Bracks keeps balance as he juggles business and unions

One significant reason the Bracks Government is performing so well in the opinion polls is that it is substantially a business-friendly government.  The reasons are clear.

It has controlled the state budget, keeping it in surplus, paid down debt and kept the workers' compensation scheme in the black.  It is positioned to cover the state's looming public sector superannuation liabilities.  State finances are generally stable.  This has contributed to a fairly positive economic environment.

The Government has made a range of important changes to occupational health and safety laws, small-business policies and has pushed along infrastructure development.

Naturally, not all is perfect.  Stupid things have happened, such as the ban on genetically modified food.  This damages Victoria as a centre for biotech excellence.  The 2030 planning scheme has made some land speculators rich at the expense of young home buyers.  New housing costs are consequently higher than they should be, thus restricting home building activity.

The scorecard overall, however, is positive and reflected in the continued Victorian economic growth.  This compares with NSW, which is in significant economic difficulty.

Much of the reason for the Bracks Government's success in the business area relates to the unusual relationship with Victorian unions.  Last time the ALP was in government under Cain and Kirner, it was captured and ultimately destroyed by anti-business unions.  But the Bracks Government has kept this key constituency at arm's-length from vital economic decision making.

In fact, the relationship between the Government and Victoria's unions is strained and often icy.  Radical Victorian unions wage war behind the scenes with the Bracks team but it's mostly contained inside ALP factional power plays.

The key indicator of how Victorian unions have been kept at bay is the refusal of Bracks/ Brumby to reintroduce a state industrial relations system.  This has caused tension with Victoria's unions.  But it has meant that Victorian business has a significant advantage over other states.

For example, NSW business is gridlocked by an industrial relations system that micro-manages business activity.  One NSW transport company recently had to supply 50,000 pages of financial records to a union as part of an industrial relations compliance requirement.  This sort of detailed industrial relations interference in business operations is surprisingly frequent in NSW.

Even more startling is that commercial and even criminal cases can be heard in the NSW Industrial Relations Commission, where appeals against decisions are prohibited.  NSW cuts business to death in thousands of ways.

So far Bracks and Brumby have kept this NSW-type anti-business disease largely out of Victoria.  This is important.  Victoria's construction sector underperforms because of entrenched union control.  This makes Victorian infrastructure construction much more expensive than Queensland, for example.  The Federal Government's new construction industry policemen are starting to clean this up and Victoria should be a major beneficiary.  The Government is letting this play out, which may fix a construction union problem the it can't fix.  But within these positives there are some signals of creeping special privilege being delivered to unions.

This year, the Government introduced owner-driver legislation.  It does a number of good things by tightening up contract obligations in the transport sector.  But it also does something else that is surprising.  It introduces a process of union-influenced price fixing over commercial contracts in the transport sector.  Proof that the intent is to do this, is that the act removes itself from the Trade Practices Act.  This means the TPA will not be able to block price manipulation when it starts to take effect.

To stay in the Government's good books, some industry bodies have agreed to this.

This mirrors the interference in business that developed in NSW.  In that state, business interference laws built up over a decade in many small ways.  Industry bodies were gradually seduced into agreement.  NSW unions achieved new anti-business powers over time.  Business and the voters didn't realise what was unfolding.

The Victorian owner-driver laws indicate that this process is under way in Victoria.  It is masked by political spin.

The Bracks Government so far has a sound pro-business track record.  But signs are emerging of seemingly small political trade-offs to unions.

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Inconvenient Truths

Former US Vice-President, Al Gore, and his new movie "An Inconvenient Truth" have triggered a remarkable amount of public interest and discussion on the subject of global warming.

But it's not really a documentary.  Gore presents some interesting information, but he also leaves a lot out.  Indeed he omits a lot of inconvenient truths.

In the movie Gore suggests that carbon dioxide from the burning of fossil fuels is the sole cause of global warming.

This carbon dioxide is shown as responsible for the melting of the world's glaciers, bleaching coral reefs and hurricane Katrina.

But hang-on.  There was coral bleaching, category five hurricanes and glacial melt before motorcars and oil refineries.

In failing to distinguish between possible human-caused warming and natural variability Gore does his cause and science a terrible disservice.

Students of geology known that over the last 2.5 million years there have been 50 ice ages initially of 40,000 years but more recently of about 100,000 years.  Between these ice ages have been warm periods of about 10,000 years.

The last interglacial warm period was 120,000 years ago.  Back then carbon dioxide levels were almost as high as they are now, but sea levels were about 6 metres higher and the earth was about two degrees warmer than it is now.

Like Al Gore, I'm concerned about the current high levels of atmospheric carbon dioxide, but unlike Gore I haven't observed any global climate crisis.

It's been dry in western NSW, but it has been dry in the past -- remember the early 1980s, and the Murray River ran dry in 1914.

Ice sheets melt during interglacial warm periods, but it is wrong to suggest, as Gore does in the movie, that polar bears are in trouble -- drowning on mass.  Numbers of polar bears have actually increased over the last 40 years from about 5,000 polar bears when there were no controls on hunting, to about 25,000 polar bears now existing as 19 discrete populations.

It is interesting that in "An Inconvenient Truth" Gore only shows the hurricane record since 1970.  There are good records back to 1851 for the US, and this data shows the 1940s were particularly bad years.

Further, global warming won't destroy coral reefs.  They occur in tropical waters because they like it warm.  As sea temperatures warm, southern hemisphere reefs may extend their range a little further south.

It will be the next ice age and falling sea levels that leave the Great Barrier Reef high and dry.

Then again, as Gore explains in the movie, for him global warming is a moral issue rather than a scientific issue and "An Inconvenient Truth" is part of his campaign of public persuasion.

So let's stop calling it a documentary.  It is full of misinformation including the assertion that there is currently a global climate crisis.

When I study the climate record all I can find are a lot of inconvenient truths for this politician come-environmental crusader.

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Full-fee places at university benefit all

The debate about whether to allow students to pay for their place at university was reignited this week.  On Monday it was revealed that some regional universities had unfilled vacancies, while other universities offering essentially the same course were charging students full fees.  This provided the ammunition for critics of the Howard Government to attack on two fronts.

First, it was claimed that the finding that some universities had unwanted places was evidence that the level of HECS fees was driving students away.

Second, it was argued that the Government's policy on universities was "illogical" because some students were attending institutions that charged full fees when they could be undertaking similar courses at another institution and pay a fraction of the price.  To some, including the Labor Party, this provides a further reason why universities should be forbidden from charging full fees.

On the first point, whether the level of HECS debt is discouraging potential applicants from tertiary study is unclear.  A vacancy in a course might simply be the result of students deciding that better alternatives are available elsewhere.

In any case, it isn't necessarily a cause for concern that students might be deterred by the size of their future HECS debt.  The average HECS liability carried by graduates is $10,000.  This represents their own contribution to the costs of the education they received.  Given that HECS debts are not required to be paid back until a taxpayer's annual income reaches $38,000, it is difficult to claim that the costs of education are a deterrent to students applying for university entry.

The contribution of taxpayers to the cost of tertiary students' education, via the Commonwealth Government's funding of universities, is about three times the amount that the students themselves are required to pay through HECS.

A university education is not an absolute right, nor is it a right that should be guaranteed to be free.  In return for paying for part of the costs of their education, graduates gain the opportunity to earn substantially higher incomes than those without tertiary qualifications.  It is unreasonable to demand that taxpayers fund the education of those who are unwilling to make even a token financial sacrifice to gain the personal benefits of a university degree.

On the second point, there's nothing illogical about students choosing to pay more to enrol in higher quality courses.  What would be illogical would be to prevent students from enrolling in full-fee courses at their preferred university until all the vacancies at every other university were filled.  Yet this is precisely what some university administrators are saying should happen.

But beyond these administrative intricacies of tertiary funding there is a more fundamental issue.

It is the question of whether students should be allowed to gain a place at university by paying for the cost of their course themselves.  These costs could be very substantial.  Next year the price of a full-fee place in medicine at the University of Melbourne will be more than $200,000.  According to the Labor Party, some students cannot afford to pay this amount, and therefore those students who can afford to pay should be prevented from doing so.

The ALP's higher education policy is a case of bizarre reverse discrimination.  Universities will be stopped from offering full-fee courses to local students, although they are allowed to do so to overseas students.  (At the moment 3 per cent of all local undergraduates in Australia's universities pay full fees).

The ALP believes it isn't "fair" that school leavers who miss out by a few points on a HECS place at their preferred university are then forced to pay tens of thousands of dollars if they wish to undertake the same course as a full-fee student.

