Leaders locked in the past

"You Australians are smart people.  We can't understand why you still think you need to make things".  So said a senior bureaucrat in the Commerce, Industry and Technology Bureau of the Hong Kong government.  It is a neat summary of the different world views held by the policy elites of Hong Kong and Australia.

This opinion was expressed just a few months before Kevin Rudd's immortal commitment to the Labor national conference in April.  "I don't want to be a prime minister of a country that doesn't make things any more".

Presumably the Labor leader didn't ask the opinion of the farmers or miners or consumers who end up paying the price for these sorts of promises.  No one at the ALP conference announced that "I don't want to live in a country that forces me to pay for the inefficiencies of its manufacturing sector".  Rudd demonstrated that quaint attachment to the belief in the necessity of making things that has been possessed by every politician who has ever got their hands on industry policy.  The element of reality that's missing is the cost of converting Australia into a nation of cobblers and tinkers.

There's a fair degree of truth in the statement that Australians are smart people.  By and large we are.  The problem is that unless we are forced to be smart we won't be.  Tariff protection and centralised wage fixation didn't do much to encourage Australian employers or employees to be smart.

This Sunday is the 10th anniversary of the handover of Hong Kong to mainland China, and just a few days later the Asian financial contagion began.  These serve as reminders that few economies have had to confront the sorts of challenges faced by Hong Kong.  Nothing concentrates the mind like a crisis.  In four days in October 1997 the Hang Seng Index lost a quarter of its value, while over the space of a few months property prices in the territory halved.

As significant as was the financial collapse of 1997, a far greater threat to Hong Kong's prosperity was posed by changes that had been occurring on its doorstep, namely the rise of low-cost manufacturing operations in China.

Although the impact on Hong Kong of a new factory over the Chinese border in Guandong making plastic flowers might not be as immediately obvious as a disintegrating exchange rate, the second development can be more easily managed than the first.

Hong Kong's response to the growth of Chinese manufacturing was not based on sentiment.  Few places in the world owed more to the things they made than did Hong Kong.  After World War II, manufacturing had lifted Hong Kong from poverty, but its citizens were willing to forgo their attachment to manufacturing in exchange for a better economic future

Instead of committing themselves to a race they knew they could not win, Hong Kong's business and political elites were smart.  They turned their attention to the economic activity in which they had a competitive advantage.  Those advantages were things such as the quality of its workforce, the territory's legal system and the absence of corruption (at least relative to many other countries in the region).  These are features Hong Kong continues to benefit from as it faces off the challenge from Shanghai to make itself the region's financial centre.

Hong Kong learned to stop worrying about making things and started worrying about how it would provide the services needed to those who did make things.  In the end this wasn't too difficult.  To most people in Hong Kong, being a lawyer, accountant, insurance broker or engineer was preferable to working on a factory floor.  Hong Kong now has a higher per capita gross domestic product than Australia, and the territory has no natural resources to speak of.

In this country, sentiment still pervades economic policy making.  We continue to believe that participation in the manufacturing process is somehow superior to growing something or mining something or providing a service.  Politicians ignore the reality that in Australia in recent years the annual rate of growth in communication, property and business services is more than twice that of manufacturing.

In that same speech to the ALP conference Rudd said, "the future I see for Australia is one fundamentally shaped by the rise of China and the rise of India".  The question is whether our response to the rise of China and India is going to be stupid or smart.

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On telecoms, regulator chuting blanks

Far from a success of public policy, the $1 billion rural broadband subsidy won by Optus and Elders demonstrates once again the failure of the competition regulation.

Ever since Optus and Telstra rolled out similar cable networks in the mid-1990s, wasteful duplication has been the bogyman of telecommunications investment.  Companies wield the term like a weapon when they want to avoid having to invest in their own infrastructure and, unfortunately, politicians listen.

This stands in contrast to the duplicated roll-out of Safeway/ Coles supermarkets and the rival brand petrol stations located next to each other.  Duplication in these cases is applauded as competition.

The roll-out of cable was one in which two private businesses went head-on for customers -- just as we see competing supermarkets at every shopping centre and bowsers along every major strip.  This is genuine competition and investment with shareholders' funds.

By contrast, the latest Optus proposal to roll out broadband to rural areas is one that will be bankrolled by the taxpayer.

Broadband policy has, in the past few months, become highly politicised.  For people who use the internet to watch high-definition movies, the ALP's $4.7 billion fibre proposal would bring all their Christmases at once.  But the cost to the taxpayer is daunting, especially considering that a private company, Telstra, is desperate to pay for the network itself.

The Coalition's plan is an attempt to cobble together the wide variety of longstanding subsidies to rural broadband users.  Communications Minister Helen Coonan has put herself into the uncomfortable position of defending the merits of specific technologies -- the sort of "winner picking" that has long discredited national industry policies.

But broadband roll-out in Australia has been absurdist theatre since well before this year.  And the Optus plan brings this theatre into sharp relief.

Most of the attention has been focused on choice of technology.  Telstra claims the WiMAX standard won't work as advertised.  But, while WiMAX will provide the Optus/ Elders network with a link to the most remote Australians, much of their plan rests on the wireline technology ADSL2+, an upgrade of the widely used ADSL.

In contrast to the cable roll-out, or competition between supermarkets, this is taxpayer-funded duplication.  Telstra, with its own shareholders' money, already has installed its ADSL2+ network in exchanges around the country.

Telstra will not switch its network in areas in which it is the only service available.  For instance, in Tasmania Telstra has installed ADSL2+ in more than 100 exchanges.  But only three of these have been switched on.  This scenario is repeated across the country.

To Telstra, switching on the network risks its appropriation by the ACCC.  The regulator would force it to be provided to other businesses at an artificially low price.

