Super, a Fact of Employment

The deal done last week between the Australian Democrats and the federal government to introduce choice in superannuation highlights a little recognised reality about the Australian economy:  the interaction between industrial relations and competition laws limits the extent to which a free market is allowed to operate.

It works like this.  Section 51 of the Trade Practices Act excludes "employment" matters from the reach of the act.  In a 1996 report, the National Competition Council accepted that industrial relations laws legalise price fixing and collusive activity which would ordinarily be illegal under trade practices law.  However, in the workplace such activity is declared acceptable on public interest grounds.

For any matter to be freed from competition laws, all that needs happen is for the matter to be inserted into an industrial instrument, an award, enterprise bargaining agreement or other order.

This is the case with superannuation which is enshrined in many awards and enterprise agreements as an employee entitlement but with an additional hook of nominating the fund.  The outcome is that not only is the entitlement to super an "employment" matter but the fund restriction is also an "employment" item thus free from competition laws.

This effectively legalises "third line forcing", which is normally illegal under non-employment contracts and considered highly damaging of free market functioning.

For example a contract to purchase a car cannot, as a condition of the purchase, also require the buyer to take finance through a specified lender.  Awards require employees, as a condition of their employment, to use the services of specified super funds.

A worker as an employee is given rights but the same worker, as a consumer of super funds services, is denied normal consumer rights.

The outcome has been the delivery of special privilege to nominated commercial businesses, in this instance principally industry funds often controlled through union and employer association trust connections and employer-controlled funds.

This legalised denial of consumer choice has wide implications for free markets.  If, for example, a construction superannuation fund were effectively controlled through building union connections, building unions could exert considerable industrial muscle to frustrate projects not financed through their preferred super fund.  Such potential market manipulation would be near impossible to identify, let alone prove.

Last week's choice in super fund legislation returns to workers some of the consumer rights denied them because TPA employment exemptions have been exploited through definitional manipulation under industrial relations.  But even as that legislation passed federal parliament, the Australian Industrial Relations Commission was deep into procedural consideration of Victorian attempts to introduce "common rule" awards.

If successful, some 400,000 plus Victorian workers currently award free will have robbed from them the super fund choice they currently enjoy when these new awards are imposed mandating particular funds.  Private superannuation funds are objecting.  The workers don't have a say.

It's an unaddressed public policy mess that denies consumer their rights.  The TPA employment exemption provisions represent a gap in competition laws which is routinely leveraged open through the industrial relations system.  Consumers have rights which should be secure, regardless of work engagement legal status.  These consumer rights are the bedrock of free markets.

The NCC reasoned in 1996 that price-fixing and collusion delivered by employment TPA exemptions are managed through state and federal industrial relations legislation and tribunals.  Yet employment legislation does not impose on tribunals obligations to take account of competition and consumer protection issues in their deliberations and decisions.

The Australian Consumer and Competition Commission is mostly a neutered observer in these matters.  A recent Industrial Relations Commission decision found that a particular agreement between a union and an employer was an agreement between the two parties to breach the TPA, but that this was not illegal.  The ACCC has withdrawn from investigation of the case.

The policy dilemma is that businesses allegedly could not function if their employee relations processes were subject to the TPA.  However, over the last decade industrial tribunals have creatively expanded the definition of employment to now embrace a vast range of business-commercial issues, thus eroding consumer rights and distorting free-market functioning.  Superannuation is only one example.

It's a critical public policy issue that needs extensive and open debate.

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Consumers Win in Energy War

The Victorian retail electricity and gas market has become one of the most competitive in the world.

Retailers, including several from interstate, are busily invading each other's territories.  We are seeing a variety of standard incentives including cash bribes and footy club oriented concessions.  In addition, the most valuable household customers are being bombarded by door-knock and telephone sales offers.  The upshot to date is that over 20 per cent of Victoria's household electricity customers and 16 per cent of gas customers have moved off their host retailer's regulated tariffs.

The share of customers who have switched supplier is a bellweather of competition.  According to data assembled by the US Center for the Advancement of Energy Markets, Victoria (and South Australia) has seen more customer switching than any of the 60 states and provinces in North America.  Only the UK has more customers shifting to a new retailer.

Vigorous competition is important in ensuring both that the consumer gets great deals and that suppliers are well informed about the demand for gas and electricity.  The feedback of consumer demand is vital to ensure that new supplies of the right sort come on stream at the right time.

But Victoria cannot simply sit back and bask in its good performance.

Competition can only flourish if government required regulated fall-back prices more than covers suppliers' expenses.  To this end, the Bracks government is allowing host retailers gradually to bring prices for each customer class into line with costs.  The Essential Services Commission is also examining ways that allow retailers to enforce payment of debts and penalise late payers.

Following fifty years of politically set prices, such measures are essential.  This is all the more so since the host retailers are now vulnerable to having their most lucrative customers cherry picked.  Last month the Herald Sun reported how energyAustralia, the giant NSW government owned retailer, was successfully signing up big spending household customers in this State.  Such deals are great for consumers but also sound the death-knell for cross subsidies that have long prevailed.  Where retailers have profitable customers captive to themselves they can also be required to subsidise other, unprofitable customers.  But when the highly profitable customers are poachable by rivals, all suppliers have to start offering them better deals and this undermines the scope for cross subsidies.

Among other potentially helpful developments would be a roll out of so-called interval metres that measure consumption by the half-hour.  These would allow households who consume when electricity is cheap to negotiate better deals.  They also mean that those who consume during high price periods, for example on hot days when air-conditioners are going full pelt, would pay the real costs.  This also encourages behaviour that flattens out the costly peaks.  Ironically, the lack of smart meters presently means affluent families who have domestic air conditioners tend to be subsidised.  However, rolling out smart metres is far from a done deal.  Even though technology is making the process more affordable it remains expensive.

Victorian gas and electricity consumers are benefiting from lighter regulation.  These benefits will increase as the wind-down of government controls offers enhanced scope for competition to do its job.

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Tap Resources, but We're not Really in Deep Water

The Council of Australian Governments (COAG) will meet today to bed down the National Water Initiative, amongst other things.  This initiative has the potential to be a major milestone in the management of Australia's water resources.

Much has been achieved over the last year, and as such, the issues to be settled are limited and achievable.

After much distortion and hype there is now recognition that the environmental issues of the Murray Darling Basin are manageable.  The demands of activists for a big flush of 1,500 gigalitres (equivalent to three Sydney Harbours) have been shelved, replaced by an agreement to provide up to 500 gigalitres of additional water for environmentally important icon sites, and with specified objectives.  Achieving this will be no mean feat.  In effect, it may involve taking some 7 per cent of water that is now used in farming along the Murray and its tributaries.

Moreover, nobody has an accurate fix on how much water is already allocated for environmental flows.  Wetland working groups and forest management committees already control many hundreds of gigalitres of water and this quantity will increase with the new water sharing plans, at least in New South Wales.  However, this environmental water doesn't appear on any general ledger.

The Murray Darling Basin Commission is not able to advise of the volume of environmental water, noting that it comes in different forms as minimum flows, environmental flow rules, contingency allowances and tradable entitlements.

What is clear, as the official statistics from the Murray Darling Basin Commission show, is that diversion for irrigation and Adelaide's water supply, total 34 per cent of inflows in an average year in the Murray River.  This is much below the often falsely quoted figure of 80 per cent.  Furthermore, despite the public perception that water quality in our river systems is in decline, key water quality indicators generally show improvement or are stable.

Unambiguous and permanent water property rights for farmers might also emerge after today's meeting.

Irrigators don't get a set water allocation.  It has always been recognised that if it doesn't rain there will be less water to divide up.  Irrigators accept and bear this risk.  But they have been understandably cautious about giving regulatory agencies carte blanche to re-set allowable formal water allocations.

This has been a major point of contention in the negotiations in the lead up to COAG.

Irrigators are familiar with the Green's track record of using each agreement as a jump-off point for the next round of concessional demands.  They believe that a proposed clause -- whereby water allocations can be reduced on the basis of "new knowledge" that shows current levels of extraction are unsustainable -- could just be the impetus for a new environmental campaign demanding more water for environmental flows irrespective of the evidence.

An increased capacity to trade water between catchments and states may also emerge from the National Water Initiative.  As a consequence, there is potential for much more water to be extracted from the overall system than would be the case if water use was limited to the original water licence holder and his farm.

Rumour has it that the federal government is preparing to announce a large compensation package to buy out irrigation licences in catchments that are deemed over-allocated.  This may be inequitable, because some money will go to farmers for water that arguably "never existed".  The advantage, however, would be that many might breathe easier on the basis there was suddenly "more water" in the total water kitty -- at least for the Murray Darling system, the region driving the water agenda nationally.

Indeed, delegates attending this week's COAG meeting would do well to approach the National Water Initiative with positive pragmatism.

After all, planet earth is 70 per cent covered by water and, in terms of available fresh water per capita, we have a lot of water in Australia.

According to the World Resource Institute, we have 51,000 litres of available water per capita per day.  This is one of the highest levels in the world, after Russia and Iceland, and well ahead of countries such as the United States (24,000) and the United Kingdom (only 3,000 litres per capita per day).

Most of this water falls in the north.  This doesn't mean we should pipe it south to the Murray Darling Basin, but it does mean we have choices.

In Australia, we divert only 5 per cent of average annual runoff.  Of the 5 per cent we divert, we even export much of it as food, including rice, wheat and sugar.

Many individual businesses are doing it tough, particularly in areas of continuing drought and where there is no developed water infrastructure.  The bottom line however, is that as a nation we are not really that thirsty.

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Gas Pipeline Monopoly? My Foot!

Attacking the Productivity Commission's draft report on gas, Terry Dwyer and Bob Lim ("Gas access report a load of hot air", June 23) argue that a government right of way for a gas pipeline confers a monopoly to a pipeline business.

They oppose deregulation of pipeline charges and argue that pipelines with a regulatory "holiday" period (say, 15 to 25 years) should revert to government ownership and be free to users thereafter.

There are several problems with their analysis.

First, the key ingredient to monopoly power is a lack of competition and once more than one pipeline serves a market that monopoly is eroded.

Second, the government retains ownership of rights of way and a pipeline business cannot stop a rival from duplicating its facility along the same route.

Third, if pipeline usage were to become free after a period, how would the rival uses for it be determined?

Government price regulations mean lobbying costs that feed consultants but are a deadweight loss to the economy.

They should be reserved for genuine monopolies, not extended to cover industries, such as most of gas transmission, where competition holds prices in check.

And if governments were to specify that all new pipelines must be handed over to the state after a period, the corollary is a reduced incentive to build such facilities.

Governments would also have to manage the pipeline it thereby nationalised (heaven forbid!) or resell them.

The value of the resale might compensate for the lost incentive to build such facilities but this is doubtful.

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Model in New Peter Principle

The Australian farm lobby could learn a lot from Peter Garrett about how to become more cohesive, effective and financially secure.

Since he recently became a member of the Labor party much has been written about Garrett the rock star and environmentalist.