Of course, in an ideal world this wouldn't happen as there would be an unlimited supply of free university places.  But the reality is different.  In the real world both funding and places are limited.  Students should be allowed to pay full fees and make the financial investment in their own future if they choose.

The fact that some students might have their fees paid for by their wealthy parents, while others will be forced to take out a loan is irrelevant.  Labor's ban on full-fee places hurts both poor students and rich students alike.  Students from poorer backgrounds may even be relatively more disadvantaged because they have fewer options than those from affluent backgrounds.

Unfortunately, it appears that envy is a key motivation behind Labor's promise to abolish full-fee places.  At the last federal election envy motivated the ALP's "hit list" attack on wealthy private schools.  Just as Mark Latham disappeared after the election, so too did his policy.

Hopefully, Labor's current higher education policy will go the same way as Mark Latham's schools policy.

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Are STD rates being milked?

The Federal Government's universal service obligation is designed to ensure all Australians have access to standard telephone services and payphones.

For country people, the USO ensures everyone can receive a basic telephone service installed at a reasonable cost.

Without the USO, the cost of installing a phone line would be way beyond the realms of possibility for most rural and remote Australians.

At the moment the USO is paid for by the telephone companies, in proportion to their market share across urban and rural Australia.

Each company's contribution is put into the USO funding pool, which is then used by Telstra to maintain and connect rural and remote networks.

But there's a problem.

To start with, the last time the regulator calculated the cost of providing the USO, it came up with $550 million.  That was in 1997.

Back then petrol cost 73 cents a litre and wages were 30 per cent lower than now.

Yet for next year the Government has set the cost of the USO at $157 million.

This is bizarre, because in 2007 installation and maintenance costs to provide telecommunications services to remote users are sure to be higher than a decade ago.

On the Government regulator's own figures, there will be at least a $400 million shortfall on the USO next year.

That's the difference between what the USO costs to provide and what is collected from phone companies.

That means Telstra has to find the shortfall.

Services to rural Australia are still being delivered by Telstra because this is a condition of its licence, even though it is not fully funded to do so.

Someone must be paying the difference between what the Government sets as the figure telecommunications companies pay for the USO and what it actually costs.

The most likely group is the very one set up to benefit from the USO -- rural and remote Australians.

Would we be surprised if rural, regional and remote telephone users are paying higher STD call charges to cover the shortfall in USO funding?

There are three groups of phone users that could be bearing the cost of paying for the USO shortfall -- city consumers, business, or country consumers.

It is unlikely that Telstra is able to extract the shortfall from its business markets, which are highly competitive.

The same applies to Telstra's residential market in major cities.

By contrast, although there is significant competition in rural areas, (we all suffer from those dreadful telemarketing calls on bad lines from phone companies nobody has ever heard of), by international standards STD and mobile phone charges remain high for many country users.

There is no way of proving whether the reason we have so many STD areas and such high STD costs is to make up for the shortfall in USO funding.

After all, in the US it costs as little as two cents a minute to make a call from one side of the country to the other.  But the lowest price in Australia is many times that amount, unless the service is bundled with other products.

And it is not as if distance is any longer the reason for higher charges.

In Queensland, business and government customers can sign up for a flat rate of 10 cents a call to anywhere in the state.

Similarly, the distance from one side of Melbourne to the other is much further than across most STD zones in country Victoria.  Yet all Melburnians enjoy local calls to the other 3.5 million in their city.

The remaining 1.3 million Victorians, living in country areas, must pay STD rates, sometimes just to the next town.

A great deal more transparency is needed to ensure that the figure the Government sets as the cost of the USO is as close as possible to its real cost.

Then all of us, country people, phone companies, the Government and urban people, can have an informed conversation about how much we value everybody in this nation having access to telecommunications.

Only then can country people be sure that they are not subsidising the connection and maintenance of new rural and remote customers by paying higher STD charges than necessary.

Bracks to the future -- energy policy is a return to protection

In spite of heady rhetoric, the Bracks Government has failed to pursue vigorous regulatory reform, and this is beginning to impact on the economy.  Transport expenditure is misaligned with user needs, we are seeing ballooning expenditure on bureaucrats, and we have seen bans on new, well-proven technology in agriculture.

These measures have been followed by the imposition of additional energy costs on consumers, with the requirement of the Victorian Renewable Energy Target to provide subsidies to new, exotic renewable sources.

Victorian governments have an ignoble history of providing subsidies to new developments and encouraging the Commonwealth Government to provide tariff assistance to support businesses that cannot compete.

This has changed over the past 25 years.  In the early 1980s, led by the Hawke government, Australia commenced a process of gradually winding down its protectionist policy approach.

This entailed eliminating regulations that created monopolies or offered price advantages to some companies.

Part of this was a gradual removal of the long-standing mollycoddling of domestic industries, shielding them from overseas competition.

The reform program encompassed businesses involved in energy, telecommunications, transport and many other industries that had been protected from the realities of competition and had grown fat and inefficient as a result.  Forcing businesses to stand on their own feet and face competition toe-to-toe has been the midwife of Australia's economic success.

As a result, John Howard has been able to lay claim to a record 10 years of solid uninterrupted growth during his stewardship.  But it was an ALP Commonwealth government that planted the seed initially.

Under the Kennett government, Victoria played an important role in the national scene, with reforms that transformed the state from basket case to national dynamo.

The Bracks Government did not reverse the Kennett-era reforms, but it has not pursued the same path of reform.  The Victorian economy is starting to languish.

On most measures, during the past quarter Victoria was propping up the states and territories at the bottom of the national growth league.

Victoria's policy on renewable power seems set to add a further straw.  Independent research estimates that the requirement placed on us all to use 10 per cent renewables will cost Victorians over $800 million, and will have a negligible impact on the reduction of greenhouse gasses.

The Government says its program will bring benefits, but that is based on internal research it has refused to release.  Indeed, in welcoming a new hydro electric power station in Bogong, Bracks said:  "This new power station would not have been possible without the Victorian Renewable Energy Target which was approved by Parliament last week".

The Opposition has pledged to scrap the legislation if elected.  And, unfortunately for the Premier's credibility, a spokesman for the company concerned, AGL, the very next day said such action would not destroy the economics of its new hydro project.  At least therefore, with the Kiewa scheme hydro facility, Victoria is not being saddled with an investment that is intrinsically uneconomic.  This is not the case with the many wind facilities under construction and planned, some of which must be even less viable as a result of the Opposition's statement.

AGL, like any other well run business, is alive to the possibilities of earnings from government subsidies and is likely to time its investment decisions accordingly.  But in giving a renewed impetus to subsidies and regulatory constraints, the Bracks Government is taking us back to a future that will once more leave the state as the nation's economic laggard.

This is regrettable.  With its regulation review initiatives, the Bracks administration demonstrated an awareness of government culpabilities and how they could detract from economic growth.  Although it has reduced regulation in some areas, like planning approvals, there are few examples where it has put its fine words into policy outcomes.

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Land rationing is not rational

Long-established home owners have seen the equity value of their homes rise as a result of the rationing of new land subdivisions.  While existing home owners may actually feel better off as a result, this is an artificial addition to their wealth.  It is offset by de facto reductions in the real wealth of those who have not mounted the house price escalator and face a formidable cost barrier.  Overall national wealth is diminished by regulatory measures that restrict the supply and flexibility of land.

The regulation of land for housing and other urban activities vividly illustrates the interconnectedness of all things economic.  Planning restraints on land subdivisions for residential and commercial uses have restricted supply and brought excessive house prices.

Aside from pricing younger people out of home ownership, these regulatory distortions pervade the whole economy.

One important outcome follows from the overstatement of home owners' real wealth that regulatory induced scarcity creates.  Notwithstanding a reduction in Australian household savings -- partly due to definitional factors -- measured levels of household wealth have increased.  Treasury estimates that real per capita private wealth has grown 120 per cent over the past 10 years.  But two-thirds of the growth is accounted for by housing and this is overwhelmingly a function of inflated house prices driven by government-induced land scarcity.

Hence, much of the increased household wealth -- that part created by regulatory restraint of land supply -- is apparent rather than real.  It does not add to genuine savings, investment and productivity.  Indeed, escalating land prices are cannibalising real saving levels and productive investment.  They represent a deadweight loss that sucks up savings but does not invest them productively.

People who receive windfall gains tend to spend them.  Many people with substantial equity in a home that land scarcity has inflated in value change the pattern of their consumption and savings.