There are several competing telecommunications networks in Australia, wireline and wireless, but the ACCC sees the spectre of monopoly and the possibility of regulation everywhere.

Expropriating the value for innovatory business activity or new investment is a sure-fire way of stopping such activity.

Australia is facing deficiencies in infrastructure development in areas beyond telecommunications -- rail and port services being the other hot spots.  In all cases the investment shortfall can be traced back to regulatory impediments.

This is the outcome of a flawed competition law, compounded by poor administration of the law both politically and bureaucratically.

The answer is radical reform.  The existing regulatory framework punishes entrepreneurial investments that bring a new or improved service.

We don't regulate manufacturing plants or processes in this way.  We don't regulate such innovations in software.  We resist the temptation in those areas for very good reasons -- regulating them would grind down the economy's productivity.

We should cease regulating new investments in infrastructure unless we want to see the economy falling behind in technology and capacity.

In telecommunications this is extremely important -- the pace of technological change far outstrips the plodding feet of the regulator.

Today the conversation is about WiMAX and fibre to the node, but when the next, inevitable, upgrade is necessary, it will again be regulation that is holding investment back.

Submission to the Senate Inquiry into the Workplace Relations Amendment Bill 2007

Submission

INTRODUCTION

The Bill has to be considered within the context of the workplace relations reforms that came into effect in March 2006 under the WorkChoices legislation.

SUMMARY

Specifically the Bill reflects and responds to the difficulties of introducing flexibility into employment relations while the legal fact of employment continues to be one in which employers have rights under contract over and above that of employees.  That is, employers have contractual rights to direct, control, and require things of employees whereas employees cannot require similar things of employers.  (Further explanation is below at "The Policy Hole".)

WorkChoices:

• Transferred the administrative processes of securing employee protections from the Australian Industrial Relations Commission and unions to new government bureaucracies (Office of Employee Advocate and Office of Workplace Services).
• Allowed employers and employees to alter their work arrangements on an individual basis subject to statutory protections administered by the OEA and the OWS.
• Retained the legal right of employers to "require" employees to do things as directed but which had the effect of making legal, potential reductions in employee take home pay when compared to pre-WorkChoices laws.  This occurred as a result of a flaw in the statutory design of WorkChoices.

The flaw in the legislation occurred because the right of the employer to direct the employee effectively extended to a right to reduce employee income in certain circumstances.  The Bill targets the elimination of this statutory flaw by ensuring that where an employee is "required" to perform duties the employee cannot be paid less than they would have under the pre-WorkChoices laws.

The need to introduce the Bill demonstrates that the legal nature of employment is not an easy fit with the objective of flexibility in labour.  The community reaction against WorkChoices is largely the result of this mismatch between employment and flexibility.  The political campaign against WorkChoices was built upon the mismatch.

OVERVIEW

WorkChoices has been a politically contentious reform to workplace relations in Australia primarily because the Australian union movement has run a successful marketing campaign against the reforms.  It is understandable that unions have run this campaign because the reforms substantially removed well entrenched union legal authority to influence, control and often dictate the terms of employment contracts between employers and employees.

Until March 2006 "employee protection" was delivered primarily through the instrument of the Industrial Relations Commission in which unions were effectively an institutional arm of government.  As of March 2006 the position of the AIRC was significantly diminished as the legal authority for administering employee protection.  With the diminishing of IRC power unions substantially lost their institutional position as a quasi arm of government.

NEW SYSTEM PERFORMANCE

What has generally not been well stated in the public debate is that the process of securing employee protections was not abandoned.  Unions have portrayed the March 06 reforms as creating a "free for all for employers".  This is only a part truth.  The part that is not true relates to the administration of employee protection.

From March 2006 the systems for ensuring employee protections were substantially transferred from the IRC and unions to the Federal bureaucracy under the Office of Workplace Services (OWS) and the Office of the Employee Advocate (OEA).  The OEA and OWS combined, acted as both policemen and prosecutor seeking to discover employee exploitation and to rectify it.

Initially the OEA and OWS suffered from start up problems related to the building of infrastructure, training of staff and establishment of systems.  However as their operations settled in, they have demonstrated a robustness in undertaking the employee protection task.  Both the OEA and OWS appeared to have been significantly more efficient and faster at protecting employee rights than under the old system.

The old system was excessively legalistic, process driven and was slow and inefficient in securing employee rights.  The OWS by comparison has been quick to prosecute employers underpaying employees and to recover money for employees.  Certainly it appears to have been much more effective in this regard that the old system which had a priority of securing union involvement in processes rather than achieving the practical outcome of recovering money for underpaid employees.

The OEA has proven to be significantly more efficient and faster at processing, correcting and approving industrial instruments that was the old system.  The old system took many months and frequently years to approve relatively small numbers of collective agreements in comparison to the tens of thousands of individual agreements the OEA has been required to process.  The transaction cost benefits to businesses, workers and the community have been significant although difficult to quantify.  A comparative study of this would be of value.

Our observation is that the OWS and OEA have performed a competent job given the time and organizational constraints under which they have been working in the early stages of implementing and creating the administrative processes for the new system.

THE POLICY HOLE

However the new system had a glaring hole because it delivered to employers the legal right to reduce overall employee income.  This is better understood when the legal, contractual nature of employment is comprehended.

Employment is a legal contract of subservience.  It delivers to the employer the right to "require" the employee to do certain things.  The language of industrial legislation and instruments is couched in this terminology.  A most obvious example of this employer "right" is in the requirement for overtime.  An employer may "require" an employee to work overtime, presumably whether the employee wants to work the overtime or not.