But perhaps the best kept secret is Garrett significant contribution to building and giving impetus to the Australian environment movement through the Mittagong Forum.

Peter Garret was President of the Australian Conservation Foundation (ACF) from 1989 to 1993 and then most recently from 1999.  It was in 1999 that the ACF Strategic Plan announced the need to "broaden and strengthen the environment movement in Australia".

The concept was realised through a series of meetings held in Mittagong in the Southern Highlands.

Garrett also lives there.  He played a key role in getting the big environmental organisations together including Greenpeace, World Wide Fund for Nature and State conservation councils.

Early discussion included methods to increase movement wide collaboration on issues and campaigns, along with understanding emerging issues and developing potential strategies to tackle them.

In 2000 ACF received a substantial grant from a philanthropic trust and directed the funds towards the Mittagong Forum, which has met at least 14 times since 2000.

Its vision is to, "develop capability, generate strategic insights, and to work collaboratively, to enhance the effectiveness of Australia's Environment Movement".

"Fundraising to increase independence of organisations and for the Mittagong Forum" has also been a key goal.

The forum recognises that different environmental groups will not "necessarily agree on issues", but says by working together they can more effectively achieve broad and specific environmental conservation outcomes.

The National Farmers Federation (NFF) is the agricultural equivalent of the ACF and perhaps it needs an equivalent forum.

The bush could do with an organisation that, "facilitated outreach and communication between its members, the broader movement, and the community" -- another Mittagong Forum objective.

The NFF problem, however, is that there is no longer a clear and shared ideology amongst member groups.

The NFF is a mish-mash of agrarian socialists, capitalists, technophobes and innovative technologists.

In contrast Garrett and his environmentalists are mostly socialists with technophobia.

But there is hope.  Some resource user groups are getting together to organise the Eureka Forum.

This year is the 150th Anniversary of the Eureka Stockade and perhaps a time to reflect on the importance of secure property rights and the liberal democratic values that underpin all free societies.

While the small miners lost that battle, they won the war including reduced regulation and better resource security along with the right to vote.

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Infrastructure Reform has Paid Dividend

The Keynesians are on the war-path, demanding a return to larger budget deficits and higher public debt.

Paul Keating expressed their claim most colourfully at last year's CPA Congress:

I inoculated a generation of treasurers with the surplus needle and none of them have found the antidote ... They always want to run these budgets in surplus, whereas in fact what they should be doing is providing public infrastructure to lift our productivity.

It's time they looked at the facts.

While the budgetary approach of the Australian governments has flaws, the flaw does not lie with the level of infrastructure spending.  Spending on public infrastructure (by the public and private sector) is high and growing even in the public sector.  Moreover, the last thing we need at this stage of the business cycle is a fiscal stimulus a la Victoria of the 1980s.

Australian governments have had a fundamental re-think about debt and infrastructure funding.  As a result the stock of public-sector net debt was cut from $164 billion (34.9 per cent of GDP) in 1994-95 to $66.6 billion (8.8 per cent of GDP) in 2002-03.  Moreover, this trend is likely to continue.

The main reason for the rethink has been money.  The public sector has been awash with funds and has had a reduced need to borrow.

A booming economy, combined with high effective tax rates, has generated a huge inflow of funds to the public sector.  Budget sector revenue has grown from 33 per cent of GDP in 1995-96 to 37 per cent in 2001-02.  This translates into an additional $38 billion per year for the public purse.

All States have expanded their taxing effort over the last six years, particularly on the booming housing sector.  Moreover, the GST has proved to be what the Premiers' always wanted -- a super growth tax.  Since 2000, GST revenues have grown at an annual rate of 9.3 per cent and GST payments to the States are currently (2002-03) about 30 per cent above initial forecasts.

Governments have also received a reform dividend which reduced debt and costs.  Since the late 1980s, Governments -- both Labor and Liberal -- have sold over $100 billion worth of operating businesses plus over $15 billion in land and other fixed assets.  These sales were used, in large part, to reduce debt levels and thereby contributed to the lowering of the public-sector interest bill by roughly $6.9 billion per year.  They have also driven reform in the remaining state-owned enterprises generating additional saving in the vicinity another $2 billion per year.

While the available data on capital formation do show a decline in public expenditure of around 4.5 per cent of GDP since the late 1980s, it is largely a statistical illusion.

About 40 per cent of the apparent decline is accounted for simply by sale of assets by the public to the private sector (in national accounts, the proceeds from privatisations are treated as a negative capital outlay).  Of course these assets have not disappeared, but continue to operate, providing the same services in private hands.

The data also fail to account for infrastructure spending, which in the 1980s would have been undertaken by the public sector, but is now undertaken by the private sector.  The fact is, whether it be from privatised businesses or through public-private partnerships, the private sector is now responsible for funding the bulk of "public" infrastructure.

Notwithstanding the growth in private provision of public infrastructure, the states have also increased their level of own capital spending in recent years and are funding it increasingly via debt.

Take NSW -- a state which has privatised little.  Since 1995-96, capital spending by the NSW GBE sector (the sector which accounts for the lion's share of infrastructure spending) has increased 77 per cent (in real terms) and is expected to reach a 30-year high this year and go higher next year.  As a result of this spending, the NSW total public sector has been in deficit for the last three years and is expected to remain so over the next four years.

Queensland, the state with the lowest debt levels and highest revenue growth, is also in the midst of a public sector funded infrastructure boom.  As a result, the Queensland total public sector is expected to run a deficit of just over $2 billion next year.  WA and Victoria also have in train large public sector capital works programs.

Reform of infrastructure has been one of the keys to Australia's recent economic resurgence.  It would be a disaster if these where jettisoned for a return to the past.

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International Power’s Application to Develop Coal Resources Adjacent to its Current Lease

A Submission to Panels Victoria

SUMMARY

The Hazelwood Power Station is one of four key baseload electricity generators operating in Victoria.  Considered almost obsolete at the time of its sale in 1997, it has been refurbished and transformed into a productive and reliable asset and its life has been extended 25 years beyond its previously scheduled 2005 decommissioning date.

The Minister and his colleagues within the Government have rightly promoted the need for integrity and an absence of political interference in approval processes.  Moreover, the Government has been careful to prevent regulatory policies being used inappropriately for matters to which they were never intended to apply.  The Minister, in line with such a philosophy, moved to prevent legislation designed to have only an interim effect on the electricity supply industry's structure from being used to prevent a takeover in the AGL-Loy Yang Power case.

The environmental approval processes for the development of the West Field Project are analogous to that case.  Their focus is on ensuring appropriate local safeguards rather than addressing matters of global importance like greenhouse gas emissions.  Misusing those local safeguard processes to pursue wider agenda issues would transform them into addressing goals that they were never intended to tackle.

In addition, the environmental approval process for specific project proposals employs a command-and-control regulatory approach.  While necessary for specific project assessments, this approach is at variance with the preferred approach of governments, including the Victorian Government, for addressing environmental "spillovers", especially greenhouse gas emissions.  The preferred approach for these national and global issues is one that employs "economic instruments", like taxes or tradeable rights, to pursue the objective since these market-based approaches have acknowledged superiorities in terms of efficiently meeting the goal.

Moreover, the Victorian Government has taken the view that the control of greenhouse gas emissions is a national policy and one for the Commonwealth to take the lead on.  For Victoria to move ahead of the national program could disadvantage the State and distort the national approach.

The EES assessment will be seen by energy investors as a guide to Victorian's attitude to investment in brown coal powered generation.  The West Field project is necessary for the on-going production of the existing Hazelwood facility.  It is being deliberated at a time when, according to the electricity market manager (NEMMCO), not only is the existing facility important for the State and the national supply, but an additional major baseload facility will be necessary in Victoria within four years.

Finally, as a $2.3 billion asset, the Hazelwood plant is among the most important investments in Victoria.  The Panel's approach of the West Field project is, therefore, a litmus test of Victoria's the environmental assessment procedures with ramifications for investor confidence in regulatory process for investment plans across the State.

INTRODUCTION

International Power's 1,600 MW Hazelwood facility is responsible for some 20 per cent of the electricity production of Victoria and about 5 per cent of the output of the National Electricity Market.

The generator has undergone a remarkable upgrade since having been sold to its present owners for $2.3 billion in 1997.  It has been refurbished and thereby had its life extended by some 25 years, an outstanding example of efficient use of capital.  In the process, the business has also reduced its plant downtime thereby improving the reliability and value of the electricity supply.

These improvements now need to be consolidated.  To effect this, a modification of the business's mining licence (the West Field Project) is required along the lines that were agreed in principle at the time of the government's sale of the facility.  That agreement was contingent on assurances that an Environment Effects Statement (EES) would be prepared and would conform to government policies for the protection of the environment.

The review of the process has some considerable implications including:

• the availability of low cost electricity in Victoria
• the integrity of Victorian Government environmental assessment procedures and the consequent credibility of the Government in dealing with business proposals

SCOPE OF THE EES

An EES is required to meet the requirements of:

1. Victoria's Environment Effects Act 1978;  and
2. environmental assessment requirements under the Commonwealth's Environment Protection and Biodiversity Conservation Act (EPBC) 1999.

Reflecting the regrettable build up of regulatory impediments to business, the coverage of the EES is required to be extensive, costly and the business planning is vulnerable to considerable area of potential administrative discretion.  The EES is primarily subject to four Victorian Acts:

• Mineral Resources and Development Act 1990,
• Water Act 1989,
• Environment Protection Act 1970, and
• Planning and Environment Act 1987.

Other legislation and regulatory matters to be taken into consideration include:

• relevant State environment protection policies and Waste Management Policies
• Latrobe Planning Scheme
• Catchment and Land Protection Act 1994
• Land Act 1958
• Crown Land (Reserves) Act 1978
• Archaeological and Aboriginal Relics Preservation Act 1972
• Flora and Fauna Guarantee Act 1988 and Victoria's Biodiversity Strategy (Native Vegetation Framework)
• Heritage Act 1995 and relevant strategies and policies, and
• Aboriginal and Torres Strait Islanders Heritage Protection Act 1984 (Commonwealth)

Assessment Guidelines were prepared by the Department of Sustainability and Environment (DSE) and Hazelwood's EES follows these.

Under the guidelines the EES must assess the potential environmental, social and economic impacts of the West Field Project and describe how the impacts are to be avoided or managed.  They deal with a number of issues largely of a local character.  These include river diversions and associated ecological impacts, road realignments, air quality due to the diversions.

A Works Approval under the Environment Protection Act 1970 needs to address discharges of water and dust, and waste minimisation for the proposed works.

Greenhouse gas emissions are also covered.  However, this issue had only a cursory coverage in the Departmental Assessment Guidelines.  Indeed, out of some 800 pages assembled by International Power in response to the regulatory approval requirements and the Government's Guidelines only 7 (10.91-10.98) address greenhouse gas emissions as their prime topic, although the matter is covered alongside a great many other issues elsewhere in the report.  Moreover, in line with the requirements of the EES, that section in Chapter 10, quite properly, dealt only with the proposed mining operations and not the subsequent burning of coal itself.  This reflects the intent of the legislation to focus on the particular and not to provide a tool which the executive or regulatory arms of government could employ to pursue wide policy agendas.