The Reserve Bank has surveyed house owners who have made withdrawals from the equity they hold in their houses.  It found that withdrawals into direct consumption comprised 17.6 per cent of the total in 2004.  But a further 7.6 per cent might have indirectly been so diverted in that it comprised repayment of other debt, while some of the sums lodged as deposits (33 per cent of the total) might also have eventually been spent in areas other than asset accumulation.  Only about 25 per cent (which went to superannuation, business and investments) could be said unambiguously to be reinvestment.

The regulatory fomented inflation of urban land also has other impacts.  Urban land rationing restricts retail development as well as housing.  This has a direct effect in reducing competitive pressures on retail outlets and therefore raising retail prices.  That effect, like the effect on housing, may well be amplified by lobbying costs.  Businesses have a great deal to gain in getting the political process to favourably designate their own land and reject such applications with regard to land owned by a competitor.

There are additional knock-on effects.  One among these was recognised by the Productivity Commission in its recent report on airport charges.  Because most Australian airports were originally under Commonwealth rather than state control, they benefit from less stringent planning restraints than those on the land in their vicinity.  Under private enterprise, airports have moved to allow their surplus land to be used for retail activities that state governments rejected.

While this, especially in the form of direct factory outlets, has moderated the price increases brought about by state governments' restraint of competition, it also boosts the value of the land for the main business of airports and puts upward pressure on airport charges.

We need to wind back the restrictions on land availability for home building and retail uses.  This would bring about lower costs for new housing and lower retail prices.  Moreover, it would free up more income for genuine productivity enhancing saving and investment.

An abundant supply of land is as much a part of Australia's comparative advantage as mineral wealth.  By erecting restraints to its use, we are not only raising costs of those without their own homes but we are denying ourselves a valuable area of wealth and competitiveness.

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Transmission Pricing for Prescribed Transmission Services

Submission to the Australian Energy Market Commission

THE CONCEPTUAL FRAMEWORK

The NEM objective is to promote efficient investment.  Price levels in the proposed rule cover the allocation of costs and the levying of charges that cover those costs to promote efficiency.

The Objective is seen to have implications for the means by which the regulatory arrangements operate as well as the ends.  With regard to the former, it sees goals of "stability and predictability" and of "transparency".

Stability as a goal is different from predictability.  Rules set out to create stability can be inimical to efficiency when the underlying conditions are highly unstable.  Predictability can also be questioned as a goal of regulations in conditions where market conditions are not predictable.

In seeking to promote stability where volatility is the normal situation, regulatory agencies might involve themselves in attempting to smooth out pricing perturbations.  While this appears to be a meritorious goal it can be harmful where the regulatory agency is mistaken on the overall trends of the market.  A regulatory agency under a form of political control is especially vulnerable to such errors.  One of the more injurious failures of an agency pursuing this approach was that of the Australian Wool Corporation which set an intervention price for wool during the 1980s that was too high and which culminated in vast over production and a stockpile that overhung the market for a decade proving ruinous to many farmers.  Even regulatory agencies not explicitly favouring a particular interest group may well get things wrong -- the more spectacular market failures as in California were certainly compounded by the regulator seeking to favour consumers in the narrow sense of shielding them from necessary price rises.

Similarly, in seeking to promote predictability inappropriate signals could be given.  Thus the spot market for electricity is highly unpredictable at certain junctures.  Trying to prevent such unpredictability is the goal of those promoting a price cap and an associated capacity payment to generators.  The nature of electricity is that it is at times inherently unpredictable and attempting to reduce that can reduce incentives that firms have to ameliorate it.

Setting a price cap offers retailers a degree of security that the regulator is unable to deliver in any scenario likely to prove acceptable in Australia.  One possible such initiative would involve the regulator fully owning a dedicated reserve supply of electricity to be called upon only in extreme price periods.  Even if this worked, it is unlikely to be realistic for the government to hold a plant fully in reserve.  That aside, promoting greater predictability than is inherently present can bring inadequate signals to market participants to contract for or supply capacity needed for those occasions where the unpredicted occurs.

There are limits to what a regulator can and should try to achieve.  Regulation is not introduced to improve the operations of the market.  Rather it is in place because it is perceived that the market itself cannot work:  that there is market failure.  In the case of electricity transmission lines (and even more so with distribution lines) this is because there are seen to be valuable externalities that cannot be fully captured by the provider, "free rider" features that might bring the buyer to seek to avoid payment and natural monopoly traits that prevent suppliers and customers from finding alternative means of transacting business with each other.

Ambition to create conditions that are more potent in reducing risk than might be the outcome of the free play of demand and supply can be dashed on the shoals of unforeseen surprises.  It may well be that the Commission is aware of these considerations and its proposed measures to promote means as well as ends are a codicil that is intended better to describe the main ends and not to supplant them should there ever be any conflict.  In that event it should specify the limits to its rule making and ensure that participants are aware that it is simply recreating the conditions normally found in markets, departing from these only where it has a clear political requirement to do so.

REDUCING THE NEED TO INTERVENE IN MARKETS

THE OVERALL APPROACH

The Commission sees its role as providing the best signals for investment and to combat market power on the part of network operators.

The Commission considers that these outcomes can be best achieved by:

• clarifying that the "causer pays" principle is to be applied in linking the prices paid by consumers and producers of electricity to transmission costs;
• permitting the recovery of the efficient costs of transmission service provision, including "sunk costs";
• ensuring that the transmission prices provide efficient locational and investment signals to participants;  and
• ensuring the pricing rules take account of other aspects of the NEM arrangements, such as transmission investment regulatory arrangements, in order to avoid inefficient "oversignalling" of the value or cost of transmission.

It generally regards the current approach whereby generators only pay "shallow" connection costs and the mix between locational and "postage stamp" price detemination as being satisfactory.

REVENUE BASED REGULATION

It endorses the revenue regulation approach rather than its cost based alternative.  This leads to a provision for "prudent discounts" and a consequent additional impost on those parties that do not receive the benefit of the discounts.

Revenue as a base for charges rather than costs is set because the service is considered to have no material affect in encouraging increased usage of the product due to its relatively low (10 per cent) share in overall costs.  In previous times and perhaps still, there was also the notion that increased usage of electricity should not be encouraged and that a revenue cap avoids network providers seeking to promote usage by reducing prices.

The Commission traverses the arguments for and against price and revenue caps.  It considers the main deficiency of price caps is that they may not be applied to take fully into consideration the future network investment.  This is however not an argument that has persuaded the distribution regulators which see price cap regulation as offering more potent efficiency driving signals than revenue cap regulation.  In opting to retain a revenue cap approach the Commission offers no arguments in its favour.

CAUSER PAYS

The Commission also sees the need for "causer pays" principles which offer a more market based signal to investment.

It argues, "In order to promote allocative efficiency, transmission prices should be set on a 'causer pays' basis where possible.  This means that where transmission costs are incurred following a direct request by (or agreement with) a particular network user or users, those user(s) should be required to pay the relevant costs." (p. 27).

It takes the view that the meshed nature of the network makes this difficult to assign to particular parties and that as most transmission investment is undertaken to meet reliability obligations to satisfy consumers, the main locus of charges should remain with consumers.  With regard to this latter factor, it matters little why the obligations are in place since, whether levied initially on consumers or suppliers, the charges will always fall upon the former.  More persuasive in not modifying the present arrangements is the fact, acknowledged by the Commission, that they are in place and changing them would create transitional gains and losses without any apparent improvement in efficiency resulting.

The Commission recognizes that investments may be inappropriately located because of the charging approach.  It favours prices being set on the basis of short run marginal costs which it argues is supported by economic theory and competitive market experience.

This is subject to a great many caveats.  Importantly, prices set on the basis of marginal costs are not found in many markets—they are characteristic of markets under stress (for example where there are few suppliers engaged in a "price war") or facing long term decline (so that sunk costs need not be recouped).  Even the market for highly perishable goods like vegetables seldom sees produce offered at marginal cost and only then is this seen at the end of the trading day.

The Commission recognizes that if charges are set to meet short run marginal costs and there is spare capacity, consumers may locate too far away from generation, especially if reliability standards are in place to fortify the initial decision.

It considers that prices based on long run marginal costs may lead to inefficient by-pass.  This leads it to support the notion of efficient discounts being offered which may be recouped by de facto surcharges on other customers.  It is likely that the conditions under which these would be permitted would be accompanied by protracted and heated negotiations.

One suggestion draws on and amplifies our published work. ⁽¹⁾  Put forward in two submissions by a group of generators and by AGL, it seeks to introduce a mechanism that would provide greater market orientation to transmission investment other than the meshed network which supplies major consumer loads.

