $200 billion farm bill that did most to knock the US off its high moral ground pedestal.

The offer to dismantle half of the subsidies is a major initiative through which Bush can yet prove his free trade credentials.  Like Reagan before him, Bush campaigned as a free trader but introduced trade restraints early in his period of office (in Reagan's case the restraints were on Japanese cars).  Like that of Reagan before him, Bush's inauspicious start can be reversed.

For Australia the stakes are high.  ABARE estimates that halving world agricultural protection levels would bring a net $360 million a year bonus to our GDP.

Alongside our like-minded allies in the Cairns Group, Australia's challenge is to maintain agricultural reform high on the agenda and not let the Europeans (or the Americans for that matter) return the genie to the bottle.  Dismantling our own crude protectionist measures that use quarantine as the excuse to keep out bananas, salmon and pork is one essential step necessary if we are to achieve the ethical consistency to fight our corner.

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Hours of Work Unlikely to Change

The decision this week by the Australian Industrial Relations Commission to give employees the right to refuse "unreasonable" hours of work will not have major impact most Victorian workplaces.

While many awards do give employers the legal right to require employees to work overtime, no one takes that legal technicality seriously.  In the real world the length of the working week is already decided by workers.

Moreover, working hours are unlikely to go back to previous levels due to changes in the composition of work, work arrangements and the preference of workers.

Occupations with the longest working hours are often the occupations of choice in today's economy.  Farming, not surprisingly, dominates the list of occupations with the longest working week. [1]  While traditional dry land farming is in decline, new forms of farming are growing.  Other occupations with long hours of work include small business owners, mangers, real estate professionals, medical consultants, legal professionals, financial advisors, couriers and truck drivers and engineers.  Virtually all the fastest growing occupations in terms of employment are in the top 50 occupations in terms of hour worked.  Most of these occupations are made-up of the self-employed, independent contractors or equity holders.  While once in these occupations people may have little real choice but to work long hours, they enter in the full knowledge that this will be the case and that they will be rewarded for their effort.

Over the last decade there has also been a trend towards more intensive work-holiday patterns which workers are unlikely to abandon.  Miners, for example, which are high on the working hour's list, now characteristically work 12 hours shifts.  They adopted the longer work-day in exchange for longer weekends and holidays.  Teachers and university lectures also have increased their workload during school time in exchange for extended holidays.  The same trend can be found in engineering, IT, nursing and other high paying professions.  The hard work/ hard play preferences of generation-X indicate that these arrangements will only become more common.  Since the data on hours worked is based on surveys of people at work during a given week and does not factor in holiday time, it trends to overstate hours worked over the year for many occupations.

While many workers may want to work fewer hours but they will resist any attempt by employers to reduce paid over-time or the bonuses that come with long hours.  These monies have been built into budgets of many household and into many enterprise agreements.  Even the construction unions which led the "working hour's campaign" do not plan to push for a reduction in working hours in up-coming wage negotiations.  They plan to keep the six day working-week but push for extended weekends and more hours paid at overtime rates.  In short they want a 36 hour working week not to reduce the hours worked but to get paid on overtime rates.

Many Australian's are working longer hours, but they are doing so out of choice and in the pursuit of higher incomes.  The AIRC did the right thing by ensuring that workers have the power to change the trend if the wish, but in reality they already do.

1.  (See Herald-Sun, 24 July 2002).

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When Saving the World Gets in the Way

Shareholders should be petrified by the suggestion that the trustees of superannuation funds appoint themselves as corporate-governance regulators (AFR, Opinion, July 22).  Shareholders should be petrified by the suggestion that the trustees of superannuation funds appoint themselves as corporate-governance regulators (AFR, Opinion, July 22).

They have neither the mandate nor the skills to do so.  More importantly this would inevitably allow them to pursue other agendas under the guise of corporate governance and to squander the hard-earned savings of workers.

Of course, superannuation funds should be concerned about the governance standards of the firms in which they invest.  It is a completely different matter however for funds to invest in companies so as to affect a change in corporate governance.

Under the Superannuation Act, trustees have a clear and straightforward mandate, which is to maximise returns to unit holders.  Under the "prudential investor rule" that underlies the act, trustees are not allowed to act on behalf of anyone but the unit holders and they are not allowed to pursue objectives that compromise this maximisation of returns.  They are not allowed, for good reason, to save the world.

The nebulous meaning of "corporate governance" provides huge scope for pursing non-commercial objectives.  Specifically, it gives the ACTU the excuse for which it has been looking to use its influence over industry super funds for industrial action.

The Californian Public Employees' Retirement System (CalPERS) has been cited as an example of an investor taking an interest in corporate governance.  But it is the perfect illustration of the dangers of mixing activism with investment.

CalPERS is a huge union-dominated public-sector super fund.  It has a long history of working in tandem with unions and pursuing an activist agenda.  It also follows a policy of being the champion of good corporate governance.  It has also had a very poor investment track record, in recent time losing around $US20 billion ($37.2 billion) or 12 per cent of its asset base in the first two years of this decade.

Its self-appointed role as corporate-governance watchdog has not advanced the interest of its unit holders or the cause of corporate governance.  It was one of the largest investors in, and losers from, both Enron and WorldCom.  Indeed it was a major investor in Enron's most egregious and illegal off-balance sheet transaction.

CalPERS also has a reputation for using corporate-governance activism as a front to help its union mates.  As the scholar Jarol Manheim states in The Death of a Thousand Cuts, "each year the fund [CalPERS] lists approximately 10 companies that it regards as underperforming in their respective industries because of poor management, and it targets these companies with corporate-governance resolutions".  Manheim observes that usually, the companies selected were "also the target of union corporate campaigns".

Earlier this year, CalPERS, again at the instigation of its union trustees, pulled all its investment from Malaysia, Thailand, and Indonesia in preference for Argentina among other countries.  Since this decision was made, Asian share markets have done well -- Thailand has increased by around 40 per cent -- while the Argentinian market has collapsed.

CalPERS shows the dual dangers of allowing activists to hijack super funds and the mantel of corporate governance.

Trustees have a vital and difficult job.  They do not need the additional task of a corporate watchdog.

They have neither the mandate nor the skills to do so.  More importantly this would inevitably allow them to pursue other agendas under the guise of corporate governance and to squander the hard-earned savings of workers.

Of course, superannuation funds should be concerned about the governance standards of the firms in which they invest.  It is a completely different matter however for funds to invest in companies so as to affect a change in corporate governance.

Under the Superannuation Act, trustees have a clear and straightforward mandate, which is to maximise returns to unit holders.  Under the "prudential investor rule" that underlies the act, trustees are not allowed to act on behalf of anyone but the unit holders and they are not allowed to pursue objectives that compromise this maximisation of returns.  They are not allowed, for good reason, to save the world.

The nebulous meaning of "corporate governance" provides huge scope for pursing non-commercial objectives.  Specifically, it gives the ACTU the excuse for which it has been looking to use its influence over industry super funds for industrial action.

The Californian Public Employees' Retirement System (CalPERS) has been cited as an example of an investor taking an interest in corporate governance.  But it is the perfect illustration of the dangers of mixing activism with investment.

CalPERS is a huge union-dominated public-sector super fund.  It has a long history of working in tandem with unions and pursuing an activist agenda.  It also follows a policy of being the champion of good corporate governance.  It has also had a very poor investment track record, in recent time losing around $US20 billion ($37.2 billion) or 12 per cent of its asset base in the first two years of this decade.

Its self-appointed role as corporate-governance watchdog has not advanced the interest of its unit holders or the cause of corporate governance.  It was one of the largest investors in, and losers from, both Enron and WorldCom.  Indeed it was a major investor in Enron's most egregious and illegal off-balance sheet transaction.

CalPERS also has a reputation for using corporate-governance activism as a front to help its union mates.  As the scholar Jarol Manheim states in The Death of a Thousand Cuts, "each year the fund [CalPERS] lists approximately 10 companies that it regards as underperforming in their respective industries because of poor management, and it targets these companies with corporate-governance resolutions".  Manheim observes that usually, the companies selected were "also the target of union corporate campaigns".