It is understood that Hazelwood, as a separate matter, has provided assurances that greenhouse gas emissions per unit of electricity generated will decline as a result of the efficiencies in operation it intends to introduce.  There are technologies for the geosequestration of CO2 being considered, including one in the US that is being trialled with brown coal but even an Integrated Gasification Combined Cycle (IGCC) with geosequestration would only reduce the CO2 emission levels to about 40 per cent or existing levels. ⁽¹⁾

THE ECONOMIC EFFECTS OF REJECTING THE APPLICATION

A decision to prevent Hazelwood proceeding on the grounds that its greenhouse gas emissions are inconsistent with the state's policies and would deter additional investment in brown coal based electricity generation.  International Power maintains that it would not be possible to continue operating the Hazelwood plant as a commercial entity if access to the West Field is denied.

The National Electricity Market (NEM) now comprises generators, network businesses and retailers that are fully privatised (in Victoria and South Australia) and largely state owned in the other states.  The state owned firms operate at arms length from their government shareholder under a corporatised governance model.  Replacing the five integrated electricity businesses that were operating in the NEM ten years ago are about 30 firms, including over a dozen major generating businesses.

New capacity is commissioned and existing capacity operated solely on the basis of the ability of the firms to operate profitably.

The early decommissioning of the Hazelwood facility would leave a major shortfall in the State's capacity since the station provides more than one fifth of the state's electricity.  This would be compounded because the steady growth in demand will require further capacity (by 2008 according to the advice of the national market manager, NEMMCO, in its Statement of Opportunities).

Alternatives using gas would be much more expensive while wind and other exotic renewables cannot possibly provide anything more than token quantities of electricity at a cost acceptable to Victoria.  With respect to the more exotic renewables, (as defined by the Commonwealth) the requirement first made in 1997 by the Prime Minister in his response to the Kyoto Agreement that the Electricity Supply Industry requires 9,500 GWh per annum in terms of "additional energy" to be used across Australia.  This will bring a cost of $380 million per year by 2010.

The Prime Minister in his Securing Australia's Energy Future address (15 June 2004) estimated that this measure will have underpinned some $2 billion in investment by 2010.  In that address, further inducements the development of renewable energy were announced.  For example, the Commonwealth's commitment of a $500 million fund is designed to leverage a further $1 billion of investment in these energy technologies, and there are further measures (including $75 million for "solar cities", $100 million for R&D).

Minister Theophanous has committed Victoria to the installation of some 1000 MW of wind power by 2006, though wind power can only provide about one quarter of the output of comparable fossil fuelled generators because of the intermittent nature of the wind.

The Prime Minister's 15 June 2004 energy address also estimated that between now and 2020 some $37 billion in investment for electricity will be required.  Most of this will be in the generation sector and little of it can come from wind.  The Government doubtless regards it as important that Victoria continues to obtain a reasonable share (30 per cent or so) of this new investment.

Brown coal, in the absence of an improbable technological advance, is always likely to entail considerably greater emissions of carbon dioxide per kWh of electricity than gas or black coal based generators.  Only nuclear is capable of near zero emissions and nuclear is not favoured on other grounds.

That aside, the early forced decommissioning of Hazelwood would have additional repercussions for industry development in the State.  These would be include:

• creating an adverse image for the State as a venue for major investment, compounding some unfavourable publicity as a result of industrial relations weaknesses that have already had an effect seen with the failure of the State to hold the mooted investment by Japanese food group Saizeriya and to attract the Barry Callebaut company and loss of other transnational investment; ⁽²⁾  Victoria's poor labour relations were further highlighted in the findings of the Cole Royal Commission;
• bringing about a wasteful scrapping of a major plant and signalling that the Government sees little merit in the further development of the State's extraordinarily rich deposits of brown coal;
• raising the costs of energy in the State with consequent losses in its ability to attract industry, especially energy intensive industry, and in bringing about higher energy costs to consumers;
• further costs increases in terms of transmission lines as a result of the need to import energy from NSW to make up shortfalls within the State.

POLICY AND ADMINISTRATIVE CONSIDERATIONS

It has been said (Courier-Mail 10 May 2004) that, "A spokesman for the Energy and Resources Minister Theo Theophanous said the minister would not sign off on the mining licence expansion until negotiations with Hazelwood over a reduction in greenhouse emissions had concluded".  It is most unlikely that such a report, if accurate, truly represented the views of the Minister.

One reason for this is because of the acknowledged importance of brown coal as a present and future energy source in Victoria.  Minister Theophanous and the Victorian Government as a whole is strongly supportive of making full use of the States brown coal resources.  At the Energy Users Association on the 2nd of June 2004 Mr Theophanous confirmed the Government's view of the vital importance to Victoria of these reserves.  He said, "Brown coal will play a key role in meeting our future energy needs.  But will do so within a carbon constrained environment".  The Government is also conscious of the need to provide a supportive and hospitable environment for investment in general, recognising its importance to the State's continued prosperity.

In addition to these industry specific matters, Mr Theophanous has been at pains to promote the integrity of government actions.  These include ensuring due process in matters where government assessment procedures have been put in place and thereby avoiding political interference in specific matters.  Mr Theophanous has emphasised the need for governments to adopt policy positions and ensure legislation is in place to promote these rather than interfering in particular commercial decisions.

In this respect the Minister is on-record as having denied the ACCC use of particular Victorian legislation to oppose the proposed merger between Loy Yang Power and AGL.  When the ACCC sought to use the legislation of the previous Victorian Government for purposes it was clearly not intended, the Minister moved to rescind that legislation.  This action, quite properly, forced the ACCC to pursue its policies through the medium of its own Act and not through Victoria-specific legislation that was targeted at matters other than those in dispute.  It endorsed major tenets of sound administration, for example:

• that a single policy instrument should not be used to serve more than one unrelated policy goal;  and
• that regulatory laws should be confined to purposes that represented the intent of the legislature at the time of their promulgation and should not provide la licence to the executive and regulatory branches of government to address unrelated matters.

Furthermore, the Minister, though strongly in favour of the Kyoto Agreement and in favour of doubling the current Mandatory Renewable Energy Target (MRET), made it clear when addressing the Energy Users Association on the 2nd of June 2004 that this was a national issue and it was quite improper for State Governments to attempt to pursue the policy individually.  If Victoria were to adopt state-particular policies this might disadvantage the state's economy;  it might also undermine the national approach by shifting it in directions that are not appropriate and more costly than they need be.

Moreover, both the Commonwealth and State Governments (and indeed, virtually all governments the world-over) are in agreement that any control mechanism used for greenhouse gas emissions should employ "economic instruments" like taxes, incentives or tradeable rights.  These are superior to command-and-control regulations or direct prohibitions that are necessarily used in local planning decisions because they employ markets with the intrinsic improvements in flexibility this entails.  MRET and the additional mechanism employed by the NSW Government make use of the economic instruments approach.  For the Victorian Government, among other members of Cabinet, the Deputy Premier and Minister for the Environment has made a strong case for using market instruments to pursue environmental goals. ⁽³⁾

For all these reasons, and in view of the efforts International Power has made to provide an accurate and informative EES that demonstrates the benefits of its proposed new investment to the State and the mitigatory actions it is taking to minimise any adverse environmental outcomes, the Panel should accept the proposal.

ENDNOTES

1.  See Iain MacGill, Hugh Outhred and Rob Passey, The Australian Electricity Industry and Climate Change: What role for geosequestration? ERGO Draft Discussion Paper 0503, October 2003.

2.  See Wood, R.J., Take Away Take-Away: The Self-Induced Destruction of the Australian Food Manufacturing Industry, November 2001.

3.  See address to the Fabian Society, RMIT May 2003

Howard Must Reveal His Vision

Only two of Australia's twenty-five prime ministers -- Robert Menzies and Bob Hawke -- have won more than three elections.  The scale of what the Liberals are attempting isn't underestimated by anyone -- least of all by John Howard himself.  Menzies and Hawke fought Oppositions that were in turmoil.  Howard's achievement is particularly impressive given that he has confronted an ALP that has been relatively united.

Failure to win a fourth term will be disappointing for him but it won't erase the fact that he has been one of three of Australia's most significant leaders of recent decades.

In the 1970s he conceived the policies of economic reform pursued by Labor in the 1980s -- Keating as Treasurer implemented them -- and Hawke as prime minister allowed them to be implemented.

Howard has not yet achieved every part of his vision.  Whether more substantial reforms to the tax or industrial relations system would have been worth the risk of a double dissolution election will be the great "what if" of his prime ministership.

For Howard to continue to pursue his agenda he must win the 2004 federal poll.  What is required?  He must do three things -- the first is tactical, the second and third are strategic.

First, the Coalition must make Labor a small target.  This might sound strange as it is usually assumed that it is the Opposition that decides how big a target it wants to be.  In 1993 John Hewson presented a big target, and in 2001 Beazley a small one.  Neither was successful.  If either had adopted the opposite strategy they probably would have won.

A Government can have a huge impact on how an Opposition is perceived.  In 1993 it was in Keating's interests to highlight the supposedly radical nature of the Coalition's policies.  In 2001 it was in Howard's interests to stress the absence of Labor policies in an uncertain world environment.  During the first few months of his leadership Mark Latham captured the public's imagination because he presented new ideas in an interesting way.  In the last few months Latham has been quiet as he has struggled to turn his ideas into policy and the Coalition has regained the initiative.

Howard's response to the ALP's complaints about politicians' entitlements was a masterstroke.  Overnight Labor ceased to provide an alternative.  Similarly the budget to neutralise the issue of tax cuts for the middle class.  Howard must portray Latham as without alternative policies.  When there's no alternative people will vote for what they know.

Second, the Coalition must provide something for everyone.  This does not mean taxpayers' funds should be doled out to every industry and community group that demands money.  What it does mean is that to win the Government must get the votes of groups other than those it has traditionally favoured.  Support from families with children and the elderly certainly is important.  But more people are now living alone than ever before.  In a decade there will be more couples without children, than with children.  Singles, and couples without children have so far been ignored in the tax debate.  This is a question that goes beyond how to deal with an ageing population.  How political parties respond to demographic and lifestyle changes is obviously a major challenge.  The significance of this issue for the Coalition is that being in government provides the resources for it to develop and enunciate policies on these matters.  And this is related to the third thing the Coalition must do to win in 2004.

Howard must provide a reason why people should vote for him.  This is so obvious that it is usually forgotten.  He has a great capacity to present a vision of the nation and society.  But because it is a vision disliked by most in the media his skill in this regard is either belittled or ignored.  In 1996 and 1998 the circumstances demanded a vision and he offered one.  During the 2001 campaign because of what had occurred a few weeks before he only had to convey a sense of stability.  In 2004 in the absence of another literally epoch-defining event Howard is again required to tell Australia of his vision.

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A Gloomy Celebration of the Environment

Last Sunday was the 22nd Annual World Environment Day, a day set aside to reflect on the state of the environment and what needs to be done to protect it.