The latter are more akin to distribution systems in that their usage cannot be ascribed to particular generation facilities or groups of such facilities.  By contrast, the long lines connecting a single generation unit or a series of such units are supplying electricity to major nodes, often in competition with each other.

The practice in Australia is to charge the customers for the transmission use, rather than generators.  Generators do not however have a property right to the transmission to the major hub.  This means that a new generator with costs and a consequent a bidding strategy lower than an incumbent generator would force the latter off the line once it was at full capacity.  This might mean an alternative supplier with a higher total cost (including transmission costs to the major node) would replace the incumbent generator.

This is illustrated in the diagram below.

If generator B locates next to generator A, the latter is constrained out and replaced by the higher cost generator C.  Costs are $1000 higher.  Generators A or B may have incentives to build additional transmission capacity but only if they can be assured of some exclusivity or some priority in its use.  A customer coalition would also be willing to finance such an investment but the transmission business may face no such incentive, while generators B, C and D would prefer the augmentation not take place since they are beneficiaries of the higher price set by generator C.  Allocation of a form of property right would bring about the optimal investment without the rancour of a series of bureaucratic hearings and extensive lobbying.

A more complete depiction of the different costs and the appropriate strategies for payment is below.

In determining the best means of arranging for new capacity it is useful to consider four models.  The first is that which normally applies to roads and bridges.  The usage both origin and destination is highly atomized.  Governments charge road specific taxes and provide new and improved facilities according to their measures of demand.  Road specific taxation is about twice the level of road specific expenditure and in many areas roads are clearly underprovided and the consequent congestion brings about a political reaction as well as increasing travel time and its variability.

A second model is that for new housing subdivisions.  In the local road, electricity, water and other service provision, the new home builder (and hence the home buyer) pays for the infrastructure.  This has generally been found to be satisfactory, although it does bring about a fairness issue since established areas were paid for by debt and much of their on-going upkeep is paid out of general revenue.

A third model is that in place for most gas, electricity and rail infrastructure.  An independent operator is in charge of the main transport system and operates it as a common facility.  Normally the access to this and its price is controlled by a government agency.

A fourth model has the producer controlling its own transport system.  In one sense this is the model operating in manufacturing industry where an automated car plant is the transport medium for a firm which combines bought-in and internally produced components into a finally assembled product.  Most manufacturers would resist having to make their facilities available to other businesses, even if they were not competitors because of the difficulties of ensuring against disruption.

The Hilmer recommendations and the Part IIIA provisions of the Trade Practices Act were careful to exclude manufacturing facilities from the ambit of control.  Rio successfully argued before Justice Kenny in the Federal Court that its iron ore transportation facility in the Pilbara was akin to a manufacturing facility and thereby avoided a requirement to have it covered by Part IIIA (the applicant for coverage was actually bought by Rio and there was therefore no further appeal).

Nonetheless, the NCC and ACCC continue to regard such facilities as being prospectively subject to coverage.  In the case of telecommunications, the ACCC's refusal to give Telstra assurances on coverage matters has led the firm to abandon plans to build a national fibre network.

Most gas carriage is contracted under arrangements whereby the supplier has some priority to use a specific level of capacity on a pipeline (Victoria has a unique "market carriage" system under which no such rights are involved).  The gas "contract carriage" approach is a variant of the fourth model.

All of these models have their strengths and weaknesses.

• The first often leads to under provision as in the case of roads or it may lead to excessive expenditure if the government is highly risk averse and feels it can avoid political opprobrium by such expenditure.
• The second may be difficult to arrange, particularly where there are many consumers all with different degrees of preference for trading off greater security for lower costs.
• The third model involves a departure from true market conditions and an attempt by a regulator to mimic the conditions that would prevail if a genuine market with many buyers and sellers were to exist;  it remains vulnerable to all the conceits and inefficiencies that often characterize regulatory agencies.
• The fourth model might set up a monopoly that could exercise price discrimination and extortion in later years. ⁽²⁾

A new generation unit or an expansion of an existing unit should be required to pay for any augmentation needed to allow its power to be transmitted.  This, implicit in which is some form of nodal pricing, gives a better market signal than if the determination is left to a regulator or to a transmission business since it allows the transposition of commercial forces for those that are actually or mainly controlled.  As AGL argue, "Applying deep connection charging to generators at the time of connection would allow the network costs to be included in their decision process on location and allow for appropriate development of networks to efficiently transfer power from generators to customers." ⁽³⁾

With rights over their current levels of service, existing generators have options about augmentation that ensure the full costs of their decisions are taken into account.  They may also downsize by selling part of their carriage rights to a new player thereby avoiding wasteful duplication of capital.

The advantages of such are best seen in allowing a market based decision to be made on where a transmission augmentation should best be made.  There may be several alternatives (e.g. in Victoria by reinforcing the lines from the Latrobe Valley as opposed to the interlink with Snowy and NSW) but requiring a new supplier to undertake the expenditure (or buy out the rights of an existing unit) introduces a market mechanism.

A market mechanism along these lines is consistent with the Code ⁽⁴⁾ and with the light handed regulation that governments and their agencies promote in the electricity market.

REFERENCES

1.  Richard J. Wood, Firm access rights:  The key to efficient management of transmission, Submission to the NECA transmission pricing review, Energy Issues paper no. 12, June 1999

2.  The common law evolved to ensure that at some time the monopoly was required to open up its services to all comers.  Frequently, as in the case of nineteenth century railways, this led to political control, under-pricing and reduced efficiency of operations.

3.  http://www.aemc.gov.au/pdfs/reviews/Review%20of%20electricity%20transmission%20revenue%20and%20pricing%20Rules/Issues%20paper%20submissions/Issues%20Paper%20Transmission/000AGL.PDF

4.  5.5 (f) of the Code specifies

The Network Service Provider and the Generator shall negotiate in good faith to reach agreement as appropriate on the:

• connection service charge to be paid by the Generator in relation to connection assets to be provided by the Network Service Provider;
• use of system services charge to be paid by the Generator in relation to any augmentations or extensions required to be undertaken in respect of all affected transmission networks and distribution networks;
• amount to be paid by the Generator to the Network Service Provider in relation to the costs reasonably incurred by the Network Service Provider in providing generator access;

A Capital idea: move them out to move us on

Last week, when Canberra was named as one of Australia's 13 biggest mistakes, the chief minister of the Australian Capital Territory complained that this was another predictable exercise in Canberra-bashing.  Presumably, because we also listed the introduction of cane toads into this country as a mistake, we can expect letters from Friends of Cane Toads.  But it is legitimate to examine the mistakes Australia has made in the past to avoid making similar ones in the future.

Australians are a remarkably creative, diverse and entrepreneurial people.  Politics is slow, backwards-looking and uniform.

Inspired by misguided ideologies and without full understanding of the unintended consequences, it is very easy for governments to make mistakes.  Unfortunately, since Federation, this has happened too often.

Australia entered the 20th century with the highest living standards in the world.  By the 1970s, we couldn't even crack the top dozen.

The media provide a good example of government failure.  We now live in a world of iPods, YouTube and MySpace.  Never has there been so much information and entertainment readily available.  But if a service such as YouTube required government-managed airwaves to operate, rather than the free-for-all internet, there is no chance it would have been given a license in Australia.

Since taking over control of the radio-waves with the 1905 Wireless Telegraphy Act, successive Australian governments have needlessly held back the development of wireless telegraphy, AM radio, television, FM radio, subscription and now digital television.  Most governments have been open about the reason -- to protect the financial viability of existing media companies.  Never mind the consumers.

Patrick White's 1972 Nobel Prize for Literature could not be considered anything but a success, and the government's response was to inaugurate the Australia Council.  But when expatriates such as Germaine Greer criticise Australian culture from afar, they fail to recognise that this too may be a result of government action.  How much different would Charles Dickens' novels have been if he had been living off a government grant?

The US, which has a famously low level of state support for the arts, has a strong, vibrant culture.  American artists are forced to respond to the demands of their audience.  The result has been a century of innovation and experimentation.

But our large arts bureaucracy, funded by government and beholden to committees rather than consumers, could easily be the cause of our "cultural cringe".  If the government left our creative artists to their own devices, without offering them protection from their fickle audience, perhaps we could finally relax our cringe.

Similarly, when parents decry their children's reluctance to move out of home, it would be worth considering that they can't afford to.  The imposition of regressive urban planning restrictions by governments has artificially inflated the prices of homes, beginning with the Western Australian Town Planning and Development Act in 1928.  These laws have shifted the decision-making powers about how to use land from the land's owners into the new urban planning establishment.  By restricting the supply of housing, prices naturally go up.