The subservient contractual nature of employment contrasts glaringly with normal contractual relationships and transactions in the community.  By their nature commercial contracts do not for example deliver to a seller the "right" to "require" a potential buyer to buy.  Normal, everyday commercial transactions operate exclusively on the basis of offer and acceptance of contract a situation which underpins much of the freedom we enjoy in a free society.  However we tend to accept this freedom of commercial transaction without thinking about it.

By comparison the employment contract only has offer and acceptance of contract operating at the point of entering the contract.  However once entered, offer and acceptance of contract ceases to exist as a legal aspect of the employment contract.  As a consequence the employment contract enjoys less moral authority than the commercial contract.  This lower moral authority emboldens union and other campaigns against work reform processes that attempt to introduce flexibility into employment.

It may be that the behaviour of employers and employees in the workplace may or may not reflect the legal nature of employment.  Employers may have a legal right to "require" employees to do certain things but may in practice give employees a choice to reject requests to do certain things.  However this is not relevant to legislative design.  Legislation is concerned with one thing only;  legality.

This is where WorkChoices lost much of its moral positioning at the point of its introduction.  It retained the employers' right to direct, and to require employees to work additional hours and public holidays and so on but delivered to employers the legal right not to compensate employees for the requirement.  That is, the legal right to remuneration levels available under the old system, were stripped from employees under WorkChoices without employees having the legal right to reject remuneration stripping.

It is probably true however that employers have not generally acted on this new power under WorkChoices due to their own ethical considerations and the need to do the right thing by valued employees in a tight and tightening labour market.

However it would also appear true that small numbers of employers have sought to utilize this new power and have done so legally.  But in exercising this legal right they have breached ethical standards expected in the community of employers.

Even though the numbers of such employers are probably few, the issue from the community perspective has been that this hole in the WorkChoices laws facilitated unethical employer behaviour.  This has been a primary reason why the Federal government has suffered political damage as a result of the WorkChoices laws.

This Bill before the Senate seeks to address this situation by making illegal, employers lowering of employee remuneration in comparison to what an employee may have received before WorkChoices.

THE SPECIFICS OF THE BILL

The Bill is some 80 pages in length with about 30 pages relating to the issue of employee remuneration.  (The balance relates to the renaming of the OWS and OEA)

A key clause is on page 15 the "Fairness Test" (Clause 346M) and has about 7 sub clauses.  It requires that total remuneration cannot drop below protected award conditions assessed on:

• Monetary and non monetary compensation
• Taking into account
• personal and family circumstances of employees
• subject to
• public interest considerations
• and having regard to
• the industry, location, economic and employment circumstances of individual cases;  and
• whether a business may be in a short term "crisis".

The Bill is predicated on employment contract terminology;  "Where an employer requires an employee…" and so on.  An expanded and re-badged Federal bureaucracy will be charged with checking all industrial instruments to ensure underpayment does not occur.

COMMENTS ON THE BILL

The Bill will add considerable complexity and uncertainty to the task of checking industrial instruments by the bureaucracy and by employers seeking to comply with the Bill.  But this is the trade-off resulting from an employment regulation regime that seeks to facilitate flexibility in work arrangements but which is still captured by the legal inequality contained within the employment contract.

Inevitably the Workplace Relations Act is a model of employment regulation that seeks to anticipate and control every aspect of the employment contractual relationship.  Hence it is written as an instruction manual to the policing bureaucracy.  Further, it remains heavily reliant on as yet unidentified regulations.  This means that the Act is not a "stand alone" document readily assessable to the layperson.

But within this framework the Bill is necessary.  If a person has a contract (whether commercial or employment) and there are terms in the contract that deliver benefits and rights to that person, the government should not sanction the right of any entity to take away previously secure rights without some form of compensation being paid to the other person.  If there was no right to compensation the government would effectively be condoning the theft of a property right.  Any government that does this deserves to experience community and political backlash.  On this issue the union campaign against WorkChoices had a strong moral basis.

But does this mean that the workplace legislative reforms of March 2006 should not have occurred?  The answer is no!

The prior employment regulation processes operating through the AIRC and using unions as an instrument of government, had become principally focused on the maintenance of itself, was cumbersome, ponderous and expensive in it's legalism and encouraged relationships in the workplace that resembled tribal warfare rather than relationships of maturity between adults.  The system favoured the cult of collectivism over the morality of individualism.

Systems that encourage individual relationships between adults in the workplace is the direction in which labour regulation must head.  The reforms of March 2006 were an important step in this direction but were flawed in enabling the theft of contractual employee rights.  This Bill before the Senate seeks to correct that flaw.

However, even with the correction in the flaw, the Workplace Relations Act suffers under the burden of the legal inequality inherent in the employment contract.  Unfortunately all employment regulation, however designed suffers from this burden.  It is one of the great dilemmas of employment regulation.

The Workplace Relations Act seeks to deliver protection to employees through the mechanism of a large policing government bureaucracy.  So far the bureaucracy appears to have been more efficient at performing this task than was the old pre March 2006 system.

But achieving flexibility in work relationships means achieving the ability to tailor work contracts to the specific and individual needs of each worker balanced by the needs of enterprises with which they work.  Achieving this through the employment contract, given it's legal constraints, presents a continuing challenge.

ACTU oversteps moral boundary line

If Australian unions aren't careful they risk losing much of their moral authority in the debate over workplace reform.  If this occurs they could do long-term damage to their viability, whoever wins the next federal election.

Actions of the Australian Council of Trade Unions at the International Labour Organisation give an idea of the union risk.

The ILO is a division of the United Nations and carries responsibility for formulating and overseeing international labour standards.  Its authority is mainly moral, which is heavily dependent on the ILO not interfering in member nations' domestic politics.  Instead the ILO focuses on labour principles such as the elimination of slavery and the right to association.  Only in extreme cases does the ILO condemn a country.  This is usually where abduction, imprisonment and murder of union and business people is state sanctioned.