Earlier this year, CalPERS, again at the instigation of its union trustees, pulled all its investment from Malaysia, Thailand, and Indonesia in preference for Argentina among other countries.  Since this decision was made, Asian share markets have done well -- Thailand has increased by around 40 per cent -- while the Argentinian market has collapsed.

CalPERS shows the dual dangers of allowing activists to hijack super funds and the mantel of corporate governance.

Trustees have a vital and difficult job.  They do not need the additional task of a corporate watchdog.

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Much Hard Work Ahead for Labour Movement

Yesterday's "reasonable hours" decision is only the end of the beginning of what should prove to be an exhaustive process by the labor movement to introduce European style working hour restrictions to Australia.

The European model caps the number of hours a person is legally allowed to work for employers in a belief that if everyone works fewer hours more people will have jobs thus reducing unemployment.  Unfortunately European countries with greatest adherence to this model seem to suffer from comparatively high unemployment.  Somewhere theory and practice has not married.

This first ACTU application was a tentative step seeking to walk Australians in this regulated direction.  Rather than apply to cap hours the ACTU sought to significantly increase costs by requiring additional paid leave when employees worked more than 60 hours a week over given periods.  It was a convoluted attempt to create two tiers of overtime rates for full time employees and has been rejected by the AIRC.  Given the effort put into the case the ACTU may be disappointed.

For more than 3 years the labor movement has been conducting atmospheric campaigns to convince Australians that we are exploitatively overworked.  Using union sponsored academic research, high quality media campaigns have impressed on Australians how their families and lives have been damaged by working too hard and too long.  This media managed softener was supposed to lay the political and community ground for the AIRC application.

The AIRC accepted that full time employees are working about 2 hours longer each week than ten years ago but made the point that "the interaction between work and personal and family circumstances of employees is already recognised in a significant way in the award safety net".  The AIRC thinks that the existing regulation is family orientated.

The AIRC decision however modifies a legal technicality.  The old wage slave model of employment is alive in the award system where employers have a legal right to require employees to work overtime.  But this is largely unenforceable because the capacity to discipline or sack an employee for not working overtime is highly restricted.  In fact industrial disputes often erupt when employers attempt to reduce employee overtime.

The AIRC decision inserts an award clause giving employees the legal right to refuse "unreasonable" overtime on the basis of safety, family and other issues.  This reduces the legalities of wage slavery and probably causes the award system to more closely match the reasonable behaviours of reasonable people that dominate requests by both employers and employees for overtime.

However this issue will not vanish because the labor movement desperately needs to have the award system perceived as a significant determiner of the social fabric of Australia.  Where once award regulation banned work on Sunday in support of church, footy and the Sunday roast, the labor movement is trying to create award relevance for a caffe latte society.  Their task is difficult but more media massaging and further award and EBA attempts to regulate maxim work hours should be expected.

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Health Check on the Australian Food Industry

An Address to Beyond Commodities:  The Food Tech Revolution
35th Annual AIFST Convention
Sydney, 23 July 2002

THE AUSTRALIAN FOOD-MANUFACTURING INDUSTRY IS IN TROUBLE

The Australian Food Processing Industry has been the great hope of the Australian manufacturing sector for decades and the subject of innumerable strategies.

And for good reason, as it plays a vital role in the economy

While there are a number of extremely positive trends in the industry, it still faces some major challenges particularly of a tough cultural kind and while the National Food Industry Strategy released last month is generally a step in it has some glaring omissions.

IMPORTANCE OF THE INDUSTRY

Food processing industry plays a vital role in the nation's economy.  It is easily Australia's largest manufacturing sector -- three times the size of the automotive industry.  It employs 168,000 people and 67,000 in rural and regional areas.

Trade in processed food is increasingly becoming a necessary means for exporting agricultural products and thereby sustaining the agricultural industry.  Processed food now makes up 75 per cent of total global agricultural trade, compared to 50 per cent in 1985.  Value-adding not only assists in circumventing the many protective barriers that inhibit commodity trade but creates new markets and products as well.

On paper, the food-processing industry has most of the essential fundamentals in place -- something that cannot be said for many areas of manufacturing.

• It enjoys a relatively large and affluent domestic market -- one of the largest in the Asian region
• It enjoys a diverse range of low-priced, high-quality food inputs.
• As a country, Australia has an excellent reputation around the world as food producer.
• We sit on the edge of the fastest-growing market for processed food in the world -- Asia.
• The Australian industry already includes most of the world's major food multinationals.
• Australia is a far more attractive place to live for European and US expatriates than almost any country
• Australia has had excellent economic fundamentals for the better part of a decade including in recent years a super-competitive exchange rate.

Despite its importance and potential, the food-manufacturing industry has struggled as a whole to live up to expectations.

EXPORT PERFORMANCE

The Food processing sector does make a substantial contribution to Australia balance of payment.  Indeed it is the only manufacturing industry other than metal products to export more than it imports.

In reality this is not saying much, given that 85 per cent of these exports are made up of simply transformed agricultural including meat, dairy and sugar as well as wine all of which have virtually zero imports.

During the mid-to-late 1990s, Australia exports of processed food did relatively poorly.

While world trade in processed food was growing in excess of 10 per cent per year, Australia's exports grew by a mere 1.8 per cent per annum.  Australia's performance was poor, not only relative to its own potential but also relative to other high-cost, mature economies such as the US, Germany and France.

Process food exports have improved significantly since 1998 with the recovery in Asia.

As a result over the 1995-2000 period, total export grew a average rate of 9.5 per cent driven by the traditional goods:  meat (up 8.8% per year), dairy (up 17.6 % per years) and wine (up 48% per year).  Sugar exports however declined during the period.

Elaborately transformed manufacture of processed food also did well over the last five years.  Indeed the growth rates have been on paper fabulous for a decade and half.  However, it started from a small base and elaborately transformed products still account for a small share of exports having increased from 5% in 1990 to 9% in 2000.

Despite the high growth rates, Australia's share of world processed food exports has changed little over the last decade, while some competitors have been steadily increasing their global market share.  In short Australia food exports have done well but buoyant market were many did well.

DECLINING INVESTMENT AND LOST OPPORTUNITIES

The 1990s should have been a decade of growth for the Australian food-manufacturing sector.  Globalisation of the industry offered the potential for Australia to attract the new generation of plants focused on supplying the Asia-Pacific region.

Traditionally the world food-manufacturing industry has been structured to satisfy national markets with a large number of relatively small plants producing a plethora of local brands.  Most food manufacturers have owned and operated their own plants.  Over the last 15 years this has begun to change.  In response to global forces, multinational firms have secured a greater share of the world processed-food markets.  Generally, their global strategies are to cut the number of brands they manage, and to focus on building and strengthening this smaller number of global brands.  They are also closing ageing plants and replacing them with large, state-of-the-art plants which focus on regional rather than national markets.  There has also been a trend towards contracting-out the manufacture of niche.  These -- as with most global forces -- present both an opportunity and a threat to Australia.  The opportunity, which on academic analysis looks very prospective, is that Australia stands a chance to attract new investment, particularly targeting the Asia-Pacific region.  The risk is that if we fail to attract the new investment, we could lose existing national plants as they reach the end of their technological lives.

There are a number of examples where world-class food firms have invested in, Australia for the regional markets, particularly in the early-to-mid-1990s.  For example, Campbell's bought Arnott's in the early 1990s specifically to develop biscuit markets and to export to Asia.  Nestlé expanded its operations in Australia for the local and Asian markets.  Indeed, quite a number of local manufacturers expanded capacity with an eye on the export market.  While there are success stories, these are also many tales of disappointment.