What did we get on the day?  Prophesies of doom and gloom, mass protests and bad street theatre.

True, numerous community groups organised practical activities such as planting trees and cleaning up rubbish.  These were, however, drowned by a cacophony of gloom and anger.

In fact, World Environment Day should be a day of celebration.

We have achieved a great deal in terms of conserving and improving our natural environment.  Sure, the job is not done, but we have made huge strides in the right direction.

Examples of success abound.  The Humpback whale, whose demise was a seminal cause of the green movement, is back from near extinction 20 years ago to a large and growing school -- enough to support a large whale-watching fleet.

Air pollution, including sulphur dioxide, nitrogen dioxide, lead and ozone, are down sharply in all urban areas.  This is despite a large rise in motor vehicle use, the main cause of urban air pollution.

The downward trend in air pollution is expected to continue into the future as higher emission standards gradually come into play.  Recycling rates have improved 150 per cent over the past 10 years.

The national park estate has been doubled in size.  All state forests are now managed on a sustainable basis and there has been a large growth in tree planting.

The farming community, which manages most of the nation's environment, have made huge strides in reducing its impact on the environment.

Minimum-till technology has been widely adopted, providing better protection of soils.

There has been large investment in monitoring and irrigation technology, which, in combination with clearer property rights, has improved the efficiency of water use.

And biotechnology, where allowed, has greatly reduced pesticide use.

Importantly, salinity is being addressed, particularly along the Murray River.

For example, salinity levels at Morgan, just upstream from the Adelaide pipeline, have been declining for 20 years.

Why then the pervasive gloom?

There are several reasons.

First, entrepreneurs have learned that frightening people with tales of environmental Armageddon sells.

For some reason people are inordinately receptive to bad news on the environment -- even in the face of strong evidence to contrary.

And there are huge numbers of people and organisations in the public, private and non-government sectors exploiting this weakness.

Second, activists whose real concern lies with changing the economic system have -- with the demise of socialism -- grasped the environment and environmental groups as their tool to change the world.

These people, known in the trade as watermelons -- green outside but red on the inside -- have succeeded in dominating the environmental debate.

Third, many scientists and politicians have succumbed to the view that the ends justify the means.  That is, that the pursuit of knowledge, or the desire to engender environmental awareness, justifies distorting the evidence.

Whatever the reason, the results are distorted priorities and excessive fear of the future and of business.

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NGO Opinion Is Not The Same As Public Opinion

In April this year, A Just Australia's Howard Glenn addressed the 60th session of the UN Commission on Human Rights in Geneva.  Glenn bemoaned Australia's "harsh treatment of refugees".  He reported that some in that forum accused Australia "as having a human rights record as bad as Libya's".

In response, an Australian businessman wrote, "Over the last six months I have travelled to the UK, Holland, Belgium, Singapore, Thailand, Hong Kong and Jakarta, and I can assure Mr Glenn that in the bars, cafes, taxis and supermarkets of the world there is a great deal of admiration for the policies of "Iron Jack" [John Howard].  Leave the salons and soirees of New York [and Geneva], Mr Glenn, and visit a bar in Rotterdam to get a more nuanced and glowing appraisal of Australia's international standing".

Some opinions, it seems, are more valued than others.  Organised opinion is more likely than unorganised opinion to receive invitations to address public forums.  These forums are reported, and in no time, the views are thought to be public opinion.  Two types of people disagree with that proposition.  Politicians who represent majority opinion, and people whose opinion is not expressed by organised opinion.

In essence, the sum of NGO opinions does not equal public opinion.  Moreover, no NGO that labels itself "public interest advocate" can hope to encompass the public interest.  In recent decades, the great enthusiasm for public policy activism has brought great benefit.  However, it has some problems that need to be addressed.

There is no longer a problem in voicing opinion in this democracy.  The problem is that every opinion cannot be given equal weight.  Nor is every opinion equally valid.  The full-blown model of "democracy as civil activism" or "participation", while not having run its course, has reached the point of diminishing returns.

Governments and international institutions like the UN are in danger of privileging some voices at the expense of others.  In international forums the "daily plebiscite" of national politics, which ensures the politicians stay close to the wishes of their electorate, is absent.  Some real "fruit loops" are invited to speak at the UN!

Within Australia, the daily plebiscite works well.  All shades of opinion are heard, and should be heard.  Any NGO, however, that has a formal relationship with government, for example, it sits on a government committee or receives government funds should have the details of that relationship placed on the public record.  This gives the unorganised opinion a chance to see who are purporting to speak on their behalf.

In this regard, I have written a report for the Commonwealth government, The Protocol:  Managing Relations with NGOs.  It recommends ways in which the Commonwealth can share with the electorate, details of the NGOs whom it chooses to grant the privileges of representative status, or expert status, or whom it funds.  It does not suggest that there should be a license to lobby, or that the NGO voices should be silenced.

Far from silencing NGOs, governments fund many.  Is the electorate aware for example, that environmental NGOs, even those who undertake almost no conservation work, and who are involved in political campaigns on an ongoing basis, are deemed charities?  In reality, they are publicly-funded non-partisan political parties.

This raises a second concern.  The Commonwealth has recently sought to define a charity.  It has expanded the number and type of organisations to whom it has granted charity status.  It has also accepted that advocacy work is a fundamental part of their work.  However, when the lobbying begins to force out real charitable work, it is time to set limits on what can be done in the public's name with the public's money.

As I understand it, the government is not suggesting any limit to lobbying by charities, other than banning partisan activity.  What it wants is a definition that stops charities from subverting their charitable purpose by spending too much of their resources on such work.  Unlike some jurisdictions, namely, the USA and Canada, it has not suggested a limit to the amount of resources devoted to lobbying.

The best way to resolve this problem of the evolution of charity work, is to let the donor decide.  This needs transparency.  A well-informed donor market can make up its own mind if it wants to contribute to a charity, which for example, may spend a large proportion of its funds on lobbying.  The donor may also want to know whether the charity's goals are achieved, and how efficient is the charity.

If the far more complex matter of corporate performance can be presented in simple terms, the same can be achieved for charitable NGOs.

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Bush Burns as Greens Grumble

Green groups are lobbying hard to make global warming the number one environmental issue for the upcoming federal election.  However, this cannot be the outcome of a process of selecting priorities based on environmental need or rigorous cost-to-benefit assessment.

If we were to properly do this, then bushfires would no doubt be high on the list -- at least higher than greenhouse in terms of a threat than can be reduced in a cost-effective way.

In terms of outright destruction to wilderness areas, including old growth forest and rare and endangered species, the 2003 bushfires were an environmental disaster of incredible proportions.

More than three million hectares were incinerated including three quarters of Kosciusko National Park.  Compare this with annual clearing rates of native vegetation by farmers in NSW and Victoria amounting to less than 20,000 hectares.

In my recent report When Will We Ever Learn?, I described "the outpouring of greenhouses gases in the bushfires" as being "matched by an outpouring of denial by some green groups".

The National Parks Association rushed into print on 22 January last year proclaiming there was "not a skerrick of evidence" to support the accusations of insufficient hazard-reduction burning.  Subsequent official reports contradict this.

One conclusion in the October 2003 House of Representatives Select Committee Report "A Nation Charred" was that "there has been grossly inadequate hazard reduction burning on public lands for far too long".

Green groups seem surprisingly uninterested in bushfires as an environmental issue, and at the same time, are reluctant to endorse an acceptable level of control burning for hazard reduction.

The many reports published since last year's Canberra region fires give the impression that advances in fire science and fire-fighting technology are being negated by a political reluctance to reduce massive fuel build-ups, with the problem only exacerbated as more land is declared National Park.

Last week the director of ACT forests told the continuing coronial inquest in Canberra that more resources should have been sent out as soon as the bushfires were detected.  In the broader scheme of things, more resources should also be spent on hazard-reduction.

As I wrote, "you can buy a lot of mitigation for the $11,000 per hour paid for an Ericsson crane helicopter" -- and we could save a lot of native animals if we got our environmental priorities even half right.

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Whisky is for drinking. Water is for fighting over

Address to Royal Melbourne Institute of Technology (RMIT),
Sustainability Soiree:  Beyond the Politics of Water
Melbourne, 9th June, 2004

INTRODUCTION

Mark Twain said, "Whiskey is for drinking.  Water is for fighting over".

He also said, "I've seen a heap of trouble in my life and most of it never came to pass".

And so it might just be that the "water crisis" in Australia (and globally) is a preoccupation -- something that has distracted and engaged us -- rather than a real crisis.

After all, saving water, and saving rivers, makes for a good environmental campaign.  And environmental campaigns can give meaning to the lives of those who would like to have something to save.

Thank you for the opportunity to be a part of this evening's discussion.

I will use my 15 minutes to answer the three questions I have, as a panelist, been given, by illustrating this point:  that we like to worry about water while sitting in our warm baths of drinking-quality water, sipping whisky.

I will explain that if we really want to understand the current water agenda, both nationally and globally, and if we want to be able eventually to move beyond politics, it is necessary that we first understand "environmentalism".

Q1.  What are the competing interests and issues around water?

Dorothea McKellar penned "My Country" a neat 100 years ago, in 1904, when Australia was in drought and before most of our current water infrastructure had been developed.  She wrote,

Core of my heart, my country!
Her pitiless blue sky,
When sick at heart, around us,
We see the cattle die --
But then the grey clouds gather,
And we can bless again
The drumming of an army,
The steady, soaking rain.

We have, in Australia, been going through another very dry period.  Last year, our newspapers were reporting that it was the nation's worst drought in more than a century.

In October last year, I read in our national daily that Sydney residents witnessed the introduction of "tough new water restrictions".  So tough that they involved restrictions on when gardens are watered and how cars are washed.

Given that in the midst of the worst drought in 100 years, Sydney and Melbourne dams were still half full, we might have acknowledged that the cities had essentially been drought-proofed.

In the midst of the worst drought in 100 years, our preoccupation has been with having the right hose nozzle and how we wash our cars.  I've heard that some children, recognising water is very precious, are now asking for their cordial straight.

There are real water shortages in the world, but they are not in Australia.

Close to half the developing world is suffering from one or more diseases associated with the inadequate provision of water.  These shortages are where there is real poverty.

Some of the driest countries such as Saudi Arabia have enough water from desalinisation technologies.  After all, we live on what has been described as the Blue Planet.  Planet earth is 70 per cent covered by water.

In terms of available fresh water per capita, we have a lot of water in Australia;  with most of it falling in northern Australia.  According to the World Resource Institute, we have 51,000 litres of available water per capita per day.  This is one of the highest levels in the world after Russia and Iceland, and well ahead of countries such as the USA at 24,000 and the UK at only 3,000 litres per capita per day.  This doesn't mean we should pipe water south, but it does mean we have choices.

Globally, water use is growing but is still less than 17 per cent of available accessible water.

Most of the diverted water is used for agriculture -- around 70 per cent nationally and globally.  And globally, agricultural water usage has stabilised below 2,000 litres per capita per day due to higher water use efficiencies as a result of improved technologies.