It's this moral integrity that enables the ILO to stay engaged in debate with all nations furthering the cause of improving labour standards.  It's a delicate business for the ILO, requiring careful compliance with diplomatic protocols.

The ACTU president Sharan Burrow is a significant figure at the ILO.  She is a member of the ILO governing body and president of the global trade union movement, the ICFTU, covering some 150 million union members in more than 150 countries.  She's a recognised union strategist.

Yet in 2006 Ms Burrow had a formal complaint lodged against her because she authorised anti-Howard propaganda placed into the dispatch boxes of 200 ILO delegates.  It happened twice.  It's considered a serious breach of ILO protocol.  If every union and employer body in dispute with its home government were to follow Ms Burrow's protocol breach, debate at the ILO would descend into cheap political point scoring, centred around shifting, national politics rather than international labour principles.

But the protocol breach proved to be a warm-up to the ACTU's application in June this year for Australia to be included in an ILO "shame" list of the world's worst workplace regimes.  This list would rate Australia as worse than Columbia for example, where 72 unionists were killed last year.

It appears that the ACTU is seeking to use the ILO as part of its political propaganda campaign against the Howard Government.  However, it's a campaign that's displaying an obsessiveness that's blinding Australian unions to basic facts.

For example, Australian unions allege that the Howard Government is breaching ILO conventions in relation to the right to unionise and to collectively bargain.  Certainly Howard's laws have taken away Australian unions' previous position as a defacto institution of government in the setting and checking of wages and conditions.  This role has been handed to the bureaucracy.  And AWAs have enhanced the option of individual agreements as an alternate to collective bargaining.  But it's pure political spin to claim that these changes breach ILO conventions.

The right to unionise and collectively bargain is protected under ILO conventions 87 and 98.  These conventions require governments not to do anything that would prevent unions operating, or to prevent collectively bargaining.  Under Howard's laws unions are free to operate and collective bargaining remains an option.

However, Australian unions are trying to claim that ILO conventions require collective bargaining and preference for unions.  They infer that the change to unions' legal standing in the system and the option of individual agreements breach ILO conventions.  But this is a perverse and false representation of ILO conventions.

The ILO is an important international institution.  If unions lie about its conventions and drag it into domestic politics, they can bring the ILO itself into disrepute.  Recently the Australian Government made a new commitment to the ILO, placing a permanent representative at the ILO's Geneva headquarters.  However, since the ACTU's attempt to have Australia placed on the shame list, commentators again are claiming the ILO is a waste and should be ignored.

This does not help the cause of improving labour standards.  What is required is a focus on facts and attempts to achieve cross-party political support on key issues.  In misusing the moral standing of the ILO in a domestic campaign, the ACTU damages its own integrity.

ILO labour standards are about achieving safer work, eliminating poverty through higher levels of employment, the elimination of discrimination at work and other important policy outcomes.

These are difficult tasks in a changed and rapidly changing world of work.  They are objectives that should not be distorted by domestic political manipulation exercises.

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Easing Climate Conscience is Tricky

With all the concern about global warming, you would think a big business that signed up to a "Climate Action Partnership" would be praised.  But in the US, a coalition that includes a former US Attorney General, Edwin Meese, have condemned farm machinery giant Caterpillar Inc, the big manufacturer of construction and mining equipment, for doing just that.

Caterpillar CEO, James Owens, was asked at the company's stockholder meeting last week if the company had done a cost-benefit analysis before joining a lobby pushing for a carbon trading system and mandatory targets to cut greenhouse gas emissions in the US.

They apparently hadn't, but have defended the action with comment that with the debate on reducing carbon emission on in earnest, it feels it can be more effective protecting the interests of coal producers and users, by supporting a single national mandate than trying to comply with potentially 50 state proposals.

Caterpillar joined a lobby calling for US lawmakers to enact a policy framework for mandatory reductions to greenhouse gas emissions through a carbon trading system similar to that which now has bipartisan political support in Australia.

There are already a variety of voluntary emissions reductions schemes operating here.

One company, Easy Being Green, will even offset your flatulence for about $20 for two years.  I wonder how much they would charge for a sheep or cow?

The company reduces CO₂ pollution through State and federally audited energy saving programs.

In the US, organisations such as WindCurrent already allow people to purchase "green tags" to offset emissions caused by automobile or air travel.  I wonder how much they would charge to offset the planting of a paddock of wheat?

Sitting in the barber's the other day, a man who was having his hair cut, told me he pays to have trees planted on farms to offset energy used in his home.

I wonder whether there will be any land left for growing crops and raising livestock if everyone does the same.

I also wonder how many trees should be planted to offset every Caterpillar Inc bulldozer?

And is there a potential dilemma here, for a product sometimes used to knock down trees?

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PPPs a helpful way to determine value for money

The State Government's announcement on water on Tuesday triggered several predictable responses.

Clearly the most justified of these was the Opposition pointing out the hypocrisy of a Government now supporting the concept of a desalination plant that it had ridiculed during an election campaign just seven months earlier.

Another Government backflip was to include as part of its plan a pipeline that would enable 75 billion litres of water, saved in northern Victoria, to be sent to Melbourne.

As it has been an axiom of water policy, at least since Bolte's time, that no water from north of the Divide should be sent south, it was hardly surprising that the National Party and farmers' groups complained that the result would lead to -- in the colourful words of Nationals leader Peter Ryan -- "the future of the Goulburn Valley flushed down Melbourne's toilets".

In reality, opposing water being sent south, particularly as it relates to individual farmers selling their water rights, makes about as much sense as saying that no food grown north of the Divide should be sent to Melbourne.  In both cases, farmers are making the choice to sell something for the best possible economic return.