In Victoria -- which accounts for 32 per cent of the national food industry -- 15 significant food-processing plants have closed over the 14 months from April 2000 to August 2001, with a loss of over 2,000 jobs. Victoria is merely the starkest example of a national trend.  Some of the closed operations are simply shifting to other Australian locations, such as the Qantas Food Centre and part of the Heinz operations.  Some of the changes are the outcome of productivity improvements that will enhance competitiveness.  Nonetheless, many of the closures represent firms leaving or reducing production capacity in Australia.

There is also evidence that the investment made in the 1990s, to take advantage of growth in export markets, has met with disappointment.  A recent survey of food manufacturers found that capacity utilisation in the local industry was low, significantly below 60 per cent.  Although there were several reasons given for the excess capacity, a common reply was "misjudgements about the likely rapidity of growth of domestic and export markets".

There is also evidence that we may have missed the window of opportunity that existed in the 1990s, and that the worst, in terms of disinvestments, is coming.  As the CEO of a major listed Australian manufacturer stated:

I'm very worried about the future of our firm, say in two to three years' time.  The Asia meltdown weakened Asia, but the rebound is already starting and that's what I'm worried about.  For example, new equipment will be installed in Asia.  If we don't act fast, we will miss the opportunity.  The multinationals who have invested in Asia are 40-70 per cent cheaper than us.  I worry about how we are going to compete.

POOR STOCK MARKET RESULTS

The overall stock market performance of many Australian food manufacturers has been dismal.  Of the 15 large food manufacturers listed on the Australian Stock Exchange (excluding fish and grain processors and wine companies), only four did better than the all ordinaries index over the last two years.  Indeed, only four stocks achieved an improvement in value.  Most experienced large double-digit declines in share value.  Indeed, the market index for the food-processing sector has declined by around 25 per cent in absolute terms and by nearly 50 per cent against the overall market (the All Ordinaries).

The listed firms that have achieved growth in market value have done so to a great extent by way of mergers and acquisitions rather than through organic growth.

These problems cannot be put down to a slow domestic market, as the Australian economy exhibited solid overall growth as well as good growth in food sales over this period.  The reasons for the poor performance are clear:  namely, in Australia there is little competitiveness in value adding.  As reported in a recent study:  During interviews with very senior and experienced managers in large companies, they said that in Australia, value-adding ... was unlikely to confer competitiveness and often diminished it.

LOW LEVELS OF PRODUCTIVITY

The underlying reason for the failure to live up to expectations -- whether in terms of export, investment or profits -- is low levels of productivity.

Arguably, McKinsey & Company undertook the best study under contract to the Australian Manufacturing Council -- a tripartite body that has now been disbanded.  It found that Australian food-processing plants were, on average, just 68 per cent as productive as similar plants in the US, and some 39 per cent behind their competitors in Denmark.

What is driving the poor productivity?

The key factors identified by McKinsey for Australia's weak performance were low capital investment, the small size of most Australian plants, weak commitment to innovation and poor labour relations.  Other reports have confirmed these findings and, importantly, have found little change in the subsequent six years.  Although the studies tend to focus on solutions aimed at other factors -- most commonly investment and innovations -- labour relations is clearly a key issue.

As McKinsey stated "poor labour relations [in the industry] ... retarded rationalisation, investment, and process modernisation".  In other words, poor workplace relations have undermined competitiveness directly, as well as indirectly, by inhibiting capital investment, plant rationalisation and innovations.

To understand the impact of workplace relation, one must look beyond the macro data to the shop floor and to the particular.

I would present three case studies of how our poor workplace relation culture stops investors from coming in the first place and force investors staying.

JOB GROWTH AND OUTPUT

The good news is that the food processing sector has created 10,000 jobs in regional Australia since 1996.

This is positive not only because of the need for rural based jobs, but those rural and regional operations tend to have better workplace and competitive cultures.

The bad news is that during this period there has been a reduction 5,000 jobs in the industry as a whole.

BARRY CALLEBAUT

Barry Callebaut is one of the world's largest and most successful chocolate manufacturing and marketing companies with sales of $3 billion and network of 24 state-of-the art production plants around the world.

Like other global food manufacturers, Barry Callebaut seeks to position itself to service the emerging Asia-Pacific markets.  In 1995, the company undertook an extensive due diligence exercise in siting its first Asia-Pacific plant in Australia.

Australia was not chosen;  instead a plant was built in comparatively high-cost Singapore.  The $80 million high tech Singapore plant employs about 45 well-paid people.  Many of the raw ingredients are sourced in Australia, processed, valued-added and sold back to Australia and to other Asia-Pacific markets.

A key factor in not choosing Australia was the problem of poor and seemingly insoluble labour issues.  Their conclusion in 1995 was that because of persistent, negative labour issues, a plant could not confidently be built within the budget or timeframes required, or operated at the levels of productivity necessary to warrant the investment.

Barry Callebaut stays abreast of the Australian scene, and believes that little has changed according Australia is not on the short list for the next Asia-Pacific plant.

The implications of the Barry Callebaut story are not just the direct loss of investment, jobs, cost of imports and loss of export revenue, but also of Australia's reputation as an investment option.  As a world leader in the global food chain, Barry Callebaut has contacts with other major food producers, particularly in Europe, and with global fund managers.  The "word of mouth" message for potential investors that the Barry Callebaut story delivers is that Australia is not a viable option in the food-manufacturing sector.  The message is as clear for Australian investors as it is for global ones.

Barry Callebaut message will not be masked by pretty advertising campaigns or hand outs for R&D.  It will require actions to address the real problem -- workplace culture.

SAIZERIYA

Saizeriya is one of Japan's modern success stories.  Go to any major Japanese city and you are bound to find one of Saizeriya's authentic Italian restaurants, with imported Italian chianti and pasta, a true Italian atmosphere and prices that are way below those of their rivals.  It is this combination that created a profitable food giant with an ambition to have 800 outlets by 2010.

A key to Saizeriya's success is the supply-chain possibilities offered by the new global economy.  Fresh produce is sourced in Italy and washed, chopped and diced before being flown direct to Japan.  The extensive food preparation abroad avoids the high labour costs involved in traditional Japanese restaurants and delivers higher quality control.

Australia was to be a beneficiary of this.  Saizeriya decided to set up a food processing facility in the City of Melton, in outer Melbourne.  All the elements existed for success.  High-quality, fresh produce is being grown in the city surrounds and could easily expand.  The road-air link infrastructure is of world-class standard.  Melbourne is a city of significant Italian heritage and has extensive local expertise in Italian cuisine.  An educated, eager workforce is at hand, and the Victorian government keenly supported the project with free land.  Saizeriya took the big step and committed to constructing the first phase of what should have been a $A400 million investment.  However, someone forgot to factor in the unwritten rules of the Australian approach to controlling work.

In doing its operational planning, Saizeriya cast around to construct an enterprise agreement to cover labour issues.  They entered discussions with the National Union of Workers (NUW) and reached an agreement that was signed off in the Industrial Relations Commission.  Then the turf war broke out.  The Australian Metals Workers Union (AMWU) claimed rights to operational coverage of the plant.  In pursuit of its claim, the AMWU banned the delivery of building materials to the construction site to try and blackmail Saizeriya into giving the AMWU operational coverage.

Currently, the plant is 12 months behind schedule.  Saizeriya is building its second plant in New Zealand rather than Australia.  And Australia will not get subsequent plants unless there are dramatic.  The Victoria Government has been unable to do anything constructive.

This tragic case reflects the uniquely Australian approach to regulating work, where nothing is ever what it seems.  The formal rules are irrelevant to the true game that only becomes apparent when exposed.  The controllers of this mafia/union game use the banner of workers' rights to mask their own self-interest.  That Australian workers will never know these lost jobs is not of concern to the AMWU.  The only job the AMWU will accept is an AMWU job.

ARNOTTS

Arnott's is one of food processing industries success stories, with more than 3,000 local staff and some of Australia's most recognised the brands.