Conceivably, fewer of these mistakes would have been made if our politicians, bureaucrats and regulators had been closer to the people they were governing, rather than sequestered away in Canberra.  The decision in 1908 to shift the engines of government to a rural area isolated decision-makers from the consequences of their decisions.

If we had left the capital in one of our major cities, some of the folly of Australian history could perhaps have been avoided.

Thankfully, steady reform since the 1970s has partly reversed some of the worst mistakes.  But if Australia is currently under the grip of some sort of "neo-liberal orthodoxy", as is so commonly argued, then the question is not how have advocates of the free market and small government suddenly gained power, but where were they during the first 90 years of our federal system?

If we'd had a strong, liberal free-trade party in Australia that embraced individualism and economic and social freedom, perhaps this would have not been the case.  Instead we were stuck with two protectionist conservative parties unwilling to challenge the prevailing dogma.

The bi-partisan reform movement to reverse some of the mistakes of past governments is giving back Australians some measure of control over their own lives.  Australians can be justly proud of our successes.  Most of our failures have been the fault of governments.

Australia's 13 biggest mistakes

1.  The end of the Reid government (1905)
2.  The Harvester Judgement (1907)
3.  Wireless Telegraphy Act (1905)
4.  The Montreal Olympics (1976)
5.  The Uniform Tax cases (1942 and 1957)
6.  WA Town Planning and Development Act (1928)
7.  Immigration Restriction Act (1901)
8.  The Labor Party split (1955)
9.  Publication of John Stuart Mill's On Liberty (1859)
10.  The release of cane toads (1935)
11.  Federal money for science blocks at non-government schools (1963)
12.  Patrick White wins the Nobel Prize (1972)
13.  Invention of Canberra (1908)

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Waking from the dream with a headache

Is Steve Bracks' dream run coming to an end?

It has been a dream to be in Government in Australia this decade, Victoria being no exception.  However, there are emerging signs that dream is coming to an end.

The state's economy is slowing.  While there is no recession on the horizon, the tea leaves point to a much more challenging time for the next Victorian government.

The Bracks Government has had the luxury of a "magic pudding" economy over the past six years.

Despite steadily increasing spending, a booming economy delivered ever more revenue and budget surpluses.

Each year the government would cautiously predict a slight slowing in revenue, only to given large increases.  Every tax and every revenue source flowed like the mighty Snowy of the past.

Even the Federal Government has been generous in the extreme.  As a result the Bracks Government has received a revenue windfall of more than $20 billion over the past six years.

Of course, all states and territories and the Federal Government experienced similar dream runs, even the erstwhile rustbelt states of Tasmania and South Australia, but Victoria has done better than most.

The key has been a robust, fast growing economy.  Each year Victoria's Treasury predicted that the boom would wane slightly, only to be surprised by even more rapid economic growth.

Moreover the growth was largest in the very areas which the state taxes most:  housing, insurance, cars and, through the GST, consumption.

In its latest budget, Treasury did something different.  It predicted that that state's growth rate would actually increase from 2.5 per cent last year to 3.25 per cent in 2006-07 and 3.5 per cent in 2007-08.

It seems to have been a bad time for optimism.  The latest ABS data shows not only a sharp slowing in the overall Victorian economy, but sharp declines in the areas on which the state relies most for revenue.

In the June quarter the state economy ground virtually to a halt, growing just 0.1 per cent.

For the year ending June 30, 2006, the economy grew by 1.4 per cent, which is a full percentage point below Treasury's prediction.

The data shows that the slowdown has been in train for months and the trend is down.

The most rapid and significant declines has been in household consumption which is now running at half the rate of a year ago.  The housing market has slowed, as have car sales.  Private sector capital investment has also declined.

While Treasurer John Brumby remains optimistic that the good times will inexorably roll again, there is a growing consensus among readers of the economy's tea leaves that the boom times are over.

Household budgets have become geared to the maximum and it is only a matter of time before this will bring the unprecedented spending spree of the past decade to an end.

Nothing surprising, but certainly a challenge to a state government hooked on an apparently never-ending flow of easy money.

There is also a growing consensus that the slowdown is not just cyclical but in part a result of the failure of governments, including Victoria's, to reinvest reform bonuses in reform.

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Submission to the Inquiry into the Broadcasting Services Amendment (Media Ownership) Bill 2006

Submission

SETTING THE AIM OF MEDIA REFORM

Reform to the regulatory framework of the Australian media should be unambiguously directed towards liberalisation of the sector.

It is important to place the relatively recent, and highly publicised changes in production, distribution and consumption of media made possible by communications technology in a context of long term and continuous radical media change.  The table opposite illustrates the vast changes that have occurred since the 1970s.

Media Environment Circa 1970 ⁽¹⁾

Product or content	Distribution mechanism	Receiving or display device	Personal storage tools
Television programming	Broadcast TV stations	TV sets	None
Radio programming	AM Broadcast radio stations	Radios, Stereos	None
Print news & literature	Newspapers & Magazine delivery	Bound newsprint, Books	Books, personal library
Advertising	TV, Radio, Mail, Magazines	Everything	None
Movies	Cinemas, Broadcast TV	Movie theatre, TV set	None
Music	Radio, Records	Radio, Stereo	Records
Telecommunications	Phone Networks	Telephones	None
Photography	Cameras	Print film	Film, Prints

Media Environment Circa 2006

Product or content	Distribution mechanism	Receiving or display device	Personal storage tools
Television programming	Broadcast TV stations, Cable, Satellite, Internet, VHS tapes, DVD discs	TV sets, Computer monitor, Personal Digital Devices (PDA, mobile telephone, etc.)	Digital Video Recorder (e.g. Foxtel IQ), VCRs, DVDs, Computer discs and hard drives
Cable programming	Cable, Internet, VHS tapes, DVD discss	TV Sets, Computer Monitor, Personal Digital Devices	Digital Video Recorder, VCRs, DVDs, Computer discs and hard drives
Radio programming	AM and FM Broadcast Radio, Satellite Radio, Internet	Home & Car Radios, Stereos, Personal Digital Devices (Walkman, Mobile phone), Internet	CDs, tapes, Personal Digital Devices, computer discs and hard drives
Print news & literature	Newspaper & Magazine Delivery, Internet, Software	Bound newsprint, Books, PCs, Internet websites, Personal Digital Devices (BlackBerrys)	Books, Personal Library, Personal Digital Devices, Computer discs and hard drives, Printers
Advertising	TV, Radio, Mail, Magazines, Cable, Satellite, Cell Phones, E-mail	Almost anything	Rarely stored
Movies	Cinemas, Broadcast TV, Cable, Satellite, Internet (e.g. Reeltime, iTunes), Tapes, DVDs, Camcorders, Peer-to-peer Networks	Movie Theater, TV Set, Computer Monitor, Personal Digital Devices	VCRs, DVDs, Computer discs and hard drives
Music	Radio, CDs, Websites, Peer-to-Peer Networks, Online music services (e.g. iTunes)	Radio, Stereo, Personal Digital Devices (MP3 players)	MP3s, CDs, Tapes, Personal Digital Devices, Computer discs and hard drives
Telecommunications	Phone Networks, Cellular Networks, Internet Telephony, IM	Telephones, Cell Phones, Internet Phones, Personal Digital Devices	Voice Mail, Personal Digital Devices
Internet Content & Services (+ email)	Phone Networks, Cable Networks, Wireless Networks, Power Lines, IM	Computer Monitor, Personal Digital Devices, Cell Phones, TV Set	Computer discs and hard drives, Personal Digital Devices
Video games	Video Game Platforms, Computer Software, Websites	TV Set, Computer Monitor, Personal Digital Devices, Cell Phones	CDs / DVDs, Computer discs and hard drives
Photography	Digital Cameras, Cell Phones, Camcorders, Websites	Print film, Computer Monitor, TV set, Personal Digital Devices, Cell Phones	Prints, CDs / DVDs, Memory cards, Computer discs and hard drives, Printers

NOTE:  "Personal Digital Devices" refers to a broad category of handheld devices such as pagers, Palm Pilots, BlackBerrys, MP3 players, cassette and CD players, DVD players, and hybrid cell phone devices

Technological and commercial innovation have provided Australians with a multitude of choice over the content we consume, the way we receive and display it, and our capacity to store it for future consumption.  Not only this, but the cost of production has rapidly dropped for seemingly mature industries like print, which has allowed niche and specialist publications to flourish.  Never before have Australians had access to so much information packaged in so many formats.

Many more services, like digital radio, are slated to appear in Australia in the next few years.  Others, like digital download services for films and television, are at embryonic phases but promise to make their full significance felt in the near future.