The third predictable reaction came from opponents of private-sector financing of government projects, who expressed concern that the Government was directly contributing only $600 million of the $4.9 billion plan and this might lead to consideration of public-private partnerships.

There are those who seem to believe that whatever the project is, it should be debt-financed by government.  However, by allowing the consideration of PPPs for capital works, governments are provided with a useful brake on what otherwise might be rushed capital expenditure on ultimately wasteful projects.

Victoria's PPP policy, Partnerships Victoria, requires that all projects must offer value for money as a government investment, independent of the delivery method.  Within the assessment process, the need to analyse whether a commercial rate of return can be delivered from a project to a private investor is surely a good way of assessing whether a project will deliver value for money.

Looking at the amount of water that will be added to the overall pool under the Government's plan, it is worth noting the greater return on investment that the Goulburn works and pipeline provide, compared with the desalination plant -- some 225 litres of water per dollar invested versus 50 litres per dollar invested.  Given that fact, it will be interesting to see if, upon more detailed consideration, the desalination plant does actually offer any value.

No Victorian would want the desalination plant to join the list of infrastructure white elephants.  Projects that fail to deliver are usually ones with problems fundamental to their nature, not to their method of being financed.  Both fully government-funded projects and PPPs can fail to deliver on expectations.

There is a further risk with PPPs that governments could use them as an excuse to defer payment for required infrastructure, instead using what would have been capital works money to increase recurrent spending.  Those who would like to see more government funding of infrastructure projects should perhaps become forceful advocates of cutting recurrent government spending if they want to see more of their plans come to fruition.

But until that happens, governments need to have the full range of funding options available to pay for capital works and that includes PPPs.  Last year, the Public Accounts and Estimates Committee found problems with how PPPs were being assessed.  While improvements in the transparency of Treasury processes are crucial, it is equally important that the PPP concept is not abandoned.

Allowing the private sector to share in the risks and rewards of building new water infrastructure will be vital components of a sane water strategy.

The other important issue that needs further study in the wake of Tuesday's announcement is the increased charges for water for households.  While consumers have been undercharged in the past, the State Government's doubling of household charges, on the pretext of paying for their plan, appears somewhat misleading, given the fact that the water itself only accounts for 15 per cent of the cost of providing water to households.

Their lack of transparency on this point does not augur well for the delivery of a sound water strategy, PPPs or not.

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The left has deserted Hawke's famous promise

This week is the 20th anniversary of the most famous promise in national politics.  At the Sydney Opera House during his campaign launch for the 1987 federal election Bob Hawke said:  "By 1990, no Australian child will be living in poverty".

Almost as soon as he uttered these words people started laughing.  And they've been laughing ever since.  As 1990 came and went, the failure to deliver was obvious.

Hawke said last week that his pledge was "silly" and "one of the biggest regrets of his career".

As we now know, he improvised.  The original text of his speech was "no Australian child need be living in poverty".  Swept up in the moment, he made a commitment that continues to haunt him.

Hawke was accused of peddling cheap rhetoric, of being hopelessly naive and of making a promise he knew could not be fulfilled.  While these criticisms might be justified, they all miss the point.  To his great credit, Hawke was ambitious about overcoming the social problem of children living in poverty.  He was willing to take a risk and he paid a price for that risk.

Maybe what Hawke did was politically foolish, and maybe it was a promise that could never have been kept.  But the promise was never as important as the idea that motivated it.  Hawke's idea was that poverty could be eliminated.  While there can be argument over the merits of his solution, at least he communicated a feeling of optimism.  He was selling a message of hope about the prospects of children living in poverty.  He should feel no need to apologise.

Hawke's approach 20 years ago can be compared with today.  Despondency now pervades the discussion of the country's most pressing social problems.  Despair is understandable in some circumstances, but it is not a useful emotion.

Whether it is poverty in general or indigenous disadvantage in particular, the hard-headed realism required to tackle problems has been replaced either by pessimism or symbolism.

In 2007, the political left in Australia exemplifies the trend to hopelessness.  Once upon a time left-wing politics was a confident creed.  Indeed, its optimism was part of its attractiveness.  All of that has changed.  These days you would be hard-pressed to find a single bright note in any pronouncement from someone who aspires to the label "left-wing".  After generations of trying to make the world a better place -- and not succeeding -- the left has now given up any pretence of concern for the poor.

Penning postmodern critiques of middle-class "consumerism" and "materialism" doesn't involve getting your hands dirty.  Why talk about poverty in Melbourne's outer suburbs when you can rally to the cause of a self-confessed supporter of terrorism instead?

For decades, the promise of economic growth for the Third World fired the imagination of left-wing reformers.  No longer.  The activists of the left in Australia, the United States, and Europe now do everything possible to stop economic development in Asia and Africa.

The truth is that the "no child in poverty" pledge made many in Hawke's own party uncomfortable.  Initially the left of the ALP welcomed Hawke's promise.  It was taken as a signal that in return for acquiescing to Keating's economic reforms, the political constituency of the left, namely the poor, would receive improved social security.  But it was soon realised that it was impossible to talk about poverty without talking about the origins of poverty.

While increased dole payments, for example, might satisfy a desire to redistribute wealth from the rich to the poor, they didn't address the root causes of poverty.  And in the long run, if the economy was not growing, such income transfers were unsustainable anyway.  As uncomfortable as it was for them, ultimately the left was forced to acknowledge a basic truth:  the single biggest cause of poverty is unemployment.

As this dawned upon the left, it fell silent.  And for the past 20 years the left has more or less stayed silent on poverty.  It is noticeable that today those in the ALP who express a concern about poverty are predominantly from the party's right.  This was not the case in Bob Hawke's time.

Since 1987, the politics of good causes in Australia has been turned upside down.  The reality is that the people who have done the most to overcome poverty have been John Howard and Peter Costello.

