Submission to the Victorian Competition & Efficiency Commission
INTRODUCTION
Our major agenda is to provide critiques of Government regulations and draw attention to the more damaging of them, to point out the costs they impose upon society as a whole and to recommend more suitable approaches.
Systematic review of regulation achieved prominence during the 1980s under the Hawke Government, which established the Business Regulation Review Unit (now called the Office of Regulation Review (ORR)). This was in response to heightened concerns about the adverse effects that the growing body of business regulation might be having on business costs, flexibility and efficiency as well as on the achievement of social and environmental objectives.
The Commonwealth body was followed by other, state based regulation review bodies, of which the most active was Victoria's. The expansion of duties and responsibilities of the Victorian unit into the Competition and Efficiency Commission reflects a commendable renewed determination to counter any adverse effects that business regulation might have on the State's economic performance. Perhaps coincidentally, it comes at a time when there is a similar interest elsewhere. Thus, the federal ALP platform heralds a Red Tape Reduction Office to replace the ORR with expanded duties.
Over recent years there has been considerable progress in freeing up the regulation of prices and access to markets in Victoria and elsewhere. It was not so long ago in this State that there were limits on the distance that bread could be transported in order to protect local bakeries. More recently we have seen the withering away of agricultural marketing boards, extension of shopping hours, abolition of most price restraints as well as privatisation of a great many assets formerly owned by the government (but still price controlled in gas and electricity). Much of this was conducted under the auspices of Commonwealth grants through the National Competition process but the trends were already underway prior to the Commonwealth-State agreements on this.
In contrast to the advances in removing "economic regulation", advances that have made a major contribution to economic resurrection in Victoria and Australia more generally, "social regulation" has generally been increased and made more intrusive. There has been no progress in reducing government market intervention in areas designed to protect the environment, to prevent consumer deception or to promote greater safety in the workplace and elsewhere.
These areas of social regulation are more pervasive than the traditional regulation of business which prevented new entrants offering to supply markets or stipulated the price at which such supplies could be offered. While offering some advantages, they also tend to engender large costs. Environmental regulation, in particular, has proliferated in recent years developed often in response to environmental campaigning and without a cost to benefit analysis. It is timely to step back and consider whether the current and proposed body of regulation is necessary, whether it achieves its stated (or any useful) outcome, whether it does so at an acceptable cost to the community and whether the best regulatory approach is being pursued.
LABOUR MARKET REGULATIONS
Labor market regulations are one area of "economic regulation" that has seen only modest progress towards deregulation. Harking back to bygone romanticised eras of class struggle, shearers' strikes and Winter Palace storming, laws and regulations have often been formulated in ways that create privilege for trade unions. Victoria was once justly regarded as an egregious example of the loss of competitiveness that ensconcing such privilege can bring.
The labour unions in this state remain somewhat more militant than elsewhere in Australia and this lends some vulnerability to the state's development process. Such activity depends upon government regulation in permitting specific labour unions to claim coverage of sites, thereby requiring workers on those sites to be a part of the union in question. Demarcation disputes between different unions for coverage are a particularly poisonous development of an indulgent approach to monopolistic activity that governments would not tolerate elsewhere.
Two recent examples of destructive union activity that impact regional Victoria significantly are the disputes over Patricia Baleen and the Saizeriya complex. Pickets at the Patricia Baleen gas-processing plant in East Gippsland, Victoria, were imposed by the unions to try and stop the use of Australian workplace agreements (AWAs) and to force company-specific enterprise agreement negotiations onto unwilling firms.
In the case of Saizeriya, the firm had decided to centralize its food manufacturing operations to a state-of-the-art, purpose built facility at Melton on the outskirts of Melbourne. It was the most important development to date in building on the vision of turning Victoria into a value-adding, food-manufacturing hub for Asia. If completed, the Saizeriya complex would have involved more than $350 million in investment, with eight large factories and direct employment of more than 1,200 people. But one of the worst examples of the destructive culture of Australian unionism thwarted this. The Government gave the National Union of Workers the enterprise agreement rights over the running of the complex. The Australian Manufacturers Workers Union claimed they should have been given coverage, declared war, and co-opted the CFMEU to apply industrial action against Saizeriya during construction, hoping they could leverage control over the enterprise agreement and future potential membership.
The Victorian government, which had promised the Japanese smooth construction and operation phases, worsened the problem by high-level ineptness in the advice they gave the firm. As a result the first of the planned factories was delayed by eighteen months and Saizeriya was obliged to pull out of all but that one committed plant. The victims are the thousand and more people who are denied secure jobs opportunities, farmers who have lost millions of dollars in fresh food supply opportunities, construction workers who have seven fewer factories to build and every Australian for the loss of millions of dollars in investment, export and tax income. The damage is compounded by the reputation we regain among overseas investors as a State unable to control destructive union activity.
What makes these cases highly relevant is that they coincide with federal ALP proposals to remove secondary-boycott provisions from the Trade Practices Act (TPA) and to place them in industrial relations legislation where they will be neutered. The impact on economic activity would be profound. It is always important that the law be upheld but rural Australia is especially vulnerable to regulatory measures that fail to bring unions within the purview of the law that generally prevails.