The giant Campbell's Soup Company of Canada purchased Arnott's during the 1990s for its "powerful brand potential in the pacific markets".  The purchase was a key part of Campbell's global strategy.

In 2001, Arnott's announced the closure of its principal manufacturing plant in the Melbourne residential suburb of Burwood, and the relocation of the Australian manufacturing and warehousing facilities to Queensland.  550 jobs are to be eliminated.  The reaction from the unions at Burwood and from the Victorian Government was one of wild condemnation and threats.

Campbell's has said little about the reasons for the closure of the Burwood plant.  Ageing equipment and proximity to residential dwellings have been offered as two factors;  however, a study of the labour situation reveals a pervasive problem.  The Burwood plant has not suffered from excessive strike action, but rather low profile and persistent labour management problems.

This is best comprehended by its the site-specific Enterprise Agreement.  The key feature of the Agreement is the requirement for a "Joint Improvement Committee" which was "charged with the responsibility for the implementation of the contents of the agreement ..."  The Committee has 15 members with only six appointed by management.  The Committee meet every two weeks with a formal agenda circulated beforehand.  Before the Committee can make operational recommendations, matters have to be referred to the Single Bargaining Unit of the more than four unions on site.

The matters over which the Committee has authority include, but are not limited to:

• Quality control processes.
• Human resource management.
• Employee payments and timekeeping.
• Employee attendance levels
• Management of absent employees
• Shift times.
• Production and delivery rosters.
• Career paths and training.
• Engagement casual and/or contract employees.
• Insurance broker.
• The provision of mobile phones.

In effect, Arnott's had signed an Agreement that undermines the ability of the Burwood site managers to manage, and where control of the plant was assigned to the employee collective under the authority of the Committee and the Bargaining Unit.

The outcome was a management system that was highly formal, bureaucratic, slow and ineffectual.  To have any impact on how the site was to operate, "managers" had to be deft at the manipulation of employee and union site politics.  This management system clearly could not have delivered the levels of continuous productivity improvement that Campbell's apply as a benchmark to their global operations.  Closing the site fixes the management problem.  The shift of the manufacturing facilities to Queensland does not guarantee that Arnott's production will remain in Australia.  To remain viable, the Queensland plant will need to prove that it can meet the continuous, productivity improvements in line with Campbell's global standards.

The message from the case studies t workplace culture needs priority attention.  After all, policies that focus on the easier, less contentious issues, such as investment and innovation and market promotion, are likely to yield little value if they are undermined -- as McKinsey found -- by poor labour relations

THE NATIONAL FOOD STRATEGY

The National Food Strategy which was released last month is the latest effort by the industry and government to "identify the actions and tasks that need to be taken to release its (the industry's) full potential"

It provides a more balanced and more comprehensive assessment of the industries challenges and potential than previous strategies and strategies put our by the states.

It gives a good overview of the global and regional trends and correctly emphasises the need for greater focus on R&D, market access, food standards, environmental sustainability.

However, it says little about workplace relations and the little it says is in carefully coded terms.

The most that is said is:

"There is an important role for policy setting to promote industry growth, which covers removing distortions in input and labour markets..."

Significant labour productivity improvements have occurred in Australian industry over the last decade.  In the 1990s, productivity growth averaged over two per cent, well ahead of most other high-income countries.  However, in an increasingly competitive market, the boundaries of business competitiveness continue to shift.  As a result, Australia cannot rest on its laurels."  This statement is true, Australia has produce world lead productive growth over the 1990s.  However, there is no evidence that this has been achieved in the food industry aside from the retail and wholesale side.  Indeed manufacture as a whole has experienced modest productivity growth during the 1990s.

The Strategy also says that the industry will:  "Encourage its members to pursue productivity improvements supported by the current workplace relations framework".  This is hardly a commitment to the status quo.

Indeed the strategy focuses much more on telecommunication and tax reform and than workplace reform.

When it comes to money the Strategy appears to be quite generous allocating $102.4 million over five years.  None was specifically allocated to address labour issues.

Some funding for workplace relation reform maybe including the $14.7 million allocated to establish and operate the new Council and to fund other tasks to support work, but that is not clear.

Clearly once again the workplace reform issue has been put in the too hard basket.

The problem is in the end cannot be ignored as it goes to the heart of the industries competitiveness.  If we do not address it the major section of the industry particularly those involved in the elaborately transformed good will decline.  And more taxpayer funds will have been wasted.

We can have the best science in the world, no trade barriers, good food standards but these will count for nothing unless manufacturing process is competitive and innovative.

Cautionary Tale: How Franchisees Took Control

The profit downgrade and near halving of the Mayne Group share price is a case study in how poor people management can rapidly dislocate a firm from it's market.  Critical lessons can be learnt concerning business structures and management.

The Mayne hospitals suffered when their feeder doctors sent patients to opposition hospitals causing a collapse in revenue.  The surprise is that the management of Mayne come from a tradition of structuring companies (Shell and Colonial Bank) where the opposing management paradigms of centralised coordination and decentralised market focus were successfully combined to create sustained profit.  The management concept is simple but the practice an art form.

Both Shell and Colonial Bank meshed two structures.  Close to their customers, they collapsed the command/ control structure and franchised their shopfronts;  Shell with petrol stations and Colonial Bank, in its pre-Commonwealth bank days, with suburban branches.  Under franchising, shop fronts take on the best elements of small business with the local franchisees frantic to look after their customers.  This institutionalises a dynamic "feel" for a market that no monolithic, central organisation can replicate.  It also largely eliminates the industrial relations restrictions that beset monoliths.

Overlaying the franchise structure, Shell and Colonial Bank interfaced the advantages that centralised organisations can deliver.  This includes mass marketing, branding, bulk buying, production and application of finances.  In this model the centralised organisation must service the needs of franchisees but franchisees must accept disciplines from the centre.

The dual structure creates a form of internal markets where relationships in the firm reflect those of buyers and sellers rather than command and control.  What follows are natural human tensions from competing egos and perceptions of opposing financial interests.  Franchisees actually think they have a right to demand results from the centre!  Managing the tension of these potentially conflicting structures is the art form that makes the model work and determines success or failure.

The dual structure succeeded at Shell and Colonial Bank but went horribly wrong in Mayne's private hospitals.  The alleged improved centralised structures created at Mayne failed to service the needs of Mayne's natural franchisees, the doctors who simply directed the market (patients) away from Mayne.  It should have been predicted that doctors would prove prickly franchisees being highly educated, comparatively wealthy, business savvy and could shift the market without damaging their wallets.  And this reality should have signaled the "art form" required to run Mayne.

Instead Mayne failed to satisfy their franchisees, the doctors and it was this poor servicing of their internal, franchisee market which then caused dislocation from their ultimate market, patients.  The Mayne lesson applies to all large businesses.

Markets are too fickle and disparate for big command and control structures.  Companies can succeed by creating internal markets to maximise focus on end customers.  But in following this structure, astute management of internal markets is critical to success.

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ALP Reform: Does it Matter?

Simon Crean's pursuit of ALP reform will have little direct bearing on the outcome of the next election.  It may help stamp his authority on the party, which may assist his leadership, which in turn may improve his prospects at the polls, but it will not determine the next Labor Cabinet or its policies.  Nevertheless, Simon Crean is right to pursue reform.

The ALP and the other major parties can no longer rely on the blind loyalty of members, "rusted on" by class and ideology.  For the foreseeable future the market in mainstream ideology is dead.  Regulated capitalism won hands down.  Furthermore, workers are either happy with their lot, unhappy with their lot and want to move out of the working class, or are too busy to worry about it.  Any way you cut it there is little market in a mainstream party for policy activism based on ideology.  In an undifferentiated market policy work is a grinding business.  It's a job that will not attract many takers.  Therefore, under any set of rules or structure, small party memberships are the way of the future.