Unemployment at a 30-year low is more than a statistic.  Having a job provides measurable benefits to individuals and their families.  The fashion of the left to ignore low unemployment as mere "economics" reveals just how far removed it is from the causes it once fought for.

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Economic Regulation of Transport Facilities

Address to Lloyd's List Events Conference,
Melbourne, 6 June 2007

THE DEVELOPMENT OF REGULATION OF "ESSENTIAL FACILITIES"

Assured property rights are crucial to promoting increased wealth.  Open competition and private ownership gives firms considerable incentives to discover and meet demands at lowest cost.

Australian network businesses prior to National Competition Policy were usually protected from competition and were mainly government-owned.  Governments sought to maintain control over these businesses' entire production chain, including those aspects that were highly vulnerable to competition, often to facilitate cross-subsidies or to influence general labour market policy.

These monopolies with legal protection from competition were characterized by inefficiencies, such as over-manning and inappropriately selected or located investments.  The 1993 Hilmer Report and subsequently Australian governments recognised that sheltering activities from competition had impaired productivity.

Because rival facilities can no longer be excluded, the risk of price gouging is much reduced.  Even so, access regimes like Part IIIA of the TPA were introduced.

EFFECTS OF REGULATING "ESSENTIAL FACILITIES"

Access regimes are departures from the standard rules that promote efficiency by allowing owners to use their property as they please (as long as they do not harm others).  Inevitably, forcing firms to offer access to their facilities also entails the prospect of regulated price and service levels more advantageous to the non-owner than could be obtained in a voluntary contract.

In the short term a price that is regulated below market levels means lower costs for users and higher demand for the services.  Over the longer term regulated prices are likely to undermine incentives to maintain facilities and to modernise them.

These outcomes are exacerbated where rate regulation drives down re enues towards variable costs. ⁽¹⁾

Also important is the effect on timing of investment.  In this respect the Export and Infrastructure Taskforce concluded:

The search for optimality and precision in regulatory decision making has not only made the regulatory process less predictable than it should be, but has also added greatly to regulatory delay, hindering investment in infrastructure used by export industries.

AUSTRALIA'S ACCESS PROVISIONS

General Issues

Australia's requirement that owners of essential facilities must offer services to all comers, even competitors, amplifies developments in the US courts.  In the US, a threshold test for government involvement specifies that an asset would be "impractical to duplicate".

Recognising that economic disincentives flow from requiring firms to relinquish their property rights, Hilmer was keen to narrowly define an "essential facility".  Adopting a US perspective, the Report argued, "Clearly, access to the facility should be essential, rather than merely convenient".

Part IIIA of the TPA broadened this into 44G(3)(b), "that it would be uneconomical for anyone to develop another facility to provide the service".  But, mindful of the dangers of regulatory overreach, production processes were excluded from regulatory control.

In Unlocking the Infrastructure Stephen King and Rodney Maddock discussed their concerns about the risks that can arise if the test of "uneconomical to develop another facility" is not carefully applied.  They argued that access should apply to services provided by facilities that are natural monopolies.  They pointed to the situation where there are many facilities in competition but the market demand and prices may not be sufficiently high to make it possible for one more entrant to build a new facility and earn a positive return.

But this means that any of the 50 facilities operating in the industry could be liable for declaration.  By applying the test only to "another" facility, the Act opens the door to declaration of facilities even in those industries where competition is robust. ⁽²⁾

The increased scope that this provided for regulatory intrusion was, however, welcomed by the NCC. ⁽³⁾  The NCC said:

Building and activating such (gas or electricity) networks is extremely expensive, but sending more gas or current around a network once it is operating is relatively cheap.  Clearly, rather than making a competitor build a second network to compete with the existing network, it would make more economic sense in such situations to give the competitor access to the existing network.

Hence, the NCC at the outset proclaimed a willingness to intervene to require access to enable applicants to gain advantage by using an owner's facility in a way that leverages off marginal costs that are frequently much lower than average costs.

While taking advantage of lower marginal costs is standard business practice for a single entity to pursue internally (for example, firms normally take advantage of their existing sales team in launching a new product line), it is an extraordinary intervention to require a firm to extend such cost-saving to unrelated entities, especially competitors.

The inspiration for assuming control over "essential facilities" was where a firm is able to favour an affiliate over competitors in its management of the facility.  Australian regulations have moved beyond that and focus on all facilities that might be construed to have some market power.  But even with integrated facilities we should be wary of controls.

Inevitably, business firms have to take decisions about what products and services they produce in-house and which ones to buy-in.

Costs and risk management are the key features of the make or buy decision, particularly where, as with some manufacturing plant, firms have some form of final assembly into which the parts are brought together.

For products that are critically dependent on the various components being brought together precisely as required the supply will often need premium service and frequently a built-in redundancy of availability.  With highly integrated production systems, product and transport is required to be available on demand.  This is a characteristic of rail lines transporting bulk products to ports or power stations.  The transport services being contracted often comprise more than a single trip, a series of journeys or the availability of track for such journeys.  What is sought is a guarantee that the journeys can be undertaken and not necessarily at times when they were planned.  In this respect the contract is for a form of chauffer service dedicated to a single customer rather than for a scheduled bus service.

While it is often possible to arrange for this service to be bought-in, doing so often involves highly complex contracts where there are supply uncertainties.  Frequently it is preferable to retain the supply in-house, which is practical with rail, shipping and elements of telecommunications.