Accordingly, the Victorian Government should oppose measures that would dilute the legal obligations on unions.
REGULATORY FRAMEWORK FOR
INNOVATIVE FOOD CROP TECHNOLOGY
The use of modern genetic technology to develop better crop varieties is recognised globally as a dynamic current area of technological innovation. The total land area sown to new genetically modified (GM) crops developed from biotechnology continues to expand globally.
Agriculture remains as a significant contributor to economic activity in Victorian economy. Promotion of an investment climate that fosters innovation in this growing field should be a major component of both the state's economic strategy, and indeed also major component of the state's research and innovation strategy.
Nevertheless, the Victorian Government has recently introduced Legislation (Gene Technology Act 2004 [sic]) this year that has banned the commercialisation of two new GM canola varieties. These GM varieties had previously passed stringent Federal government regulatory requirements to assure they pose no risks to the environment or to human health.
The Victorian act has also made it impossible for oilseed growers to carry out demonstration farm trials to establish their ability to effectively segregate GM produce from surrounding farms and other crops and, for example demonstrate whether adventitious presence of GM canola in dairy pastures can be avoided.
These prohibitions and the long time lags in plant variety improvement mean that genetic technology used already for ten years by Victoria's international trade competitors including in Canada and Argentina are denied Victorian farmers. As a result of this legislation and of the political risks posed towards plant biotechnology, innovative plant breeding research groups in rural Victoria have now been disbanded. General concerns about the effects of this legislation on the state's agricultural biotechnology sector have been well articulated by the Ausbiotech Industry Association.
A detailed enquiry into the punitive effects of the Victorian gene technology legislation on crop variety innovation in Victoria is well within the scope of the commission's brief.
The actual outcomes of the Victorian Gene Technology Act would seem to be in direct conflict with the economic policy position paper Victoria: Leading the way. The Gene Technology act does not "Make Victoria a location of choice for agricultural biotechnology businesses", it does not "Foster innovation", neither does it "Maximise sustainable returns" or "Create best practice by cutting red-tape and reducing costs" which are the stated priorities of the position paper.
Also, as a separate issue, the current Victorian Government biotechnology strategy does little to address the difficulties now faced by organisations seeking to bring new plant varieties, developed using modern genetics, through to the market and instead of leadership only voices caution.
There are several areas of substantial ongoing research which the Commission could profitably investigate concerning the impacts of the Victorian genetic technology regulation on future economic competitiveness. For example, the Victorian Government itself has commissioned two substantial economic studies (ACIL, Lloyd Reports) which conclude that marketing issues are not an impediment to deploying new plant genetic technology in this state.
Although safety concerns are repeatedly raised by environmental activists, scientific studies including a recent report from the United States National Academy of Science continue to confirm the objective safety of the new food products and the validity of decisions by the Federal Office of the Gene Technology Regulator. The Australian cotton industry provides a case study documenting the very real contribution of GM technology to sustainability.
Finally, the commission could well investigate changes in policy stance that are occurring in overseas markets for our export produce, such as the recent approval by the European Commission of genetically modified maize for farming in the European Community.
REGULATORY "TAKINGS" IN WATER
Agriculture in the Murray Darling Basin is generally dependent on irrigation. The area contributes some 40 per cent to Australian agriculture and very much more than that to Victorian agriculture.
Rural Victoria has prospered over recent times as a result of irrigated agriculture founded on well understood property rights to water. It is notable that agriculture in this state features a far greater share of high value perennial crops than is the case in NSW. Many have attributed this to the highly secure property rights to water that are perceived to exist in Victoria and which have been less clear in NSW.
Regulatory takings of water in pursuit of ill-founded but oft-repeated claims that water is needed to remedy environmental degradation are likely to have significantly impact economically on rural Australia while delivering little if any environmental benefit. According to the Centre for International Economics, the cost of current plans to take 500 gigalitres (about 7 per cent of allocations) from the Murray irrigators is $72 million per year. The federal ALP would triple this at a cost of $316 million per year (the Greens would take 3000 gigalitres for starters, at a cost of $800 million per year).
Such measures would clearly detract form the ability of the agricultural sector to survive let alone flourish. There is strong evidence to show that the Murray Darling system is not under the sort of stress portrayed by green groups and accepted by many in urban Australia. Together with ecologist Dr Lee Benson, we have carefully sifted through the evidence for degradation and found it seriously lacking. A Commonwealth 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.
Farmers need to have confidence about fair play with future decisions. 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 Intergovernmental Agreement on a National Water Initiative 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 would lose water without compensation only in proportion to their share of losses that might result if the total available is reduced as a result of climatic events or changes.
These sorts of measures are essential if the sector is to realize its potential to contribute to prosperity in rural Victoria. The Government should, in pursuit of this, oppose any further regulatory takings and ensure that confidence in the security of property rights is maintained by requiring full and fair compensation for the takings presently planned. It should also ensure that a full trading scheme should be in place (one that does not require land and water to be jointly traded) to facilitate the transfer of water to those activities where it is valued most.