Nevertheless, for the sake of political stability, the majors have to field candidates for public office in order to win office.  The system works for ordinary voters because politicians want to be in power.  They get paid to tailor policy for a majority constituency.  That is a difficult task.  In some ways it does not matter two bob who parties select, as long a they do the job.  Nevertheless, in as much as parties need to win votes, a party with too narrow a base may fail to attract a sufficiently wide audience.  But the proof is in the pudding, who the voters support, not in some preconceived notion of the correct mix of identities - women, working class, ethnics and so on.  Only those with the right skills and tenacity need apply.  So, is there a fair competition in the ALP for these jobs?

The accusation to which ALP reform is apparently responding, is the dominance in the parliamentary wing by trade union, party and electoral officials.  At present a couple of big wigs run the show in each state.  It is not a very attractive system for new recruits.  The dominance is real, and the parliamentary wing were almost all elected with factional support.  And the factions are based on the bloc vote of affiliated unions.  Changing the proportion of the vote assigned to branch members and unions will probably not change the control over preselection exercised by unions.  Only the abolition of the bloc vote, the ability of a trade union leader to carry all of the votes of his union delegates, will change control.  A proportional representative ballot by union members for party delegates will loosen the grip of union leaders.  Anything less will be window dressing.

What else to do?  Government has a significant ownership in political parties.  More than a third of their income comes from the taxpayer.  These monies are well accounted for at the end of each election, but there is an argument that the parties should be open to all those who wish to join and adhere to their rules, and that the competition for jobs is fair.  In effect, parties are now part of the electoral system provided by the state.  Public scrutiny of the parties can occur through the courts and an increasing number of party disputes are ending in court.  But as many have found, a win in court does not mean a win in the party.  As part of the price of taxpayer support for the new, small and professional parties, the parties should make their rules available for public scrutiny.

Parties have been managing these subtle and intimate aspects of political recruiting for a long time.  They are experienced at it and as private associations should continue to do so.  The one addition, as a condition of registration for public funds, is to make their rules available for public scrutiny.  This may assist new leaders who want to open their parties to new recruits.

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The Financial Costs and Benefits of Privatisation

Energy Forum Papers

THE KENNETT GOVERNMENT POLICY SETTING

The vigorous process of privatisation which the Kennett Government embarked upon following its election in 1992 radically transformed the Victorian economy.  Following many years during which the State was among Australia's worst performers with low income growth and fiscal mismanagement, the post 1992 period saw it converted to enjoy rapid growth and a sound budgetary position.

Asset sales were a major feature of the policy both as a means of restoring the States parlous credit rating position and allowing lower levels of taxation, and as a means of injecting greater competitiveness into the state's economy.  Privatisation of the Victorian electricity assets accounted for the lion's share of the State's asset sales in a process which was among the most notable in the world.  By the time of the Government's fall in 1999, as well as electricity, the state owned gas, rail, bus services, trams and ports had been privatised.  In addition, the Government had brought in private ownership to build its major road development, City Link and had introduced private ownership of prisons and hospitals.

Only in the case of the latter two did the incoming Labor Government reverse the process.  The Labor Government has also broadly endorsed the need to maintain a tight budgetary policy.

The basis of the sales, in line with those in other jurisdictions, was a break down of the supply into generation, long distance transmission, local distribution and retailing.  It was intended for generation and retailing to operate in a totally deregulated market with distribution and transmission to be regulated.  At the onset, generation, transmission and distribution/retailing were to be structurally separated but there were no long-term measures to prevent re-aggregation.  Although retailing and distribution were sold as combined units, they were to be structurally separated to prevent the distribution business favouring its affiliate.  In the event it is likely that all five of the original host distribution business/retailers will have separate companies handling the two activities.

Regulation was to be based not on costs but "incentive" based.  This is the CPI-X formula (allowing prices to rise in line with inflation less than a factor for expected productivity improvements).  In both retailing and generation, different segments of the market were to be progressively opened to competition over a five year period.  In the interim, prices were fixed for the regulated customers and associated vesting contracts allocated to the generation businesses.

THE VICTORIAN ELECTRICITY INDUSTRY IN 1990

The State Electricity Commission, having pioneered the efficient development of Victoria's brown coal, was by the 1980's exhibiting clear sclerotic symptoms.  "Slow Easy Comfortable" became a frequent sardonic descriptor.  SECV was exhibiting clear evidence of featherbedding.  This included being used by governments as a tool to promote social and industrial goals at hidden costs, and making inappropriate and excessive investments in new generation plant and transmission.

Different studies by Victorian Government bodies had established ⁽¹⁾ the nature of the malaise and the Industry Commission (IC) documented this more comprehensively. ⁽²⁾  The IC set out a blueprint which included measures to ensure state based electricity businesses were operated along private sector lines but also argued that competition was necessary to ensure gains are quickly taken up and on-going.  It also argued that these gains would only be sustained if the industries were privatised.

The IC report was mainly focussed on introducing competition in order to stimulate greater efficiency.  Privatisation was also recognised as important in bringing disciplines of capital markets and "the sanctions provided by the possibility of take-over and the risks of insolvency.  It also significantly reduces the scope for interference by governments." (Vol 2 p.147).  The Commission was forthright in articulating its view that "Ownership clearly does matter." (Vol 2 p. 154).

The architect behind the Victorian privatisations was Treasurer Alan Stockdale.  Stockdale honed his own views in favour of during a visit to the UK in 1990 when he observed deficiencies in the UK privatisation outcome.  He saw these deficiencies chiefly as insufficient disaggregating generation so that price outcomes were in excess of those likely to emerge from a more atomised supply structure. ⁽³⁾  The privatisation approach drew from the proposals developed by the Industry Commission and from a joint Tasman Institute paper, ⁽⁴⁾ which was part of an agenda for reform for Victoria.

The general consensus had emerged among policy formulators and the economics profession that parts of electricity (mainly generation and retailing) were as open to competitive provision as is generally the case in industry.  To this was added the increased recognition of the importance of private ownership in stimulating efficiency to create the groundswell for reform.

THE SUMS RAISED IN PRIVATISING ELECTRICITY

Sales of privatised electricity assets between 1993 and 1999 realised $21.4 billion, with gas assets realising a further $6.5 billion.  These funds were used to pay off State debt which was reduced from 26.7% of State Gross Product to 3.1% in June 2000.

According to the Auditor-General, ⁽⁵⁾ excluding certain franchise fees and other payments the estimated sales values and the average Price/Earnings as follows:

TABLE 1:  SALE PROCEEDS AND EARNINGS MULTIPLES
ACHIEVED FROM THE SALE OF ELECTRICITY ENTITIES (a)

	PowerNet Victoria	Southern Hydro Ltd	Electricity generation businesses	Electricity distribution businesses
P/E multiples Average	12.3	14.5	12.0	13.9
Sale proceeds ($m)	2,545	398	9,001	8,270

(a) The earnings multiples are based on projected earnings before depreciation, interest, tax
and abnormal items (EBDIT), as per the Information Memorandum for each company (in
nominal dollars).

The Auditor-General put the annual savings, net of dividends that might otherwise have been expected, in 1997/98 at $760 million, a sum that would have been expected to increase year by year.  This was equivalent to some 9 per cent of the State Government's own taxation raisings.  Furthermore, the debt alleviation and other reforms to State Government finances led the debt rating agencies to raise the State's rating to AAA.  This brought about further savings in terms of interest charged on debt.

The businesses realised far more than had been anticipated.

Prior to privatisation, the five distribution businesses had an optimised replacement cost (written down) value of $3.8 billion but sold for $8.3 billion.  This was in contrast to the UK experience where privatisations had raised lower sums than the written down value of the distribution assets.

The generation businesses also sold for far greater sums than anticipated.  Indeed, Hazelwood Power, which sold for $2.4 billion in 1996, was considered to be obsolete and had been scheduled to close in the year 2001.  Its new owners, National Power of the UK, embarked on a refurbishment which has allowed its life to be considerably extended.

Table 2 details the more important of the sales.