Some types of production, especially those where a process is concerned, leave too many risks if they are based on independent contracting rather than under a management system.  As the Infrastructure Task Force expressed it, ⁽⁴⁾

The difficulties associated with physical coordination of complementary investments are, however, greatly complicated by disputes over the division of the gains from those investments.  Historically, vertical integration between infrastructure providers and the activities that most rely on their services has been a way of avoiding these complications.  ... Where vertical integration is impossible, or for wider policy reasons judged undesirable, coordination issues ... ... are likely to arise.  Difficulties in organising all the parties required for complementary investments to occur, and in securing agreement as to the sharing of the costs of needed capacity expansion, can paralyse the capacity expansion process -- perpetuating bottlenecks that all parties would be better off resolving.

UK Railtrack is an example of how things can go wrong where de-integration is made mandatory.  Gomez-Ibanez ⁽⁵⁾ found that co-ordination a vertically unbundled British Rail proved too difficult du to rail track and trains being separately owned.  The different interests in network enhancements to improve safety in the light of expanding usage led to inadequate investment, a deterioration in track quality and hence to disasters.

The Railtrack experience also illustrates the difficulties with contracting out aspects of supply where the capital assets are not easily compartmentalised.  The fact is that rail and the rolling stock are jointly provided and forcing the track to be independent creates an economic incentive problem.  Rolling stock owners have an incentive to economise on that asset even if this imposes excessive costs on the track owner.  Contracting to avoid such inefficiencies can often lead to prohibitive complexities.

Whether a supplier chooses to integrate or contract to ensure delivery precisely as required, it will, if the cost of missing a desired delivery time is high, ensure considerable redundancy in the delivery system.  That redundancy is not capacity "surplus to needs" but represents a supply buffer to meet unknown eventualities.  The supplier in that situation may also consider any form of sharing to provide risks too great for any level of compensation to mitigate.

OUTCOMES OF ACCESS REGULATION IN GAS

Regulators have frequently claimed (sometimes with the support of commissioned research) that the gas access regime has delivered considerable gains to the economy.  Indeed citing industry developments the Chairman of the ACCC rejected the claim by the Productivity Commission that the ACCC regulation has "had a chilling effect" on investment in the industry.  However, no new pipeline has been built in the expectation that it would be regulated.

Adverse experiences with regulation doubtless influenced business strategies for the SEA Gas pipeline from Victoria to Adelaide.  This was built with the intention of avoiding the regulatory costs and distortions of coverage.  The partners inflexibly designed the capacity to prevent any availability for other users and therefore any case for declaration.  As building-in some provision for increased demand is relatively inexpensive, this represents regulation forcing sub-optimal investment.

OUTCOMES OF ACCESS REGULATION IN COAL TERMINALS

Unsatisfactory outcomes are evident in the provision and expansion of coal port and rail facilities where users and owners are unrelated parties and the facilities are regulated.

Faced with an expansion of demand for coal in 2004 the BHP owned Hay Point facility saw an approval and commissioning of a 25 per cent increase in capacity in a little over 3 years.

By contrast, a comparable multiple-user regulated facility at Dalrymple Bay took an additional year, albeit with a larger planned capacity increase, as a result of argy-bargy and regulatory intercession over price.

Even greater delays are being experienced in expanding the facilities serving Port Waratah, the rail capacity to which has been increased following Commonwealth Government intervention.  However the coal exporters' different agendas have held up funding for expansion of the multi-user open access terminal by the coal exporting facilities but now face transport bottlenecks.

OUTCOMES OF ACCESS REGULATION IN PRIVATE RAILWAYS

The Pilbara Rail Lines

Two Federal Court cases have been heard on private rail.  In Robe River (1998) Kenny J. determined that access was not justified because the rail facility was part of an integrated production process "by which a marketable commodity is created or manufactured" and thereby excluded from coverage.

In BHP Billiton Iron Ore v NCC (2006) Middleton J. considered this to be incorrect and ruled that access to the railway is not "use of a production process" but rather it is a transport or conveyance service.

The rail lines in the Pilbara were developed through State Agreements which were seen as a package which would ensure that:

Through the resulting legal framework, major resources development would be recognised, encouraged, assisted and promoted.  (Department of Resources Development 1997, p. 6)

However, although the companies agreed to carry people and freight of third parties, this was highly conditional (Hamersley agreed to do so only if this was possible "without unduly prejudicing or interfering with its operations").

The State Government agreed to facilitate the removal of government barriers but placed no unusual call on government funds or facilities that might require some quid pro quo in return.

Competitive Provision of Rail Lines in the Pilbara

BHP and Rio Tinto both have integrated iron ore production facilities in the Pilbara.  Each firm's rail lines are almost exclusively for their own use.  And FMG is to build a rail line of its own (as well as seeking access to BHP's for some deposits).

This would mean three different lines serving the southern Pilbara area.

If none are made available to an unrelated party, in the clear absence of market power, this indicates that:

• the sort of facility employed in this line of business must be totally controlled by the integrated firm and that an unrelated entity operating on the tracks would create too many managerial difficulties;
• there is no spare capacity or those presently having unused capacity envisage it being required in future;  or
• any apparently spare capacity may be needed for built-in redundancy purposes as an insurance against unplanned events.

In any event the track owners see the risk of contracting to transport for an unrelated entity as placing too great a risk on their integrated business.

The BHP/NCC process brought evidence from some very prominent economists.  Important in this respect is the position of Professor Ordover, who provided expert advice in the case of the Eastern Gas Pipeline to the degree that he endorsed the position of the regulatory authorities that a pipeline should be declared unless it is duplicated by a parallel line.  Professor Ordover's views on this matter are important because of his interventionist position on infrastructure sharing.  He regarded the fact that more than one facility exists as "trumping" theoretical views that there should only be a single facility and therefore argued against regulating the facilities.

COSTS OF REQUIRING THIRD PARTY
ACCESS TO THE PILBARA RAIL LINES

Over the past ten years, Australia's iron ore exports have more than doubled.