One of the next big potential efficiency gains is through biotechnology -- through the genetic modification of our crops.

In Australia, we divert only 5 per cent of mean annual runoff.  And of this 5 per cent we even export some of it as food.  Did you know that rice growers in the Murray-Darling Basin now produce and export enough rice to feed 40 million people a meal each day, every day of the year?  And after they have grown the rice crop, the residual soil water is usually used to grow a crop of wheat -- most of this also exported.

According to the IPCC, with climate change, in some areas it will get wetter, in others drier.  Australian climatologists predict that it will generally get wetter as it gets warmer.

But I read a few weeks ago in the Sydney Morning Herald that, "Full dams will not end water restrictions".  Why?  Because, "A survey by the Independent Pricing and Regulatory Tribunal found high levels of public support for water restrictions".

Water restrictions in metropolitan Australia might be popular and impacting marginally on people's lifestyles, but not significantly on pay packets and profit margins.  In contrast, the Living Murray Initiative targets Australian irrigators and has the potential to impact significantly on the viability of communities in rural and regional Australia.

It is often only when decisions are likely to affect us significantly that we bother to check the facts.  This brings me to the second question.

Q2.  If 60 highly credible scientists can be accused of getting it wrong on the health of the Murray, what role does science play in the management of water?

Real science has nothing whatsoever to do with numbers.  A consensus of 60 or 60,000 scientists is not science.  Consensus is the business of politics.  Science, on the contrary, requires only one investigator who happens to be right, which means he or she has results that are verifiable with reference to the real world.

I looked for the evidence to support the claims of declining water quality, declining native fish stock and dying red gums in July last year.  I discovered junk science supporting predetermined agendas.

Last year, the CSIRO Website was claiming "salt levels are rising in almost all of the Basin's rivers".  The reality is that salinity levels have reduced over the last two decades, particularly at the key site of Morgan where they have halved.  Morgan is just upstream from the off-takes for Adelaide's water supply.

Despite repeated claims that other water quality indicators are also deteriorating, official statistics indicate that nitrogen, phosphorus and turbidity levels are stable and generally consistent with a healthy river system in the context of inland Australia.

Red gum forests in Victoria and New South Wales are generally healthy.  Indeed, the largest forests are recognised as internationally significant wetlands because of their high biodiversity and because they regularly support very large colonies of water birds.

Despite propaganda that dryland salinity and rising water tables are destroying agriculture and the environment in the Murray-Darling Basin, the region celebrated a record wheat harvest last summer.

Much has been made of the Murray's blocked mouth as a symbol of irrigators taking too much water.  It is evident, however, from the diary of explorer Charles Sturt that in 1830 -- before water was diverted for irrigation -- the Murray's mouth was then, as it is now, a maze of sandbars.

The official statistics from the Murray-Darling Basin Commission show diversion for irrigation and Adelaide's water supply total 34 per cent of inflows in an average year in the Murray River -- much below the often falsely quoted figure of 80 per cent.

Murray cod was listed as vulnerable to extinction in July last year on the basis that there had been a 30 per cent decline over the last 50 years.  The Australian newspaper ran a story titled, "For cod's sake, Murray needs stronger flow" (July 5, 2003).  But there are no data to support the claims of declining Murray cod numbers.

The most widely quoted source on native fish status in the Murray-Darling Basin is a 1995-96 NSW Fisheries survey.  The report's principal conclusions include the statement that:  "A telling indication of the condition of rivers in the Murray region was the fact that, despite intensive fishing with the most efficient types of sampling gear for a total of 220 person-days over a two-year period in 20 randomly chosen Murray-region sites, not a single Murray cod ... was caught".

A local Murray River fisherman's retort to the scientist's declaration that they caught no fish goes something along the lines, "The scientists, although having letters behind their names, spending some $2 million on gear, and 2 years trying, evidently still can't fish".

In the same regions, at the same time the scientists could catch not a single Murray cod, the commercial harvest was 26 tonnes.

The Environmental science sector is currently operating well below the standards of accountability that have been established and are enforced for other sectors.  The days are long gone when the stock market assigned any value to financial statements solely on the basis that the directors found mates at the club to peer review the document.

Environmentalism is subversive because it uses the authority that science can give to an idea to justify beliefs that have no evidential basis -- to justify beliefs that have no basis in observation or tested theory.

Q3.  How do we get beyond politics?  What role can RMIT play?

In the first instance, there is a need to take environmentalism out of science.  This is going to be even harder than moving beyond politics, because religion can be even harder than politics to deal with.

Recently, I gave a lecture to a class of environmental science students on "The Burden of Proof in the Environment Sphere".  My key message was proof/ evidence appears to be increasingly unnecessary as scientists increasingly operate on the basis of belief.

The lecture focused on the inconsistencies between the claims of environmental scientists and the available evidence with respect to the Murray-Darling system.

As the lecture progressed, the students became uncomfortable but they didn't seem outraged by the inconsistencies.

While I continued to emphasise the importance of operating on the basis of evidence, the point was made to me by the students that, "Belief is important.  It is what makes the world go around".  One of their main concerns was that if people believed that everything was OK, the environment would be destroyed.

The reality is that problems of water availability and pollution are being solved through technological and engineering innovations.  While many university facilities remain wedded to the concept that our land, air and water are generally becoming ever more polluted, and that technology is the problem rather than the solution, the empirical evidence does not support this belief.

Environmentalism has been described as the new religion of choice for urban atheists.

If we accept environmentalism as the new religion, then it is perhaps easier to understand much of the current public policy agenda regarding water.  It is as much about process as outcome.  It is as much about what is morally right and wrong as it is about the real state of the river environment and fixing real environmental problems.

In material, standard-of-living terms, Western democracies have progressed and benefited enormously from the secularisation of society and the power of independent science.

The issues of scientific integrity, and the extent to which technology can continue to provide solutions for environmental problems, needs to be publicly and openly debated -- because in the end, the integrity of science is dependent on a secular society that understands and values truth above environmentalism.

Water Reform Starts with de facto Rights

In August of last year, the Prime Minister, John Howard, and the State Premiers laid out the framework for a "National Water Initiative".  Including a $500 million rescue plan for the Murray-Darling River system, this was designed to provide water to important environmental sites in the Murray Darling Basin.  A national plan to enable compensation for those who relinquish water rights is a major goal of the initiative.

On 25 June Mr Howard is again scheduled to meet with his CoAG counterparts, the State Premiers, to advance policy on water.

Doubt is being cast on whether the Murray Darling system is actually under the sort of stress portrayed by green groups and accepted by many in urban Australia.  Ecologist Dr Lee Benson has carefully sifted through the evidence and found it seriously lacking.  A Parliamentary Committee that has comprehensively examined the matter issued a bipartisan report, expressing severe reservations about the validity of the science on which proposals to take water for environmental initiatives were being made.

Proposals for reduced irrigation water use include diverting some 500 gigalitres (the current government proposal) or 1,500 gigalitres (endorsed by Mr Latham) to environmental uses.  The latter plan was warmly welcomed by Michael Young, a senior CSIRO official and member of the Wentworth Group who described it as "very very courageous".

Courageous it is since the proposal would involve a considerable diminution of wealth in regional Australia.

There are some 11,700 gigalitres of extraction permits issued, but not all of this can be used.  The additional "environmental allocations" would need to come from irrigators using the Murray and its tributaries in NSW and Victoria.  This amounts to around 7,000 gigalitres.  The bottom line therefore is that the current proposals would take 7-22 per cent of the water presently allocated to irrigation in Australia's most important agricultural region and the area which must form the backbone of aspirations to be Asia's food bowl.

Although creating short term uncertainty, the green assault on farmers' property rights on the Murray Darling system may have brought a positive outcome.  It has been the catalyst for a long overdue specification of and reform to irrigators' water rights in the form of the Intergovernmental Agreement on a National Water Initiative.  This is to be considered at the CoAG meeting on 25 June.

The latest draft of the Agreement is concerned to ensure property rights to water are defined and made secure from government seizure.  It identifies the need to have water and the land to which it has traditionally been attached placed on individual titles, each of which may be separately traded.  It requires that water trading not be confined to specific districts but be allowed along the system wherever this is physically possible.  It requires comprehensive plans and definitions of the water entitlements and uses including those for public benefits like fishing.

Some matters remain to be clarified.  These include a greater flexibility sought by the NSW Government.  But the flip side of government flexibility is reduced security for farmers, and NSW's propositions bring concerns in this respect.  They seek a review of water rights at least every ten years -- a matter that puts a sword of Damocles over long term investment planning.

Such matters aside, a serious shortcoming of the current draft is its failure to specify the current entitlements as rights.  If farmers are to have confidence about fair play with future decisions they cannot be served up a system that starts with a clean piece of paper.  Irrespective of the merits of the water allocation decisions and water rights acquisitions that have taken place over the past century or more, the status quo of de facto rights needs to be the starting point of any reformed system.

Broadly speaking, the Agreement as now drafted offers benefits in requiring that governments offer full and fair compensation if they wish to take more water for environmental, indigenous or other uses.  Rights holders will lose water without compensation only in proportion shares that might be lost if the total available is reduced as a result of climatic events or changes.

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Probing Liberty's First Principles

Scepticism And Freedom:  A Modern Case for Classical Liberalism
by Richard A. Epstein
(University of Chicago Press, Chicago, 2004, 311 pages)

I will say it up front:  Richard Epstein is really, really smart.  A reasonable presumption is that, if you disagree with Epstein, he is right and you are wrong.  Of course, that is not strictly true;  he is not always right.  But he is right so often and so deeply that, if you possess a dollop or more of good sense, you can never disagree with him without suffering a nagging fear that his vision and knowledge (especially, but by no means only, of law and economics) reveal to him things that you somehow have missed.

Happily for my own peace of mind, I am in wide, if not complete, agreement with Epstein.  He is a classical liberal who understands that the state is a human institution afflicted by all of humanity's flaws.  He understands that the special legitimacy fuelling state power often generates fearsome tyranny out of otherwise innocuous human pettiness, vanity, greed, ignorance, and envy.  He is committed to reason, preaching its virtues and practising what he preaches.  He knows that being principled does not mean being dogmatic.  He loves freedom;  he has no wish to impose his tastes and preferences upon others;  he realises that markets need not be perfect in order to be good;  and he eloquently explains that private property is indispensable for both prosperity and liberty

Epstein -- for 30 years now a professor of law at the University of Chicago -- probably is the world's leading living philosopher of freedom (under the age of 91).  For this reason alone, any book by him is welcome.  His latest work, Scepticism and Freedom:  A Modern Case for Classical Liberalism, is no exception.  In the first third of the book, he reviews freedom's foundational meaning and its classical liberal justification.  In the next two thirds, he tackles some recent challenges to classical liberalism.  Throughout, Epstein displays his signature deftness at negotiating from first principles to specific applications and back again.