NATIVE VEGETATION
The principal legislative instruments here are the Planning and Environment Act 1989 and the Fauna Guarantee Act 1988 (which impinges on the management of native vegetation) and their subordinate regulations. These were covered in the broader report of the Productivity Commission on Impacts of Native Vegetation and Biodiversity Regulations.
The legislation is similar in many respects to that enacted in other States, with the rider that clearance of native vegetation has been more extensive in Victoria in the past. Clearance rates now are negligible. Just over 1 million hectares of native vegetation are on private land.
The legislation provides some exemptions mainly to facilitate normal farming activities. But these exemptions are sometimes more apparent than real and there are many adverse effects of regulation which would repay examination -- not least because there has been no comprehensive review of these regulations since their introduction 15 years ago.
The unease with these sorts of regulations is not just a Victorian characteristic. Specific issues are many.
First, the regulations do not embody well-defined objectives. For this reason their proponents and administrators are not obliged to weigh the costs and benefits of the regulations or the decisions made under them. This situation arises because the regulations have generally been devised without those who bear the costs being consulted and, as a result, not adequately considered. This is not just a problem for those in the rural economy but it tends to have more widespread effects there. It is past the time where we can accept all environmental restrictions as an absolute good. The costs arise both from the processes and the outcomes.
Second, there is inconsistency in the application of the regulations. The reason is that they are devised at a high policy level and administered by local authorities, case by case, often by unqualified staff with no means of cross checking. Moreover, officials often have little experience in or knowledge of the pressures and requirements of practical farming. This is not helped when the Government changes the rules to reverse particular cases such as the novel restrictions which have been on vermin control activity. Such a case was identified by the Productivity Commission.
Third, the provisions for compensation are either non-existent or inadequate where decisions are made that affect the income-earning capacity or capital value of assets. Where limited compensation is applied under the Fauna Guarantee Act there appears to be a more realistic application of restrictions -- it applies some form of explicit valuation.
Fourth, because the rules are more stick than carrot, there are powerful incentives for landowners to undermine the purpose of the regulations. This is reinforced by the increasingly popular but farcical requirement for Net Gain of native vegetation cover whenever an application to clear is made. This principle inappropriately values native vegetation as an absolute good. The results are predictable:
- Many sound, beneficial clearing proposals are not put forward as the costs of regulation exceed the benefits to the farmer.
- Farmers tend to favour exotic species in tree planting to avoid future reservation for environmental purposes.
- New native forestry activities are discouraged for the same reason.
- Rare and endangered species of vegetation are concealed to avoid quarantining of productive land.
- Poor management practices (overgrazing of native vegetation) are encouraged in an effort to circumvent the restrictions.
This perverse incentive structure is all the more regrettable given the relatively small area of remaining native vegetation on private land in Victoria.
Finally, the regulations tend to be "one size fits all". This implies both a distinct inequity and a significant barrier to entry. Small operators find the regulation both more daunting and relatively more costly than large businesses. New entrants to businesses affected by the regulations, especially those with limited capital, find the cost of compliance a strong disincentive. The discouragement of small business and start up activity is an unhealthy aspect of the State economic administration which the establishment of this inquiry seeks to combat.
BUSHFIRE HAZARD REDUCTION
In the 2003 bushfires, twenty thousand hectares of Alpine Ash were burned. These caused an estimated economic loss of $121 million in four shires alone. The Alpine parks were severely damaged. The 3 million hectares burned across Australia would classify as "clearing" under native vegetation rules. This compares with average annual clearing rates in NSW and Victoria together of less than 20,000 hectares and logging over all Australia of 60,000 hectares.
There is a propensity to regard such fires as natural events and therefore beyond the reach of human control. This is not the case. With our increased knowledge of wildfire behaviour we should be responding more effectively in advance of such events rather than engaging in frantic emergency reaction when the fires are out of control.
Many factors have played a part in the tragedy. One is the indiscriminate, massive enlargement of under resourced National Parks. But regulation plays a part as many of the official inquiries have since found. Given the enormous cost of the fires it would be worth examining whether there is potential for improvement in the various regimes as a special case to allow them to mitigate the losses.
Several possibilities occur:
- A relaxation of the rules to allow more extensive hazard reduction burning. This would be combined with more precise and proactive guiding principles for bushfires control. This links to the preceding section in that the processes for approval of burning native vegetation are detailed, delayed and expensive.
- Rewrite National Parks regulations to require a style of management which favours hazard reduction, maintains better access and concentrates on protection of fire sensitive areas rather than whole tracts of bush.
- Enforce rural building fire regulations on the urban fringe to prevent construction among trees and other high fuel load areas and require regular hazard reduction.
- Dismantle regulation-mandated committees that give excessive influence to groups with no interest in the land and allows them to apply inertia to prevent decisions on mitigation.
- Apply realistic regulation to fire operations, which assess overall rather than immediate risks -- the application of strict OH&S rules to the fires in Canberra allowed a controllable fire to develop into a firestorm.
This area of regulation is an amalgam of different State departmental responsibilities but the issue is sufficiently important and integrated to merit a unique regulatory response. We have already forgotten the fires but the fuel build began again immediately. Fires will inevitably occur but we can reduce their toll.
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