These massive changes have occurred because of innovative and entrepreneurial companies predicting and responding to consumer demand.  These companies have utilised emerging technologies to bring new products to the market.  As a result, both the quantity -- and the quality -- of the media we consume everyday is richer.

This has come about despite the Australian government's historic ambivalence towards new communications technologies.  Many new technological developments have been needlessly delayed by regulatory restrictions and government reluctance to allow their introduction.  Franco Papandrea nominates three major examples of "the disgraceful record of attempts by policymakers and regulators to burden major development initiatives with ill-conceived and inefficient schemes":  the FM radio decision which was not reached until 1974, Subscription television's delayed introduction until 1994, with advertising restrictions until 1997, and the current digital television transition. ⁽²⁾

It is our position that government is an inappropriate body to manage the introduction of new and future media services, and that any attempt to do so will needlessly hold back uptake.  Furthermore, attempts to pursue peripheral policy goals like universal access and cultural development by enforcing new regulatory restrictions will needlessly retard development in the delivery of new services.

These changes have undermined the monopolistic aspects that might have previously been said to have been in place.  As almost anyone in Australia can access media from anywhere in the world, a much wider variety of print, audio and visual entertainment than ever before, and has new forms of local and national media, many of the justifications of strict media regulations are eroded.

Finally, while the media is an important sector of the economy, no one medium -- radio, television, and the internet, for example -- is particularly unique and deserving of medium-specific regulation.  The degree of substitutability between formats is only determined by individual consumers' subjective preferences, and attempts to discern the most "important" or "influential" medium, for whatever policy purpose, is futile.

The goal of the government should be the steady liberalisation of regulations affecting the media.  It is within this framework that we approach the Government's media reform package.

BROADCASTING LEGISLATION AMENDMENT
(DIGITAL TELEVISION) BILL 2006

DIGITAL MULTI-CHANNELLING

We have had a long history arguing for the release of regulations on the introduction of digital television in Australia. ⁽³⁾  Given the government's policy aim of encouraging consumers to switch over to digital broadcasting, many of the policy measures, particularly the relaxations of restrictions on multi-channelling, will certainly provide much needed incentives to consumers to migrate to digital.

Alterations to the current set of regulations on digital broadcasting suffers from the same problem that much of the media reform package suffers from:  asymmetrical regulatory burdens which fall harder upon some industry participants more than others.  These unbalanced regulations artificially distort the investment and popularity of certain formats which may not be as appealing in a free market for media.  The government must be cognizant of the fact that any attempt to increase the popularity of a certain media format -- in this case digital television -- will harm the financial viability of an alternative format -- for instance, subscription television -- given the large degree of substitutability between them.

If the government had allowed operators a free market in which to provide these services, then this would not be of any policy concern.  But as all media operators are subject to a heavy regulatory burden -- usually burdens unique to their specific medium or technologies -- or have been given economic protection (or whose competitors have been given protection), this normally natural process of creative destruction is perverted.

While there appears to be no easy way out of this regulatory morass, it would be valuable for every deregulatory measure to be accompanied with similar deregulations across the industry.

ANTI-SIPHONING

Unfortunately the government has chosen to continue the regressive, quasi-egalitarian, anti-siphoning regime and to extend it, at least in part, to the multi-channelling reforms.  By targeting much of Australia's most popular content, anti-siphoning laws restrict the capacity for producers to attract consumers to new technologies.

There is a case to be made that consumers and producers have invested in television equipment on the basis that the most popular programming -- in this case, the government has nominated sports programming -- will be available without further investment.  This is an unfortunate legacy of media regulation in Australia, as the government protected FTA broadcasters against competition.

However, given the equal capacity for FTA broadcasters to bid on sporting rights, as well as the reforms in this package which benefit FTA broadcasters at the expense of other media entities, the justification of anti-siphoning laws is undermined.  Contrary to the thrust of government policy over the last century, consumers do not have a "right" to consumer certain forms of entertainment for free.

BROADCASTING SERVICES AMENDMENT
(MEDIA OWNERSHIP) BILL 2006

FOREIGN OWNERSHIP

The removal of foreign ownership restrictions is very welcome.  However, it should be noted that the desirability of the Australian media for foreign investors will be far greater if and when the sector is liberalised.  As News Limited rightly notes, ⁽⁴⁾ the artificially finite pool of broadcast media licences in Australia distorts investment decisions across all media sectors.

CROSS-MEDIA OWNERSHIP AND OWNERSHIP RESTRICTIONS

We have stated its case against the retention of ownership restrictions previously. ⁽⁵⁾  If the policy aim of the government is to maintain and encourage diversity of content and opinion, ownership restrictions are a remarkably indirect way of doing so.  Concentration of ownership can also accompany greater diversity of content.  Similarly, diversity of opinion is not contingent on diversity of ownership -- the conspiratorial Chomskyite model of a propaganda-spouting media cartel notwithstanding.

The history of objectivity in the news media is not as linear as critics suggest.  "Independent" journalism -- that is, journalism independent of any formal affiliation with a political party or umbrella organisation -- only came into being in the last quarter of the 19th century. ⁽⁶⁾  Bias and objectivity have arisen from economic and technological forces, which have made some models of news production more profitable than others.  Still more models are being made possible as prosperity grows.  In 2006, questions of preserving the innocence of an objective media through rigid ownership regulation need to be re-examined.

Like any other market, producers of media content and the delivery mechanisms they rely upon prosper and fail upon the whim of a fickle consumer.  It would be more valuable for regulators and legislators to view the media as a market responsive to consumer demand rather than an influential sector independent of the rest of society.

PUBLIC DISCLOSURE OF CROSS-HELD ENTITIES

The introduction of a disclosure regime upon commercial television and radio broadcasters places asymmetrical regulation upon some forms of media and not others.

As reputation is often a key part of the news product supplied for consumers, media organisations have a vested interest in maintaining a level of trust.  If viewers -- and rival companies -- feel that that trust is being betrayed, it will have negative financial consequences.  A reliance on feel-good regulations to "provid[e] comfort as to the impact of media ownership reforms on the accuracy of news and information" ⁽⁷⁾ (emphasis added) is poor public policy.

LOCALISM

The belief in a decline of localism in regional Australian media is a microcosm of the cultural critique of globalisation -- larger, commercial entities utilising economies of scale can under-provide, or even replace cultures unique to small regions.  Putting aside questions of what is the "optimal" provision of local content and culture, this argument is as invalid as the broader critique against globalisation.

In many circumstances consumers prefer national, or even international, content to local.  Often the efficiencies commanded by a larger consumer base allow higher production values and better quality and quantity of news gathering.  While many comments in the Communications Law Centre's Content Consolidation and Clout ⁽⁸⁾ (cited in the Bill's explanatory memorandum) display dissatisfaction with the volume of local content, it is notable that a number of those interviewed appear to prefer national products to their local ones.

Given this, and given the near guaranteed dissatisfaction with the results of a regulatory framework that restricts entry to television and radio markets needlessly, it is entirely possible that the current mix of local and national content in regional markets reflect, at least in part, consumer demand.  If consumers demand more local media than is being provided by existing providers, their failure to do so would present an opportunity for entrepreneurs to provide it.  As local content can be provided upon any number of the delivery mechanisms listed above, even with the existing restriction on broadcast entry, producers can still strive to meet this demand.

If entrepreneurs have not attempted to meet this assumed demand, then the assumption that the demand exists begs re-examination before regulation is called for.

Anecdotal impressions are insufficient.  Despite the perceptions of many interviewed in Content Consolidation and Clout, as the Government notes, the 2002 ABA investigation into local content on regional television found that the quantity of local news broadcast had increased rather than decreased over the past decade.

However, it would not be unexpected if, as the available of alternative news sources such as those made possible by the internet increase in popularity in regional markets, the amount of local news broadcast on capital intensive broadcast television and radio decreased.  This would not reflect some form of market failure, but instead a reallocation of resources to where they can be used more efficiently.

The Bill's proposals to compel Local Content Plans upon regional radio licences changing ownership represents a further regulatory imposition upon a sector already heavily regulated, and is incompatible with liberalisation.

Consumers may not prefer local content.

NEW SERVICES IN DIGITAL SPECTRUM

The release of two new channels for television broadcasting is welcome, and hopefully reflects an understanding that the scarcity rationale for spectrum regulation, which states that the broadcast requires regulation because radio spectrum is scarce, is no longer valid. ⁽⁹⁾  If the government is to be consistent with that diagnosis, then presumably further allocations are to follow across much of the spectrum.  (Although the provision for the Minister to veto future applications to utilise spectrum outside the Broadcasting Services Band for television broadcasting does not inspire confidence.)