FREEDOM'S FOUNDATION

Although no longer as skeptical as he was in his youth about consequentialism, Epstein continues to found his case for freedom on natural law.  But his natural law is no brooding other-worldly omnipresence.  Instead, it evolves out of real-world situations and takes human nature and the world we inhabit as they are.  It is the utilitarian-inspired natural law of Henry Hazlitt (whom Epstein does not cite) and of Randy Barnett (whom Epstein cites briefly but inadequately).  What does this natural law command?  If the goal is maximum and widespread human flourishing and prosperity, then the following are the foundational requirements:

• individual autonomy, or self-ownership;
• private property rights with initial ownership established by the rule of first possession;
• contract;  and
• protection against the initiation of aggression.

To those foundational features, Epstein adds three less obvious (and less liberal-sounding) rules, all stemming from cases of what, in Anglo-American law, is known as necessity.  Necessity softens otherwise strict property rights protections, often justifying the replacement of contract with the practice of "take and pay".

First, take and pay is usually justified in dire emergencies in which negotiations are impractical.  The classic case is the sailor who, surprised by a violent storm, secures his boat to a dock without the dock-owner's permission.  As long as the sailor compensates the dock owner for any losses the owner suffers because of such emergency dockings, the law does not and should not require the sailor who is at imminent risk of losing his life to first to get permission before docking.  Second, government must tax and sometimes even use powers of eminent domain to acquire the resources necessary to supply genuine public goods (of which, of course, national defence is the most potent example).  Third, government must actively police against private monopolies.

The dire emergency exception to the work-a-day rules of property rights and voluntary contract is clearly justified.  Only the most wooden "libertarian" would have the law permit a dock owner to deny the safety of his dock to a boat caught in a deadly storm.  But the second and third exceptions are less obviously justified.  This review is not the place to join the debate on the feasibility of a purely voluntary, stateless society.  Epstein has a powerful point when he reminds his readers that states are ubiquitous in time and space.  That fact surely conveys a great deal of relevant information.  So let us not argue here with Epstein's case for taxation.  But eminent domain is quite a different matter.  The only justification Epstein offers is the standard argument that government cannot let vital projects be held hostage to private owners who might withhold their property.  He, no doubt, imagines the highway or airport that would get built but for the recalcitrant grandmother who refuses to sell her family farm, either because she truly does attach an enormously high sentimental value to the homestead or because she is strategically holding out for an absurdly high price.

While it is easy to imagine such problems, I doubt that they are significant enough to entrust politicians with the power to take private property, even if politicians follow Epstein's sound advice on when to pay for whatever properties are taken.  America is planted thick with housing developments on large contiguous plots of land.  Private developers manage to assemble those tracts without eminent domain.  The Walt Disney Company purchased 30,000 contiguous acres of land in central Florida for its amusement park and resort.  That is an area twice the size of Manhattan.  With skilful contracting manoeuvres -- for example, buying each plot of land contingent upon the successful purchase of all other plots of land necessary to build the road or airport -- a government intent on serving the public should be able to do its job without powers of eminent domain.

Epstein's case for active government policing against private monopoly power is even less persuasive.  His presumption is that, in markets, monopolies arise with sufficient frequency and durability to justify antitrust legislation.  That presumption, of course, is widespread -- even at Epstein's home institution, otherwise famous for its confidence in the reliability of markets.  But the only evidence he provides is the fact that the common law refused to enforce contracts in restraint of trade.  Indeed it did.  But it is too long a leap from recognising the potential wisdom embodied in this common-law rule (and in a few other related ones, such as those imposing special duties and restrictions on common carriers) to the conclusion that active state policing against monopoly power is justified.  I know of no compelling evidence that private monopoly power is a problem in reality;  I know of plenty of compelling evidence that antitrust statutes have been abused by plaintiffs to thwart competition.  Therefore, a useful simple rule for our complex world is to abandon all statutory efforts ostensibly aimed at protecting consumers from monopolies in markets.

BEHAVIOURAL ECONOMICS, LAW AND LIBERTY

Given the scope and depth of this book, the foregoing is nit-picking an eloquent, powerful, and persuasive case for classical liberalism.  Especially welcome are the final three chapters on behavioural economics.

The case for classical liberalism is sometimes made inappropriately.  A chief example is objecting to government intervention on the grounds that it is unnecessary because individuals are hyper-rational -- that is, so rational as to be immune to systematic error in perceiving and judging reality.

Properly understood, individuals are rational.  But contrary to the impressions left by some writers, everyone this side of the grave has emotions and psychological traits that cause actual perceptions and choices to differ often from what most reasonable standards hold to be accurate and wise ones.  In 2002, Daniel Kahneman, a professor of psychology at Princeton University, shared the Nobel Prize in Economic Science (with my colleague Vernon Smith) for his pioneering work on how real people differ from the homo economicus of economists' models.  This work in "behavioural economics" is both interesting and important.  But because the strongest case for liberalism does not rest on the assumption that people are hyper-rational, discovering and cataloguing the many ways that individuals deviate from hyper-rationality does surprisingly little damage to liberalism's rationale.

Perception and decision-making biases do exist, but they often cancel out when decision-making is decentralised, are minimised by specialisation, are further minimised by the market's concentration on each decision-maker of the benefits and costs of any decision, and have especially great potential to wreak widespread damage when they distort collective decision-making processes.  Epstein successfully argues that the best of behavioural economics strengthens the case for classical liberalism.

The three chapters Epstein offers on behavioural economics alone make the book well worth reading.  But you must read the entire volume.  It supplies a masterful analysis of classical liberalism and of the most potent current ideas that threaten to undermine it.

Saturated With Good Deeds

A Tradition of Giving:  Seventy-Five Years of Myer Family Philanthropy
by Michael Liffman
(Melbourne University Press, 2004)

In my article, "The Capture of the Myer Foundation" (March 2004), I criticised Myer philanthropy for its radical bent, suggesting it was of recent origins.  I was wrong.  It has been going on for a lot longer than I imagined!

The Sydney Myer Fund and the Myer Foundation have distributed almost $100 million, in present dollar terms, since their respective inceptions in 1935 and 1959.  That is a considerable amount of money "to do good".  Just how good is a question that can now be answered.  Michael Liffman's valuable history of Myer family philanthropy is a full record of the deeds of Australia's pre-eminent philanthropic family.

The book contains a brief account of the life and origins of Sidney Myer, the young Russian Jew named Simcha Baevski, who migrated to Australia in 1899 and founded a successful retail empire.  It also records the philanthropic deeds of his wife and four children.  It is also an account of the establishment of Myer philanthropy and its radical transformation in the hands of subsequent generations of the Myer family.  It is the latter part with which this review is concerned.

Not unexpectedly, Liffman's account is enthusiastic and "optimistic" -- he was, after all, employed by the Foundation for a number of years.  It is, nevertheless, a useful resource as it develops a number of key themes, which are an aid to understanding not just the Myer tradition, but also the place of philanthropy in public life.

GIVING MONEY AWAY IS NOT EASY

How does one decide what to do with the proceeds of an estate set aside for charity?  With benefactor instructions as broad as:  for charitable purposes "in the community in which I made my fortune", or for the "good of mankind", the job is not straightforward.  It is made more complex with the passage of time, when the actions of the benefactor as a guide to present needs and fashions begin to fade.  With the multiplication of descendants, even more so.  By 1996, there were 57 living descendants of Sidney Myer, many of whom were involved in the distribution of funds.  On the other hand, what is clear in the Myer example is that second and third generation members of the family have made their own financial contributions to the original endowments.  Such practice has overcome much of the dilemma of donor intent.

In the early days of the Sidney Myer Fund, "the Trustees were not called upon to consider controversial, politically shaped, or socially activist proposals".  The overwhelming bulk of requests sought to assist individuals facing some sort of difficulty.  "Rarely, if ever, did these activities seek to change, let alone blame, the larger structural arrangements of society".

With time, however, philanthropy, like government, became a moral pursuit.  It began to see itself as a force for the greater good.  Meriel Wilmot, the first executive secretary of the Foundation, put the case in 1976.  "Business can only be healthy if the surrounding community is healthy".  This is the sort of sentiment behind the currently fashionable discourse known as corporate social responsibility.

If there is to be a better world, whose view of the shape of that world should prevail?  Philanthropy faces this dilemma with one significant disadvantage, and one significant advantage over government.  The disadvantage is that, in government intellectual enthusiasms are tested and tempered by a public who have to pay for the enthusiasms.  The advantage is that, in the case of philanthropy, the public -- apart from some taxation advantages afforded philanthropists -- does not have to pay.

Liffman describes the situation some decades after the establishment of the funds.  By the 1970s, the "less rosy" and "[less] complacent view of the quality of life in Australia", as expressed by Whitlam, the New Left, the anti-war movement, feminism, environmentalism, multiculturalism, disability, welfare, and Aboriginal rights, was reflected in the Myer Foundation priorities.  "Over the next twenty years almost all these new social movements were to receive support from ... Myer philanthropy.  Social reform through critique and empowerment rather than through academic research and improved professional practice came to be seen as the way forward.  Optimists saw in this mood a better path to the future;  sceptics feared the negativity of this “culture of complaint”.  Myer philanthropy sided with the optimists".

Where one could easily part company with Lipmann is his characterisation of the Left agenda as optimistic.  The Left has never been anything other than pessimistic and distrustful not only of the private sector, but fundamentally of individual responsibility as well.  This encapsulates a fundamental shift in philanthropic thinking.  Philanthropy has a strong tradition that assumed that it did not need to change the world, but assist individuals to make their own way in it.  The new philosophy promoted by the "community sector" and various directors of the Myer funds, and apparently a number of trustees, was that the system was unfair and had to be changed.  The difficulty in funding enthusiasms among the "community sector" is that the citizens generally do not share them.

CROWDING OUT

The second theme Liffman raises is the relationship between philanthropy and government provision.  He traces the expenditure pattern of Myer gifts in the context of Federal government programmes of the day.  These varied from being crowded out of direct provision to the needy by a "generous" Whitlam Government, to the need to fill gaps in provision created by the withdrawal of services at the time of the Fraser Government's "razor" gang, and the new era of so-called "neo-liberalism" ushered in by the Howard Government.

When a government such as Whitlam's spends money like a drunken sailor, it rather leaves the philanthropist high and dry.  Then again, to suggest that Fraser ever seriously cut public outlays is a gross error.  So too the old chestnut that Federal governments have been withdrawing from the field of welfare provision in recent decades, either directly or indirectly.  Governments may have withdrawn their support for the ownership of government entities where mature markets no longer required the government to be the first entrant:  banks, airlines, telecommunications, pharmaceuticals.  They certainly have increased transfer payments and public provision of health and education services.  The perception of lack of support arises because the demand for subsidised services seems to rise quicker than the public's desire to pay for them.

Forgiving Liffman his mistaken characterisation of government patterns of expenditure, there is nevertheless the question:  what value does philanthropy add to an already well-provided citizenry?  The crowding out of philanthropy in some years and then a resistance to pick up the slack when governments are thought to withdraw services in other years has generated a view that philanthropy need not follow government.  Instead, it should lead government in the generation of ideas.