Table 2:  Major Energy Asset Sales

ELECTRICITY
United Energy	August 1995	$1.553 billion	AMP/ Axiom/ Utilicorp
Solaris	October 1995	$950 million	AGL/ Energy Initiatives (US)
Eastern Energy	November 1995	$2.08 billion	Texas Utilities
Powercor	November 1995	$2.15 billion	PacifiCorp
Citipower	December 1995	$1.575 billion	Entergy Corporation
Yallourn Energy	March 1996	$2.426 billion	PowerGen, ITOCHU, AMP, Axiom and Hastings
Hazelwood/ Energy Brix	August 1996	$2.357 billion	National Power, Destec, PacifiCorp and others
Loy Yang B	April 1997	$84 million (6)	Edison Mission Energy
Loy Yang A	April 1997	$4.746 billion	Horizon Energy Consortium
PowerNet Victoria	October 1997	$2.555 billion	GPU
Southern Hydro	November 1997	$391 million	Infratil Australia Consortium
Ecogen	March 1999	$361 million	AES Transpower
GAS
Westar and 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

DETAILS OF THE SALES

DISTRIBUTION, TRANSMISSION AND RETAILING

Some $8.3 billion was paid by (mainly overseas) interests for the five distribution/retail businesses.  In the following half dozen years four of the businesses have undergone changes in ownership.  The fifth (TXU) has sought to sell its distribution system at a price reportedly below the original purchase price.  TXU also bought one of the three gas distribution businesses.

CitiPower, having already undergone one ownership change when Entergy sold the business to AEP is to be sold again.  The first sale was for slightly more than the $1,575 million originally paid perhaps reflecting some expenditures that Entergy had undertaken;  the on-sale is scheduled for July 2002 and reports suggest it is unlikely to be in excess of the price paid by AEP.

AGL bought Solaris with GPU which sold its half share to AGL once it bought the transmission business Powernet.  AGL also has extensive energy interests in NSW and South Australia.

United Energy, comprising the original electricity purchase an the subsequent gas purchase of one of the three gas retailers/distributors.  The firm has undergone a partial float and spun off its retailing activities into Pulse–a joint venture comprising United Energy (25%);  a consortium of Aquilla (United's US part owner) and AMP (25%);  Shell (40%);  and Woodside (10%).  United has also made investments in Western Australia and in telecommunications.  The business in February 2002 announced a $30 million write down of its investment in Pulse and its trading affiliate.  The Pulse electricity and gas retailing business was sold for $880 million in July 2002 to AGL.  This represents a modest discount on the price the Pulse partners paid United Energy.  Although the notional retail component of the original 1995/99 sale realisations is not public, this price probably represents a strong premium on the implicit price paid.  This is due in part to the business's relative success and in part to synergies in its "fit" with AGL.  There has also been a general re-rating of the value of retail operations over recent years.

United Energy's share value was $900 million in July 2002.  It has been traded on the market since May 1998 when its shares were listed at an average of $2.30.  The company has had a relatively generous dividend policy;  its value in July 2002 was about six per cent below its original list price, (this compares to a general market increase of around 17 per cent).  The company's share price dropped from about $2.70 prior to the announcement of the Victorian retail price cap.

Powercor was originally bought by Pacificorp, a Seattle based supplier that was subsequently taken over by Scottish Power.  It was subsequently sold to CKI-Hong Kong Electric who on-sold the retailing arm to Origin Energy.  The reported sale price represented a modest profit on the original privatisation;  Pacificorp had enjoyed considerable retailing success, including a successfully contested contract with NSW government owned generator Pacific Power.  Origin Energy was spun off from Boral, which in addition to electricity also bought one of the three Victorian gas distribution businesses and has other energy interests in South Australia.

The transmission business, Powernet was originally bought by GPU (which was obliged to sell its half interest in Solaris to its partner AGL).  GPU, having been severely mauled by UK regulatory decisions decided to concentrate on US activities and sold Powernet to Singapore Power for $2,100 million;  this represented a loss of $450 million.

GPU also bought the State's gas transmission business, GasNet, for $1025 million and subsequently exited the investment in a float that valued the business at $826 million.

Profitability in these businesses and the transmission business is fundamentally driven by government regulatory decisions, principally concerning price levels but also on service levels.

Price levels had been established at a rate of return of over 11 per cent at the time of privatisation.  Regulatory authorities have reduced this in line with inflation, interest rates and other factors to its present level of a little over 6 per cent.  The reductions required by the ORG during 2000 were the spur to TXU seeking to exit the Victorian market.  The distribution businesses objected both to the magnitude of the required reduction in prices and to what they considered to be a perversion of the specified CPI-X regime under which these prices are determined.  An appeal to the Victorian Supreme Court upheld the ORG's methodology.

The final tranche of electricity customers to be opened up to competition, households and small businesses, was delayed by one year to January 2002.  This delayed shift to Full Retail Competition was further distorted by an introduction of price caps on each host retailer.  The ability of the Government to set such caps was established in the Bracks Government's Essential Services Commission Act, wherein the Office of the Regulator General was converted into the Essential Services Commission.  Unlike with previous tranches, the final tranche's opening to competition was taking place at a time when energy prices were increasing and all the businesses sought to increase their listed prices.  The Government set caps at levels much lower than the price applications made by each of the businesses.  The lower than sought for price increases also incorporated measures that prevented the businesses from re-aligning their price structures between different classes of customer.

The businesses expressed strong disappointment about the price setting outcomes.  CitiPower announced them as being the reason why its American parent was selling the business and the early events in the retail market have shown less than anticipated activity among retailers to seek new customers at the household level.

GENERATION BUSINESSES

Aside from the 3,700 MW Snowy hydro-electric business, in which the Victorian Government has a 29 per cent share, with the Commonwealth and New South Wales Government owning the balance, Victorian generation included four major brown coal fired stations plus gas and hydro-electric generation.  Snowy itself remains in government hands largely because of the difficulties in reconciling the different products of the scheme:  power, irrigation water and environmental flows.

Of the SECV's four major power station interests, one Loy Yang B (1,000 MW) was a joint venture with Mission entered into in 1992 by the newly elected Kennett Government and later fully sold off by that Government.  The other three, Yallourn (1450 MW), Hazelwood (1,600 MW) and Loy Yang A (2,000 MW), were sold for a total of $9.5 billion.  In addition to these base-load stations, there were the SECV owned gas stations, Ecogen (966 MW) and several hydro-electricity stations, Southern Hydro (about 450 MW).

At the time of their privatisation, the Government argued that the value and likely long term market price of electricity in Victoria was about $38 per MWh, the cost of establishing a new gas fired unit.  The vesting contracts for electricity which covered the progressively diminishing market that was not open to competition were also set at that rate.

In the event, prices have mainly been much lower than this.  Prior to 1999 they were at around $25 per MW, falling to $22 in 1999.  Prices have risen in 2000 and 2001 to $36-37 as demand has gradually increased.

The very low prices that have prevailed most of the time since privatisation demonstrate the absurdity of claims that the system is subject to excessive monopoly induced prices.  And the absence of any such high prices is reflected in the value of the assets.  In spite of the vast improvements in the businesses' efficiency levels (discussed in the next section) low prices have severely reduced the value of the power stations.  The giant Loy Yang Power was sold for $4.7 billion but the value of its equity was at less than a half of this in 2002 and its major owner has been seeking a buyer for some time.  Powergen, the majority owner of Yallourn Energy is also reported to have incurred a major loss in selling its interest.

In summary, available information indicates the following post privatisation asset price movements.