There appear to be no compelling justification for the content restrictions being placed upon these two new channels.  The designation of Channel A as a free-to-air station, but not one which resembles "traditional" commercial television, and Channel B as a television service isolated to mobile devices, illustrates clearly that the government has not learnt the lessons of a century of government failure in introducing new media technologies.  A cursory glance at communications history shows the folly of governments which attempt to second guess consumer preferences and the capabilities of new technologies -- not least the most obvious example of the Australian government's digital television debacle.

For similar reasons, the ownership of the new television licences should not be restricted.

Rather than dictating the uses of the newly released spectrum, the Government would be better off leaving these decisions to the market.

CONCLUSION

The Government has been presented with an opportunity to genuinely reform the regressive regulatory framework that the Australian media and communications industry has been burdened with for a century.  While this reform package makes a few minor adjustments, its practical effect is not as large as the public debate has made out.

However, this does not mean that the reforms are without value.  The removal of cross-media ownership regulations -- as absurd an ownership restriction as can be imagined -- is welcome.  The package needs significant revision;  however, the need for reform is clear and should not be abandoned.

RECOMMENDATIONS

• Remove restrictions on Channel A and Channel B television licences.
• Do not impose Local Content Plans on merged local broadcasters.  The hypothetical demand for "localism" does not prove the need for regulation.
• Ownership restrictions should be more vigorously liberalised, and
• The removal of foreign ownership restrictions should be welcomed
• The digital television transition should progress immediately to regulatory harmonisation with other services.
• Anti-siphoning needs to be immediately abolished.

---

REFERENCES

1.  Adapted from Adam D. Thierer, Media Myths, Making Sense of the Debate Over Media Ownership. p24

2.  Richard J. Wood, Broadcasting Planning and Entrenched Protection of Incumbent Broadcasters, Policy Paper, February 2000

3.  Ibid.;  Submission on the Draft Report of the Productivity Commission's Broadcasting Inquiry, 1999;  Franco Papandrea, Digital Three-Card Trick, Review, 51(1) March 2000;  Submission to Meeting the Digital Challenge, 2006

4.  News Limited submission to the Discussion Paper on Media Reform Options

5.  Submission to Meeting the Digital Challenge Discussion Paper on Media Reform Options

6.  See James T. Hamilton, All the News That's Fit to Sell:  How the market transforms information into news, Princeton University Press, 2004

7.  Broadcasting Services Amendment (Media Ownership) Bill 2006 Explanatory Memorandum, p32

8.  Content Consolidation and Clout:  How will regional Australia be affected by media ownership changes? Communications Law Centre, 2006

9.  For a contemporary criticism of the scarcity rationale, see John W. Berresford, "The Scarcity Rationale For Regulating Traditional Broadcasting:  An Idea Whose Time Has Passed" Federal Communications Commission Media Bureau Staff Research Paper, March 2005

Second-guessers get it wrong

"Public intellectuals" are often pompous, usually wrong, and sometimes dangerous.

Donald Horne, as the inventor of the term "the Lucky Country" was one of Australia's foremost public intellectuals.  His claim, first made in 1964, that "Australia is a lucky country run mainly by second-rate people who share its luck" made his reputation.

The reference to second-rate people (in this case politicians and business and trade union leaders) was a consolation to all of those who thought they could do a better job running the country.  Horne complained that intellectuals didn't have sufficient influence over policy decisions.  "People who might be described as intellectuals are assuming enormous importance almost everywhere in the world except Australia".

Horne never contemplated that we were a lucky country precisely because intellectuals didn't have the same authority in Australia as elsewhere.  Whether Australia in the 1950s and 1960s was as banal and as provincial as Horne made out is debatable.  In any case, he never paused to ask whether anyone wanted the alternative to this "ordinariness" -- which presumably was some sort of European-style riot and revolution.

The Lucky Country was scathing about the management of Australian companies.

"There is still talk of 'free enterprise' in Australia, but to many Australian manufacturers this is just a lesson they have learned off by heart ... Often what it means is that the businessman demands from the government a special protection that will help him continue to survive".  And there was more.  "To many Australian businessmen the way to make money has been to grab some ideas from overseas, rush them into operation, however inefficiently, and then rely on the Tariff Board for protection".  The Tariff Board is gone, but the calls for more industry assistance from government assistance haven't diminished.

According to Horne, policies such as industry protection ultimately led to a "stupid society" which was "not capable of reacting to danger or making its own decisions".  This might be a little harsh, but it's true.  What Horne doesn't admit is that such a condition is the consequence of what happens when intellectuals (or politicians acting under the influence of intellectuals) ignore the market.

Australians have suffered from many policy disasters.  The invention of Canberra in 1908, and the release of cane toads in northern Queensland in 1935 are notable examples.  Less obvious was the inability of Australia's Olympic team to win a gold medal at the 1976 Montreal Olympics.  The resulting national shame prompted the Fraser government to establish the Australian Institute of Sport, and today federal funding of sport is more than a quarter of a billion dollars a year.

On any assessment the worst mistakes are those that came about when intellectuals and governments convinced themselves they knew better than the market.

For instance the Wireless Telegraphy Act of 1905 nationalised the entire electromagnetic spectrum, and ever since communications ministers have been attempting to frustrate free competition in media and telecommunications.

Intellectuals constructed the economic regime that existed in Australia until the 1980s.  The philosopher of liberalism, John Stuart Mill, also supported tariff protection for infant industries, and his arguments were eagerly taken up by journalists and writers in the pre-federation colonies.

The landmark Harvester Judgement in 1907 established the requirement of the basic wage, and Henry Bournes Higgins, the judge who made the decision, was the typical public intellectual of the early 20th century.  Like most intellectuals he had little knowledge of or interest in commercial enterprise.  It was inevitable therefore that when he set the basic wage he didn't investigate whether firms could afford to pay it.

Higgins' industrial relations legacy allowed Horne to produce one of the best lines from The Lucky Country -- "Other countries also get themselves into a mess with the regulation of wages and conditions of labour, but they usually do not set up so many institutions to do it".  The situation hasn't got much better.  With the passage of the Work Choices legislation there will be a record number of federal agencies enquiring into, monitoring and regulating employment arrangements.

If Horne had contemplated the role of public intellectuals in practice, rather than in theory, he would have soon concluded that most interventions into public policy by intellectuals result in disaster.

Attempts to second-guess the outcomes of a free market by intellectuals usually fail -- and attempts by governments to second-guess the market always, in the long run, fail.

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Loving the Corporation

When Peter Drucker died late last year, his reputation as the "father of the modern management" was secure.  Leading business figures such as Jack Welch -- the CEO who led a revolution at the massive GE Corporation -- credited Drucker for the insights behind some of their key business strategies.

In a similar vein, the Editor of Review once introduced an article of Drucker's by calling him "probably the best-known writer in the world on the philosophical and practical aspects of industrial management"

Nothing remarkable there perhaps, except that the year of publication was 1956, highlighting the remarkable productivity and longevity of Drucker's life as the original management guru.

Drucker's 1956 article was called "The Management Horizon", and it looked at the impacts of automation and the challenges this raised for management.

"The Management Horizon" pointed out that automation would not mean mass unemployment -- as many then feared -- but rather a shift in the type of work that people did.  There would be more technicians required to manage the new machines, and more managers to organise the work flow.  The workers in automated factories would need higher levels of education and training.  No longer unskilled factory fodder they would become a new type of knowledge worker, and must be free to do their jobs properly.  Innovation continues to drive wealth creation, but in a corporation it is created by systemic management processes.  Fundamentally, automation of production would drive the transition to a knowledge society.

Fifty years after publication of that article, it is perhaps time to resurrect our understanding of Drucker's philosophical stance and how it informed his practical advice.  This can tell us much about both the efficiency and the legitimacy of the free enterprise system.

Drucker was interested in the potential of the Corporation, because he shared the common belief that modernity had shattered the traditional social structures, but he resisted the so-called "progressive" assumption that the State must expand to fill the empty space.  This approach he maintained, was doomed to failure.

His first big idea was the "emergence of Big Business ... as a social reality".  He called this "the most important event in the recent social history of the Western World".  Corporations don't just manage economic transactions;  they have become the pre-eminent institution of society itself.  A corporation -- like any powerful institution -- should constantly renew its legitimacy by establishing and explaining its reason for being, one aligned with the objectives of the broader society.  The rise of the corporation also meant that the leading social type was now the professional manager, who had to take a leading role.