Compare, for example, an idea of Kenneth Myer (son of Sidney Myer) with Michael Myer (son of Kenneth, grandson of Sidney).  Sidney Myer's most famous single act of philanthropy, was to feed the Melbourne masses a Christmas dinner in 1932, in the depths of the Great Depression.  Some 30 years later, the normally entrepreneurial Kenneth Myer decided that a Christmas treat for needy children was back in vogue.  He suggested a $25 Christmas voucher made out to the Myer store.  As Liffman describes it, this was clearly, in philanthropic philosophy, a "reversion".  Michael Myer, on the other hand, has extended the entrepreneurial dimension of philanthropy by providing "seed funding" to various groups, much in the mode of venture capital to inventors and business people.  The mode is known as "venture philanthropy".  The means of Myer philanthropy has, with some reversion been unerringly entrepreneurial.  The method is sound, the causes to which it has been applied are suspect.

For example, the Myer Funds were major sources of support for de-institutionalisation activists and their associated programmes for the disabled and orphaned and so on.  Rhonda Galbally, appointed as director in the early 1980s, who argued that "self-management avoids the dependency from being helped constantly", promoted this support.  Indeed, the argument was that "rights and empowerment had taken over from social improvement in the thinking of many social theorists and community activists".

There is now evidence to suggest that the outbreak of homelessness that commenced in the 1980s and is still with us, was caused by the emptying of institutions.  The grand experiment has had its victories, but it has also proved that there is a limit to which others are willing to support those people who, no matter how deserving, are unable to support themselves.  The radical philanthropic sector has come to the same conclusion as the welfare state.  No amount of "morally fervent analysis and action in the field of social welfare" overrides the right of the giver to say "no".  A plus for Myer is that, many years later, it funded a review of the experience of de-institutionalisation.

Liffman confirms the radical bent of Myer philanthropy and, in doing so, he has opened the debate of the role of philanthropy in a nation saturated with good deeds.

Developing A National Framework For Workers Compensation In Australia

Keynote Address to The Australian Self-Insurance Summit
Sydney, 31 May 2004

The Minister for Employment and Workplace Relations will release the Productivity Commission's National Workers' Compensation and Occupational Health and Safety Frameworks Inquiry Report, and presumably the Commonwealth's response, on 27 June 2004.  I am therefore limited in my remarks to those recommendations made by the Commission in its Interim Report.  However, I can tell you that these differed in only minor ways from the Final Report, especially in the field of self-insurance.

Allow me a brief reminiscence!  In 1994, the Commonwealth's response to the Industry Commission's Report on Workers' Compensation in Australia was released.

It seems to me that the overriding goal of the 1994 Report was a desire to achieve a "uniform compensation package in all jurisdictions".  The vehicles for this goal were, a national scheme incorporating Comcare, with the opportunity for self-insurance, the retention of individual state schemes, setting agreed national standards, and the establishment of a National WorkCover Authority to oversee the nationally available scheme.

It could best be described as an "unfortunate orphan".  Apart from my own enthusiasm, no-one wanted to adopt it.

The overriding goal of the 2004 Report is, in my opinion, more focused and strategic.  It is a desire to facilitate access by eligible firms to an existing scheme.  Those who sign up will do so for its efficiency and cost advantages.  In turn, they will inevitably create a new constituency for change to elements of the scheme, of which they will be stakeholders.  The new constituency will help the drive for a nationally available scheme.  In the absence of that constituency, no committee consisting of the States and the Commonwealth will do so.

NATIONAL FRAMEWORK PROPOSALS

In 2004, this is what the Commission has in mind.

National uniformity in OHS regulation should be established as a matter of priority.  In essence, all jurisdictions agree with the fundamental principle of "duty of care".  There are no compelling arguments against a single national OHS regime, and there are significant benefits from a national approach, particularly for multi-state employers and for the increasingly mobile workforce.

For workers' compensation, each scheme reflects community norms, evolving workplace arrangements and the legal and medical practices of that particular jurisdiction.  However, this leads to compliance and cost issues for multi-state employers that should, and can, be addressed.  The solution is the progressive expansion of a scheme offering alternative national coverage, which would operate alongside those of the individual jurisdictions.

In addition, all jurisdictions should collectively pursue improvements to workers' compensation by establishing a formal review mechanism similar to that already in place for OHS.  This should lead to an increasing level of national consistency (and perhaps for some scheme elements, national uniformity) over time.

Existing national coordinating mechanisms have proven ineffective in resolving the compliance complexities and costs for multi-state employers.  Over the last five years, Heads of Workers' Compensation Authorities primary output has been the provision of comparative information about the schemes.  The Workplace Relations Ministers' Council, whilst also generating comparative performance monitoring information, has been primarily concerned with industrial relations matters.

With these observation in mind, the Commission has recommended four models of national frameworks for workers' compensation arrangements.  The first three are to be introduced consecutively and the fourth to be implemented independently.

1. The Australian Government offers to license employers who qualify under the current competition test to self-insure under the Comcare scheme.
2. The Australian Government establishes, for all corporate employers, an alternative national scheme of workers' compensation self-insurance to operate in parallel to existing State or Territory schemes.
3. The Australian Government considers, at a later date, an alternative national premium-paying insurance scheme for all corporate employers who wish to join, to operate in parallel to existing schemes.  It would be privately underwritten.
4. The Australian Government, States and Territories establish a national workers' compensation body that would develop nationally consistent scheme elements for adoption by individual jurisdictions.

The Commission has no evidence of support by the States and Territories for a single uniform national workers' compensation scheme.  Many of the stakeholders at the individual jurisdiction level have suggested that concessions won in hard fought negotiations would not be willingly surrendered for the sake of national uniformity.

Importantly, the Commission does not support national uniformity of workers' compensation for its own sake.  In arriving at this view, the Commission recognises that the vast majority of employers (who are predominantly small to medium enterprises) and their employees operate only within a single jurisdiction.  To them, national uniformity has little relevance.

Further, it is not apparent that there is any single perfect or best scheme.  Best practice can be reflected in a number of different ways.  Innovation and learning should be encouraged, with the consequent reforms benefiting workers and employers.

A NATIONAL SCHEME TO OPERATE IN
CONJUNCTION WITH EXISTING SCHEMES

Step 1:  Actively encourage self-insurance applications under Comcare (model A)

Currently, the Australian Government's Safety Rehabilitation and Compensation Act 1988, which establishes the Comcare scheme, enables private employers to apply for a licence to self-insure.  The Minister has discretionary power to declare as "eligible", employers who are "carrying on a business in competition with a Commonwealth authority or with another corporation that was previously a Commonwealth authority".  This test could potentially apply to the banking, telecommunications, air transport, defence, broadcasting and postal sectors.  The granting of a licence is then subject to approval by the Safety Rehabilitation and Compensation Commission (SRCC) under certain prudential and other criteria.

Four public policy principles that guide the Minister in exercising discretion are the impacts of the grant of a licence on:  employees;  the employer;  the integrity of the Comcare scheme;  and the operations of State and Territory schemes.

Employees would become eligible for benefits as provided under Comcare.  Employers will self-select, but will need to comply with the rigorous prudential and other requirements.

Of direct concern to the Australian Government is the risk to itself associated with granting a self-insurance licence to a company which is subsequently declared bankrupt or is otherwise unable to meet its workers' compensation liabilities.  Based on advice sought by the Commission, the Australian Government Actuary proposed specific prudential requirements that would reduce the residual risk to the Government.

The Commission proposes that the cost of any residual risk be internalised to self-insurers by a post-event levy, as has been recommended for insurance by the HIH Royal Commission.

The Commission has also proposed that the existing regulatory framework provided by the SRC Act be modified and developed progressively to support the expansion of national insurance under this and the subsequent steps, with the SRCC being developed as a stand-alone regulator.

Actuarial advice to the Commission is that the impact on the State and Territory schemes is unlikely to be significant.  Many of the employers eligible for self-insurance under the proposed national scheme are likely to be self-insured under existing State and Territory arrangements and are thus already outside the premium pools in those jurisdictions.  However, the national scheme would extend to some employers who currently pay into some premium pools for various reasons, such as not meeting minimum employee criteria for self-insurance of particular jurisdictions.  Queensland's threshold of 2000 local employees is a case in point.

Some participants expressed strong concern that small businesses, in particular, could be disadvantaged by the loss of premiums from their risk pools by large firms self-insuring.  The concerns related to the effects that the loss of premiums could have on the viability of some risk pools and on the ability to provide cross-subsidies from within a scheme.  There could be some changes in premiums for those remaining if risk pools were to be reformulated, but, of itself, this would be unlikely to systematically increase (or decrease) premiums.

In privately underwritten schemes, the nature and extent of any existing cross-subsidies is likely to be limited by commercial considerations and competition between licensed insurers.  Accordingly, the loss of premiums from large employers would have little, if any, effect on the premiums of those remaining.  For publicly underwritten schemes, and notwithstanding policies to minimise the extent of cross-subsidies, actuarial advice was that any increase in average premiums on remaining employers would be very small, even if those employers who were to exit were providing quite large cross-subsidies.

Without further legislation, private employers self-insured under the Comcare scheme would continue to operate under State and Territory OHS arrangements.  The Australian Government Solicitor has advised that the Australian Government, drawing on its constitutional heads of power, could enact legislation that enabled all employers self-insured under the Comcare scheme to elect to be covered by Australian Government OHS legislation.

Step 2:  Establish an alternative national self-insurance scheme (model B)

The Australian Government could also commence, at the same time, the drafting of legislation to establish an alternative national self-insurance scheme (administered by the SRCC) for all employers who so wish and who meet certain prudential and other requirements.  The Australian Government Solicitor has advised the Commission that this could be covered under the Commonwealth's corporations' power under the Constitution.

In terms of scheme design, the Australian Government could offer the current Comcare arrangements, or redesign particular elements of the scheme, such as the current long-tail benefit structure and the dispute resolution procedures.  Actuarial advice, as noted earlier, is that this step is also likely to have little impact on existing schemes as the relevant employers are predominantly self-insurers.  The initiative may pick up the smaller premium paying State or Territory offices of some firms.

Again, as with step 1, employers opting into this scheme could be covered by Australian Government OHS legislation.

Step 3:  Establish an alternative national premium-paying insurance scheme (model C)

Following consideration of the success achieved under steps 1 and 2, and the outcome of cooperative institutional reform (model D), the Australian Government could extend its alternative national scheme to be available to all corporate employers, involving both self-insurance and premium-paying insurance.  As with the previous step, it would require the exercise of the Commonwealth's constitutional powers and the passage of new legislation.

In the Commission's view, private underwriting of this expanded scheme would be desirable.  Although research into the relative merits of public and private underwriting suggests that sound management can be more important than the form of underwriting, the characteristics of private underwriting are nevertheless attractive.  These include:  the capital risk being accepted by the capital markets;  competition in the marketplace, with incentives for efficiency and innovation;  and greater transparency of any governmental influence over premiums.

Employers covered by the national insurance scheme would also be eligible for coverage by Australian Government OHS legislation.