Table 3 Estimated Changes in the Asset Values of On-Sold Victorian Electricity and Gas Businesses

Sector	Business	Approx Change in Value
Retail	Pulse (2002)	+ 40%
Distribution	Citipower (1998) Powercor (1999)	+ 5% + 5%
Transmission	Powernet (2000) GasNet (2001)	-17% -20%
Generation	Loy Yang (2002)	-25%

OUTCOMES IN PERFORMANCE OF THE
VICTORIAN ELECTRICITY INDUSTRY

DISTRIBUTION

Victorian distribution businesses since privatisation have shown marked increases in productivity and in customer service.  Data limitations hampers documentation of this improvement and Victoria's relative performance against other states.  Personal communications with two companies revealed considerable savings post privatisation.  In the period between privatisation and mid 1999, Eastern Energy (TXU) made savings in operating costs of 22 per cent, while CitiPower, which inherited municipal council owned electricity businesses that were even less efficient than the SECV, made savings of 38 per cent.

However fully documenting the productivity performance of the distribution businesses is difficult.  This is not least because data in the ESAA annual publication Electricity Australia shows some inconsistencies, possibly because of the difficulties of unscrambling retail and distribution personnel in earlier years.

On the available data, between 1994/5 and 1999/00 NSW, Victoria and Queensland all achieved labour productivity gains of 45-50 per cent, while South Australia achieved a 71 per cent (mainly since its privatisation) and Western Australia showed a 71 per cent improvement.

The latest data is more likely to be more reflective of the true position and the following chart indicates a far superior labour productivity in Victoria to NSW.  On that basis, in 1999/00 labour productivity in NSW and Queensland respectively was only 62 and 61 per cent of that of Victoria.  South Australia, post its privatisation, appeared to have leapfrogged Victoria, while Western Australia (which covers only the South East interconnected system) was also well ahead.

Chart 1Source:  ESAA

The above yardstick measuring efficiency levels, labour productivity, excludes the important component of capital productivity.  Energy businesses themselves attempt to determine their relative efficiencies to set internal targets (and, in the regulated environment in which distribution operates, to deter regulators from seeking excessive price reductions).

Benchmarking one of the Victorian distribution businesses against 104 US utilities, the Pacific Economics Group (PEG) found that the Company's computed overall cost is 44% of that of the average U.S. firm.  The study's findings would have placed United Energy close to the frontier of efficiency.  However the ORG reduced the business's line prices by 13 per cent which was amended on appeal to 9 per cent. ⁽⁷⁾

The following table shows United Energy compared with the average in the sample compiled by PEG.

AVERAGE VALUES OF VARIABLES IN THE BENCHMARKING STUDY

Variable	Units	US Sample Average	United Energy	United Energy/ Sample Average
Total Cost	Thousands of $(US)	377,782,714	171,158,503	0.45
Price of Capital Services	Index Number	1.00	1.07	1.07
Price of Labor Services	$1,000(US) per Employee	51.75	36.59	0.71
Price of Materials	Index Number	1.12	1.08	0.97
Total Customers	Customers	695,777	538,000	0.77
Retail Deliveries	MWh	17,358,000	6,448,605	0.36
Miles of Distribution System	Miles	20,480	3,387	0.36
% of Distribution System Electric	Percent	89%	100%	1.12

Source:  Pacific Economics Group, Kaufmann, L., Lowry, M.N., and Hovde, D., United Energy Performance, Results of International Benchmarking, November 1999, p. 39

Reliability of distribution in Victoria has improved considerably since privatisation.  The ORG sets targets for each of the businesses, targets that are far less controversial than those covering prices.

A steady improvement in reliability, as measured by minutes off supply, has been experienced in the years since 1995 as illustrated below.

Figure 1Source:  ORG

The improvements have been seen in all five distribution businesses as illustrated in Chart 2 below.

Chart 2Source:  ORG

A small increase (4 per cent) was recorded in minutes off supply in the first half of calendar 2001.  This was ascribed to more normal storm situations following a very benign first half year in calendar 2000.  The Office of the Regulator General noted that the distribution businesses remained on track to the target reductions in minutes off supply that had formed part of the 2001 rate re-set.

In respect of reliability, the Victorian outcome has shown relatively more improvement than that in other jurisdictions.  Chart 3 illustrates this.

Chart 3

Chart 3 shows that improved performances have been logged only by Victoria (outages down 32 per cent) and NSW (outages down 24 per cent).  Other states have shown increased outage times of between 41 per cent (Queensland) and 71 per cent (Tasmania)

GENERATOR PERFORMANCE

As with distribution, it is rarely possible to assemble simple benchmarks allowing state by state comparisons between generation businesses.  Using simple labour productivity is difficult.  For example, output per employee, as well as having definitional problems with employees following a greater use of contract labour, also compares Victoria's brown coal generators with other states' black coal generators which employ less labour simply because they do not own and mine their own coal.  Similarly, gas generators and hydro-electric generators require fewer staff.

In addition, as with distribution businesses, profit figures are now not readily available as a result of the privatised businesses' profits normally consolidated into parent company accounts and not separately identified.

Nonetheless, there is sufficient data to be able to construct a reasonably accurate picture of the operational performance of the privatised Victorian generators and to compare this with the performances of other states' generators.

Chart 4 illustrates the comparative trends.

Chart 4Source:  ESAA

The available data shows that productivity in all state systems has experienced marked improvements.  That of Victoria has, however, been the strongest.  Over the past decade, the Victorian generators' productivity has increased by 237 per cent.  The comparative performance of five states is shown in Chart 5 below.

Chart 5Source:  ESAA

Part of the improved productivity of the generators is their greater availability.

Not only did the pre1992 generation sector exhibit gross over-manning but the generators were available for less than 80 per cent of the time.  Having generators available to run at short notice allows an ability to meet unexpected changes in demand, thus bringing about lower prices at such periods and allowing higher earnings by the generators.  The improvement in Victoria's generators has been outstanding as Chart 6 illustrates.

Chart 6Source:  ESAA

PRICES TO CUSTOMERS

The shift to a competitive market means it is no longer possible to discover prices in the traditional way by dividing revenue by energy usage and subdividing this into different customer classes.  The ESAA publication Electricity Australia conducts its price surveys on this basis.  The historical data remains useful for the regulated customers, where energy price is determined by governments and the customers are captive.

However for contestable customers it is not possible to provide such estimates.  As the Eastham Task Force found in South Australia, "The Task Force was not able to ascertain the number of business customers who have signed contracts with other retailers, nor the price of those contracts.  However information from AGL suggests that of the total contestable market in South Australia, around 40% of customer load will be supplied by other retailers from 1 July 2001.  This 40% figure has been confirmed by information available to the South Australian Independent Industry Regulator (SAIIR) which also indicates that a number of retailers are now active in South Australia." ⁽⁸⁾  A somewhat larger percentage of the larger (over 160kWh) contestable customer load has shifted in Victoria.  In noting that prices quoted to South Australian contestable customers had risen by 30-35 per cent, the Premier also quoted evidence that similar price increases were evident in other markets.

Retail competition means it is now not possible to specify the average price outcomes on a statewide basis.  What we can be sure about is that though governments can force down prices for some periods of time, competition will result in the lowest sustainable prices.

CHANGES IN THE VALUES OF THE PRIVATISED BUSINESSES

Victoria, and to a lesser degree South Australia, achieved prices far in excess of those expected for the privatisation of electricity assets.  It is most unlikely that the same sums would be raised today.  In part the high prices were due to a general outward-facing attitude of US and UK energy businesses that prevailed during the mid 1990s but has since faded.  Other reasons include the experience of low prices for energy and government decisions on regulations.

The more recent improvement in prices has led to increased interest in building new capacity.  Some 1,200 MW of gas fired peaking is either newly built or planned.  This plant has all been either built by retailers or has been based on log term contracts with retailers.

This pattern of development represents an important rejection of the hypotheses that plant would be built purely on market price expectations.  Financiers of generators and their equity investors are risk-averse and demand some comfort in terms of long term commitments on the part of customers to the output planned.  The high level of new planned generation investment confirms that such commitments are not difficult to obtain when the counterparties are also expecting a tightening of the demand-supply relationship and upward pressure on prices.

At the outset of electricity markets there was much dispute about the nature of the "pool" on which the market should be based.  This debate continues with the UK having moved to a pool that formally involves contract for power and a residual pool closer to real time in which "unders and overs" are bought and sold.