This was a social and political view of modern free enterprise and its purpose, and Drucker saw no need to evoke the so-called "profit motive" as taught in schools of economics.  Unlike the left, he had no issue with profit per se.  "Even if corporations were run by angels", he said "they would still need to make a profit to survive and prosper".  But profit was the outcome rather than the objective of rational, purposeful activity.

Drucker wasn't much interested in debates about what Government should do to manage the economy and deliver services, because they missed the point that there was little that Government could do without stuffing it up.  He was also beginning to see the potential of the third or voluntary sector to make a comeback, if only the State would get out of the road.  "Most post World War II social government programs," he said, "have been disasters".  Governments rarely abandon any activity no matter how bad the failure, as something like -- say -- the provision of electricity assumes a "moral" rather than an economic dimension, and rational resource allocation goes out the window.

Perhaps in our post-Thatcher world complete with the Third Way, we might see Drucker's critique of State activity as an unremarkable sentiment, but in 1956 it took a certain intellectual fortitude to maintain that position.  The Cold War was in full swing and even many defenders of freedom believed deep down that a centrally planned economy was the superior model in strictly economic terms.  Ever since Lincoln Steffens returned from the Soviet Union in 1921 and declared "I have seen the future and it works," an endless stream of fellow travelers and useful idiots helped promote that falsehood.

In the West it wasn't always the principles behind the battling ideologies which were winning the hearts and minds, but rather expectations of who might win the industrial race.  Drucker was trying to establish that capitalism could be managed to achieve superior economic outcomes, while also achieving social objectives and maintaining the dignity of the worker.

When in 1956 Nikita Khrushchev famously and furiously banged his shoe on the desk at the UN and told Harold Macmillan "We will bury you", the fear in the West was as much about being overrun economically as it was about a military challenge.

Drucker had no such fear.  At the age of 93 he maintained the position he had reached when he left behind Nazi Germany as a young man to head for the USA:  "I am for the free market," he said, "even though it doesn't work too well, nothing else works at all".

Only the market can properly reshape the media

Robert Menzies despised television and stated privately that he hoped it would not be introduced during his government.  Does Communications Minister Helen Coonan have a similar attitude towards the next radical media change?

Given the opportunity to robustly liberalise the regulatory environment that the Australian media has been subject to for over a century, the government has declined to act.

There are big entrenched media companies which have made large investment decisions based on the current framework, and the political reality is that genuine deregulation would have to be a slow and careful process.  But instead of attempting to unwind our Byzantine media regulations, at whatever pace, the government's media reforms do nothing more than add more rope.

For instance, the proposed auction of two additional swathes of spectrum should have been greeted with enthusiasm.  Entrepreneurial companies which had won these new licences could have used them to deliver whatever services they perceived to be in demand.

Instead, the government has chosen to dictate to potential users the terms and conditions of their licences, terms and conditions which will not apply to existing users of broadcast spectrum.  This "command and control" approach to economic management has been discredited in both theory and practise.  It's ill-suited to managing a limited and static array of services, and it's doubly unsuited to manage the fast paced and high-risk communications and media industry.

It does, however, allow the government to claim credit, as the Communications Minister did this week, for any potential new services delivered within their strict framework.  What Coonan fails to mention is the services that the government will not allow us to receive.  To this end the government has invented two terms, "narrowcasting" and "datacasting", defined not by what they can do, but what they cannot.

One of the channels to be auctioned is allowed to broadcast free-to-air, but not replicate traditional TV services.  Why not?

The government is not a suitable body to predict the possibilities of and the demand for newer forms of media.  Only a market unhindered by restriction is capable of doing so with any success.

Similar objections can be raised to the government's proposal to replace one elaborate formula for media ownership restriction within a market with another elaborate formula.  While touted as a grand liberalisation of ownership regulations, they are in fact, little more than minor adjustments.  For advocates of genuine deregulation throughout the economy, this should be a disappointment.

Many critics of the reform proposals hinge their arguments upon the potential lessening of diversity that could be the result of consolidation within the industry.

It is absurd to argue that media diversity will decline without stringent checks on the ownership of broadcast media outlets.  In no era in history has this been less true.  While the internet has been justifiably praised in bringing alternative viewpoints and independent media outlets to the home, rapid technological improvements in seemingly mature industries like printing have increased in the last few decades the volume of magazines, newspapers and printed material manyfold.

Anybody who doubts that minority or niche voices will not get heard after genuine media reforms should consult the vast ethnic press, made possible by dramatically lower print production costs.

In fact, mergers between media organisations could have tangible benefits.  A fully vertically integrated corporation, able to command world-wide news gathering and content production, may be able to produce a far better and diverse range of services.

The massive competitive pressure exerted upon existing media companies from the proliferating new media compels dramatic change, even in such seemingly dominant organisations as News Ltd.  Rupert Murdoch's recent acquisition of the social networking website MySpace is a case in point.

These gains are not guaranteed, however.  The US market, after a rush of media consolidation in the 1990s as companies rushed to prepare for the digital era, has been beset by a series of failures and divestitures.  AOL Time Warner has been shedding assets now that the financial gains expected from its highly publicised merger have not appeared.  Viacom, Disney, Clear Channel, Knight-Ridder and many others have downsized or spun off companies in the last few years.

But these companies need the freedom to experiment, and fail, with new business models.

New media organisations are popular and influential, and will become more so.  Governments of all stripes across the world are struggling to predict its significance.  That is understandable -- nobody has any inkling of how these changes will pan out.

But instead of indulging itself in public consultations and submission processes, commissioning reports and carefully releasing sections of the spectrum with highly prescriptive regulations, the government would be far better to leave the future of the Australian media up to the market.

There is no convincing reason why entrepreneurs, allowed to experiment with new technologies and business models, cannot amply deliver the services that Australian consumers demand now and into the future.

Crikey! Talk about one-off

The death of the Crocodile Hunger, Steve Irwin, from a sting-ray barb in Far North Queensland last week has triggered a remarkable outpouring of grief across Australia and overseas.

This larger than life national identity was a passionate conservationist, and nobody could have ever accused him of being an armchair environmentalist.

As feminist and author Germaine Greer wrote:  "There was no habitat, no matter how fragile or finely balanced, that Irwin hesitated to barge into, trumpeting his wonder and amazement to the skies".

He certainly liked to get up close and personal with wild animals.

He had apparently at various times been kicked by a cassowary, groped by a baby orangutan and learnt how to wrestle crocodiles when he took part in a Queensland government funded crocodile relocation program.

He only seemed to hold a grudge against parrots -- complaining that they tended to go for his nose.

This hands-on approach won him international recognition and acclaim, and it got people interested in wildlife and conservation.

Irwin also did a lot of good work behind the scenes with an animal hospital at his sunshine coast zoo, caring for animals and rearing them for people to look at and photograph.  But he wasn't a fan of eating our native fauna;  Steve Irwin was no farmer.

In January 2002, he protested against kangaroo being on the menu for the Commonwealth Heads of Government Meeting (CHOGM) at Coolum on the Sunshine coast.

He got the menu changed by clutching a Joey on national television and telling everybody that it would be un-Australian for the Queen to eat our precious native animals.

Steve Irwin also features on the Vegetarians International Voice for Animals (VIVA) website telling us that everybody can make a massive difference to global conservation by simply never purchasing wildlife -- including kangaroo -- products.

VIVA ran a campaign against British-born soccer hero, David Beckham, and his love affair with soccer boots made from kangaroo leather and eventually the soccer star switched to synthetic boots.

Irwin was also at odds with the Northern Territory Government and its plans to allow the big game hunting of crocodiles.  He only believed in shooting animals with cameras.

At Irwin's advice, the Federal Government has repeatedly refused to approve the export of crocodile skins and, in this way, he thwarted the Northern Territory's plans to attack hunters from Europe and the US.

This somewhat romantic approach to wildlife conservation is increasingly opposed by some experts, who claim the best chance of saving many animal species is by legalising and regulating trade in accordance with strict quota systems.

There was nothing predictable or conventional about The Crocodile Hunter.

Born in Melbourne, he lived at a zoo in Queensland and traveled the world making documentaries about the animals he loved.

He was often at odds with the experts and more than once in trouble with the law for getting too close to animals.

A favourite memory of Irwin is of him on his belly sliding down an icy slope in Antarctica with penguins.  Even then -- in the black wetsuit in the freezing cold -- he had his arms and mouth half open in anticipation of something.  Crikey!  It would have been cold.

His enthusiastic, close and personal approach got many people interested in saving the world's unique animals and his documentaries on wild animals will continue to amaze and amuse us.

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