The opening up of an alternative national insurance scheme to all corporate employers could have potentially significant impacts on existing State and Territory schemes, if there was widespread uptake.  Those public schemes with large unfunded liabilities may need to impose appropriate "exit" arrangements.  Some of the smaller schemes may ultimately become unviable on a stand-alone basis if a significant number of employers switch to the national scheme.

Nevertheless, the operation of a number of private underwriters in small jurisdictions such as Tasmania, the Northern Territory, and the Australian Capital Territory attests to the capacity of insurers to operate with small premium pools for any one class of insurance.  Further, if introduced in the staged form recommended, then it is unlikely that the changes would occur at a pace that precluded the steady rationalisation of existing arrangements.

National Cooperative Institutional Reform (Model D)

Independent of and in parallel to the Australian Government's own initiatives as set out above, the Commission is proposing that the States and Territories join with the Australian Government to strengthen and upgrade the national institutional infrastructure relating to workers' compensation.  This model centres on formalising cooperation between the jurisdictions.

I will not provide details of the model as there were a number of changes between the Interim and final reports, but more importantly, the Minister has already indicated, in broad terms, his direction in this regard.

SELF-INSURANCE

So much for the models, what are the specific requirements for self-insurers?

The inquiry was asked to identify and report on a regulatory framework that would allow suitably qualified employers to obtain national self-insurance coverage that is recognised by all schemes.

To self-insure, employers must meet certain requirements.  Although jurisdictions vary, their self-insurance requirements cover the following four broad areas:

• prudential standards;
• claims management capability;
• OHS performance;  and
• in some jurisdictions, a requirement that the employer has a minimum number of employees in that jurisdiction.

A number of participants (particularly employers and self-insurance associations) have expressed concerns about particular aspects of these legislative requirements, as well as the extent of inconsistency across jurisdictions.  Many supported the incorporation of self-insurance into a national framework.

PRUDENTIAL REQUIREMENTS

As self-insurance provides for the risk of workplace fatality, injury and illness to be paid for by employers on a pay-as-you-go basis, there are legitimate concerns about their ability to meet all claims costs in all circumstances in the future.

A number of participants raised concerns that the prudential requirements were insufficient to reduce the risk that self-insurers would bring to a scheme.  The most probable risk is that the company self-insuring collapses and the bank guarantee is not sufficient to cover all the claims liability.

INSTRUMENTS TO DEAL WITH RESIDUAL RISKS

If the bank guarantee and reinsurance policy were insufficient to cover the claims liability of a collapsed self-insurer, then, in the absence of other prudential arrangements, injured workers would bear the burden of not having their claims met.  To avoid this, all the State and Territory schemes explicitly guarantee to pay claims arising from a collapsed self-insurer.  Although the Australian Government does not explicitly provide such a guarantee, it is very likely that there would be pressure for it to take responsibility if such an event occurred.

The available Australian and international evidence suggests that the probability of the Australian Government being exposed to the claims liability of a self-insurer under the Comcare scheme is relatively low.  The most likely exposure would first require a self-insurer to collapse and then for the bank guarantee to be insufficient.  Although such a combination of events is unlikely, it is important to recognise that it is still possible.

The Australian Government Actuary noted several conceptual reasons why a bank guarantee may be insufficient, including that the self-insurer experiences an increased number of claims and that there are claims which are unforeseen.  There is some evidence of bank guarantee insufficiency, as this occurred in the cases of both of the Australian self-insurers that collapsed.

Given that there are residual risks, the Commission considers it prudent for the Australian Government to consider additional risk management instruments.  It is recognised that such instruments involve a transfer of risk from the Australian Government to the remaining self-insurers, at their cost, and that the efficacy and efficiency of the transfers are important considerations.  The Commission considered three instruments -- scheme reinsurance, a security fund, and a post-event levy.

As time is short, suffice to say that the first two were not considered useful instruments, but the post-event levy was.

POST-EVENT LEVY

The cost of financing any liabilities arising from the failure of a self-insurer and their guarantees/reinsurance can be recouped by way of a levy on the remaining self-insurers.  There is increased certainty as to the amount of funds required and the administration cost can be relatively low.

While it would add a cost to the remaining self-insurers, it internalises the cost of self-insurance failure to self-insurers as a category.  If the prudential arrangements operate as intended, the costs are likely to be small and imposed infrequently.  The internalisation of the costs would act to ensure individual and mutual support for prudential regulation among self-insurers.

The post-event levy does not require the ongoing administration of a pool of funds or the continual purchase of insurance scheme reinsurance.  The administrative costs that would be incurred, however, would arise from the scheme administrator being empowered to accept and pursue recovery of the self-insured's scheme liability.  The funding could be dealt with in a variety of ways, such as by a Government loan or guarantee of loans (as occurred for Ansett employee entitlements).

In the Commission's view, a post-event levy is the most suitable approach.

CLAIMS MANAGEMENT REQUIREMENTS

The jurisdictions require self-insurers to have appropriate procedures for managing workers' compensation claims.  Most jurisdictions allow for self-insurers to engage third parties to manage the claims.  However, in Queensland, only local governments are allowed to contract out their claims management processes.

Self-insurers are required to demonstrate that they employ suitable staff and engage service providers approved by the scheme.  This is to ensure that employees of self-insuring employers have their claims managed in a professional manner in accordance with scheme benefit structures.  The differing requirements generate compliance problems and costs for multi-state employers.

Most jurisdictions require self-insurers to have claims managers located in that jurisdiction.  A number of self-insurers noted that this prevents them from operating a national claims management centre, which would reduce claims management costs.

Multi-state self-insurers are required to have detailed knowledge of up to eight different claims management processes and benefit structures, with the associated information technology costs.

The employer may also need a different claims manager in each jurisdiction (and perform its own claims management in Queensland).  Telstra notes that "there is a shortfall of national claims managers who are accredited in each State/Territory jurisdiction.  As a result, a national company would be required to have different claims managers in various States".

Some Union participants raised concerns about the claims management practices of self-insured employers.  In part, this is seen as being a consequence of the strong incentive self-insured employers face to minimise the occurrence of workplace injury, fatality, and illness and the subsequent cost of any accidents.  Whilst the Commission has received other anecdotal evidence of self-insured employers inappropriately managing claims, there is no evidence of systematic failure.  Robust administration of claims management practices, however, remains important.

O.H.S. REQUIREMENTS

OHS regulations apply to all employers, irrespective of whether or not they self-insure.  However, most jurisdictions place an added requirement on self-insurers to demonstrate, through an audit, that they have appropriate OHS management systems to prevent work-related injury and illness.  These systems and audit processes differ between the schemes.  They constitute an added cost for multi-state employers.

Expressing concerns about their appropriateness, CSR argued that the additional OHS requirements are inefficient because they do not target employers with the greatest risk of work-related fatality, injury, and illness (which is somewhat independent of whether they are self-insuring or paying premiums).

The National Council of Self Insurers argued that OHS management systems should be determined on the risks of an organisation, rather than general OHS management systems applied to all employers.

For multi-state employers, the problem of additional OHS requirements is exacerbated with the additional expense of multiple audits and the differences between audit requirements.  This makes it difficult and costly for multi-state employers to develop uniform OHS management systems.

For example, Woolworths has different OHS management systems in each state because of the difficultly of developing a single OHS management process that meets the different requirements.  Woolworths estimates they could save approximately $400 000 per annum if they could have a single national OHS management system.

The Commission does not support OHS requirements for self-insurers that are additional to those applying to other employers.

THE MINIMUM EMPLOYEE REQUIREMENT

In order to self-insure in some jurisdictions, employers are required to have a minimum number of employees in that jurisdiction.  Where such a requirement is not specified, the number of employees of a self-insurance applicant may be taken into account when assessing eligibility for a licence.

Justifications for a minimum employee requirement include:  that it helps gauge the financial strength of the employer;  that a minimum number of employees is required for self-insurance to be cost effective;  and that the quality of claims management will not be assured in firms with small numbers of employees.

A central concern with the requirement is that, if it is set too high, it can restrict otherwise eligible employers from obtaining the benefits of self-insurance.  Employers who can obtain a self-insurance licence in one jurisdiction may not be able to obtain a licence in another jurisdiction because they do not meet the minimum employee requirement in that particular jurisdiction.

The justifications for a minimum employee requirement are not strong given that there is no direct link between the number of employees and the financial strength of an employer.

Whilst a minimum number of employees may act as a guide for the scheme to assess the appropriateness of self-insurance for an organisation, on balance, the Commission concludes that setting a minimum number of employees as a requirement to self-insure is a poor proxy for the more fundamental requirements of effective prudential standards and claims management processes.

If prudential regulations focus on the ability of the employer to meet all future claims and manage them effectively, then the individual employer, not the regulator, should decide whether it is cost effective to self-insure.

OTHER REQUIREMENTS

There is a range of other self-insurance licensing requirements that, although they may not be individually significant, can have a collective impact.

Self-insurers are required to pay an application fee and ongoing levies for each licence.  These fees and charges include the recovery of self-insurance administration costs and contributions to OHS functions.  For employers self-insuring in more than one state, there may be unnecessary replication in the payment of some components of these fees.  There is also concern from self-insurers that the fees and levies are not based on the administration cost they bring to the scheme.  As an example, the contribution fees Pacific National pays to the New South Wales and Comcare schemes are "very different" despite there being almost the same number of employees covered by each licence.

Self-insurers are required to supply data to the regulator on an ongoing basis.  Whilst the collection of data is appropriate, self-insurers feel that the schemes do not adequately use the data that is collected.

The collection of data imposes costs on multi-state self-insurers because each scheme requires a different data set and software to supply the data, thus preventing self-insurers from operating an integrated computer system to satisfy the various scheme requirements.  BHP stated that each State system costs $50 000 to purchase and is required to be tailored to each scheme's definitions, which themselves vary.

CONCLUSION

For multi-state employers, the costs generated by the replication and differences in self-insurance requirements provide a justification for a regulatory framework that would allow them to obtain a single self-insurance licence to cover all of their workers.

The Commission recommends that eligible employers be allowed to obtain a single self-insurance licence under the Comcare scheme, or under an alternative national self-insurance scheme, to cover all their workers throughout Australia.  Relating these observations to the models, the requirements are as follows:

Model A. The existing self-insurance requirements of the SRC Act administered by Comcare would apply.  The Commission, along with advice from the Australian Government Actuary, has assessed the self-insurance requirements of the SRC Act and have found them to be sound.  It is also noted that the prudential requirements have been strengthened in response to the advice from the Government Actuary.

Model B. As new legislation would be required to implement an alternative national self-insurance scheme, the Australian Government could use the current Comcare self-insurance requirements as a sound base and take the opportunity to refine certain of its requirements.  Although the most important prudential and claims management requirements may not need to be changed, the minimum employee requirement should be dispensed with.

Model C. If the proposed alternative national insurance scheme is introduced, the self-insurance arrangements under model B would be incorporated in it.  In each of the steps one to three, self-insurers under the national scheme should withdraw from, rather than be recognised under, any or all other schemes.

Model D. Self-insurers have argued the benefits of common licensing and audit requirements.  The above recommendations could form a basis for the States and Territories to develop consistent requirements across their schemes.