In reality, all electricity markets are based on this model.  Buyers and sellers contract for all of their requirements weeks, months, and years in advance, progressively tailoring needs to demands close to real time.  Energy retailers work on a slim margin with a product that has a highly volatile cost and customers who require the product at a known price on demand.  For them, having certainty in price and product availability is an imperative.  Generators too, knowing that the price can fall to quite low levels, wish to know in advance that they have buyers who will pay the price they need.

Private ownership is ideal for this market process.  It avoids the political driven decisions that seem inevitably to take over under government ownership.  And it places disciplines on managers and owners that can never be fully replicated within the public sector.

These matters are the crucial issues in electricity privatisation.  However, the high asset sates prices and consequent ability to wipe out most debt, together with the achievement of competitive final prices to the consumer has resulted in a classic win-win outcome for Victoria.  The taxpayer is better off by hundreds of millions of dollars a year.  The electricity consumer is also better off as a result of the increased efficiency and consequent lower prices that have been brought about.

---

ENDNOTES

1.  These included:  Natural Resources and Environment Committee of the Victorian Parliament, Electricity Supply ad Demand Beyond the Mid 1990s, Melbourne April 1988;  SECV/DITR, Demand Management Development Project, Melbourne June 1990

2.  Industry Commission, Energy Generation and Distribution, Report No 11 AGPS, Canberra, May 1991

3.  Stockdale, A The Politics of Privatisation in Victoria, Privatisation International No. 134, London November 1999.

4.  Project Victoria, 1992, Tasman Institute

5.  http://www.audit.vic.gov.au/mp98/mp98t&f.htm, paras 3.8204-3.8206

6.  Edison Mission Energy Group released the State from significant liabilities and exposures associated with previous contractual arrangements.  The State valued the transaction at $1.1 billion.

7.  Specified 2001 Price Reductions (X Factors)

	Original Determination	Re-Determination
AGL	17.1	15.5
CitiPower	12.4	11.2
Powercor	19.6	14.5
TXU	21.8	18.4
United Energy	12.9	9.1

8.  The state government electricity taskforce, final report, 29 June 2001

Labour Pains: Australian Unions Target Call Centres

The Australian union movement is in serious trouble and to fix their problems the call centre industry is in their sights.  Union membership in the private sector is less than 18 per cent of the workforce, and the worst-case scenarios of decline predict that the movement will disappear by 2012.  But unions are not taking their prospective demise lying down and have devised, and are implementing, strategic attacks to rebuild their membership, income and business.  The call centre industry features prominently in the union resurgence efforts.

The strategic re-thinking began in 1994, when the ACTU established a unit called Organising Works.  The unit creates long-term strategies and trains and assists union operatives on implementation of those strategies at the grass roots.  The tactics are sophisticated, multi-disciplined, have long time-frames and draw on lessons learned from activists' community-style alliances.  The call centre industry has been subject to such a campaign for almost five years now.

The philosophy underpinning the campaigns can be understood by listening to some of their motivating language.  The ACTU talks of working to defeat "the dictatorship of the market", how to "beat our bosses", "protect ourselves against labour market changes" and "employer neutrality is the aim".  Their specific actions are multi-pronged and all the elements of the campaign are being used against call centres.

And the campaign being waged by the unions is working.  Last year, for the first time since the 1970s, the union movement experienced a growth in membership of 900 people.  Modest, yes, but it is the first swing away from decline so far experienced.

In applying their "re-birthing" strategies, the union movement has strategically assessed where best to allocate resources.  First, they have sought to rebuild in their traditional base of manufacturing.  The increasingly aggressive tactics used in Enterprise Bargaining negotiations over the last three years reflect the new approach.  Second, they have assessed those emerging industry areas that appear "factory like".  This is their assessment of call centres.  The union movement views call centres as a modern form of the slave-like factories of the Dickensian early Industrial Revolution era, and believes that call centres are ripe for traditional factory-type radicalisation.

The third and fourth levels of campaigning focus on the government sector where union influence is already strong, and on information technology and related professional service sectors.  The government sector is likely to give the unions results, but the IT sector creates problems for unions because IT "workers" see themselves as professionals and generally can command comparatively high levels of pay, even in a depressed market.

Call centres offer unions one of their great emerging opportunities and substantial resources are being devoted to capture the industry in an incremental process.  The unions have significant strategic advantages in this exercise.  Call centres generally have younger managers, which is an operational advantage but an industrial disadvantage.  Much union activity relies on bluff.  Unions use their old and tested tricks on young managers who are caught out in the early stages and take a while to distinguish bluff from legal authority.  The atmosphere of call centres is one of "can do" hype.  For marketing and promotional purposes, corporate cultures are designed to suppress the negatives and highlight the positives.  In industrial campaigning, this creates structural weaknesses for call centres where a culture of "it's okay" pretence pervades decision-making.

In this environment, unions are well down the path to achieving their call centre objectives.  They have targeted five of Australia's largest call centres -- Tele Tech, Sitel, UCMS, Salmat and Salesforce -- and have done an internal union carve-up as to which union "owns" which company.  This is critical to union strategies in terms of focus, allocation of resources and avoidance of infighting.  They have conducted a four-year war of attrition against the Luthansa-owned call centre Global Tele Sales (GTS) where they are close to sealing a new enterprise award.  The importance of this move is that the GTS award is designed to set benchmarks that can be applied throughout the entire call centre industry.  This should be tied up well before Christmas, thus enabling an aggressive award roll-out process to hit the industry.

The impact of the campaigning has been felt for some years, but it has been largely sporadic and not yet universal.  Some call centres are totally locked up by the union, with management's capacity actually to manage squeezed out.  Attempts at "change management" are closed, given the ability that selected unions have to "switch off" the centres at a moment's notice -- usually during critical customer servicing or selling phases.  So far, these more extreme factory-like industrial relations constrictions are isolated to an unlucky few enterprises.

The big constraint on the unions' campaign is the internationalisation of the industry.  While the Australian call centre industry is still in its comparative birth phase, its vulnerability to fast-moving international competitors is high.  Sophisticated call centre companies from the Indian sub-continent are actively selling their wares to Australian clients.  Does it matter if a call is taken in Sydney, Ballarat, Dubbo, Alice Springs or New Delhi?  All that matters is that the call is handled professionally.  And India has long had more English speakers from an educated middle class than the entire population of the United Kingdom, let alone Australia.  Australian call centres simply do not have the luxury to opt for protective working practics.

The outcome is simple.  Australian call centres must perform at world-competitive standards.  Otherwise, an industry at the moment in its infancy will die in its childhood.  And pay rates are not the issue.  It's all about performance.  To date, the industry has been able to grow with an exclusive focus on servicing customers.  Now the focus is shifting:  with one eye on customers and an equal eye on artificial industrial relations requirements.  The lynchpin is the way in which call centre workforces are engaged.

Most call centre people see themselves as part of the rapidly expanding paradigm of "free agents", "independent contractors" or whatever tag describes the self-thinking, self-motivating new professional class.  The idea of being a wage-slave employee is unsettling for them and being tagged in this way -- as industrial relations fodder -- is close to insulting.  These people are part of the 28 per cent of the private-sector workforce that the Australian Bureau of Statistics classify as "non-employees".  These independent contractors like to call their own shots and feel more comfortable working through contract management agencies where they can ignore industrial pressures and get on with their own business activities.

Some call centres are responding to this new class and are actively structuring and partnering with contract management agencies in a way that is common in the IT sector.  This free-agent response strategy is an effective counter-response to any union push because it denies them legal jurisdiction over the free-agents and the centres.  Several call centres have quietly implemented this approach.

The strategies and counter-strategies in play have a significant distance to travel.  As always, there will be winners and losers, determined by the strategic options exercised by key players in the industry today.  Only time will tell which call centre businesses prosper and which succumb to the growing external pressures.

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