With a doubling of output, a doubling of infrastructure investment is necessary.  There may be some economies from sharing existing facilities but these are likely to be modest in such a magnitude of expansion.

In the context of the Pilbara BHP access dispute, three respected economic consultancies have sought to investigate the implications of regulators' requiring access.  These are the Centre for International Economics (CIE), Charles River Associates (CRA) and Port Jackson Partners.  All three have used conservative assumptions in estimating outcomes but have still arrived at large costs.  All three see regulatory intrusion as bringing about delays in investment as a result of:

• the machinery of regulatory approvals,
• the diminished control of the investor over his investment expenditure and the need to engage in commercial negotiations outside the framework of an individual firm, and
• a higher risk premium required as a result of the increased uncertainty about when the investment can commence.

In addition, the uncertainty over future controls over the investment and the possibility that it might be opened up to parties that have not been engaged in the initial negotiations would add a further risk premium that is difficult to estimate.

CIE examined a deferment of six months in the commencement of an investment program which would eventually duplicate the estimated $35 billion in capital investment in the Pilbara mines and associated transport and port facilities.  The outcome involved a net loss over 20 years of $20 billion.

CRA estimated a one year investment delay in annual spending of $2 billion investment with a catch up in the following year would still mean a permanent loss of output of $400 million.

In both these cases the losses were borne by the economy as a whole -- that is by businesses and consumers that were not necessarily related to the iron ore miners.  The cost is transmitted through the economy largely by the effect of a reduction in exports and the associated effect of a lower value of the Australian dollar.

Port Jackson Partners used a different approach which arrived at similar outcomes.  They estimated the value of exports forgone from a one year delay at $21 billion over a 20 year period.

The actual delays would far exceed the assumptions that these models used.  Indeed, if the investments were to await the finalisation of a Part IIIA dispute they would according to estimates made by the Queensland Mining Council take a minimum of three years and more likely five years. ⁽⁶⁾  But even the conservative assumptions used by the three consultancies indicate the huge penalty the economy pays for the sort of intrusive approach to property rights that key regulatory agencies are taking.

THE ARBITRARY APPLICATION OF PART IIIA

Businesses will normally willingly share their facilities with all parties, including competitors, as long as they can profit from the undertaking.

Many raw material producers effectively have only one plant as a customer.  This is the situation that confronts a great many small oil fields.  Indeed, in WA the sole oil refinery, (owned by BP) serves 22 crude oil producing fields in the Perth Basin.  The owners of these fields' options to the BP refinery services are developing their own refinery facility, or sending their crude to Singapore.

BP clearly and quite properly exploits its location to the full in terms of the charges it requires.  Anything else would be inefficient.  The wells close to its facility now account for around 15 per cent of the refinery throughput.

This is a variation of an "essential" facility in its wider definition employed by some regulators (and access seekers).  Certain choke points have been developed by businesses, whether in manufacturing facilities as traditionally defined or in transport and communications.  For many such facilities it would certainly be "uneconomical for anyone to provide another facility to provide the service".  Yet governments have correctly avoided intervention in the associated commercial conditions.

Decisions on which facilities are generically eligible for regulation are increasingly arbitrary.  The concept of manufacturing, if it ever was neatly segregated from transport and communications is certainly not so today.  The continuous nature of the iron ore mining-transport-preparation system was prominent in Justice Kenny's insights in Robe vs Hamersley.

Arbitrary though the concept of a production processes is, those framing essential facility laws have excluded it from their reach conscious of the massive and debilitating scope such laws would have if they encompassed manufacturing facilities across the economy.

CONCLUDING COMMENTS

Requiring owners to allow unrelated parties to make use of their assets is pregnant with risks to efficient investment.  This applies to integrated facilities as well as those of a stand-alone type.  Many businesses opt for vertical ownership for a variety of reasons, including to maintain control of a centrally important facet of production.  In some cases there may be built-in redundancy to ensure that the facility is available on demand to combat unforeseen eventualities.

Australian law has made an exception for production processes in the ambit available for regulatory coverage.  Such a distinction, commonly associated with manufacturing, if it ever was a meaningful means of distinguishing commercial activities, no longer is.  Production functions are changing throughout industries and no clear demarcation of the different stages of these, particularly regarding manufacturing and services is either meaningful or appropriate.

Already there has been considerable economic damage in terms of delays to developments and costly legal challenges stemming from the considerable reach that Part IIIA brings to the regulatory framework of Australia.  The illumination of these costs in the case of the Pilbara rail lines highlights the problem the regulatory framework is bringing specifically to one key industry.

The infrastructure developer in Australia today has no franchise protection and will always be vulnerable to competition.  A regulatory model featuring price or profit control will prevent or, at the very best, delay major new investments.  The policy basis must be based on an automatic expectation that any new investment, facility or otherwise should be unregulated and, in line with regulators' frequent assertions that markets are superior to regulatory agencies, that regulation should be removed as soon as more than one supply source is in place.

---

REFERENCES

1.  This was the case with rail regulation in the US for nearly a century until, in an early example of deregulation, stifling layer of price regulation were removed by the Staggers Act of 1980.  The outcome was an upsurge in investment and productivity.  In the past courts have sometimes attempted to set prices with farcical outcomes.  Thus in Pont Data v ASX in 1991, Justice Wilcox set the price as being the marginal cost of connecting to the ASX system at $100 per annum, compared to a price of $1.45 million set by the Full Federal Court.  Former ACCC Chairman Allan Fels had also called an approach that did not incorporate pricing principles (AFR, 7 April 1995).

2.  King and Maddock, pages 79-80.  1997.

3.  National Competition Council, The National Access Regime, A Draft Guide to Part IIIA of the Trade Practices Act, 26 August 1996

4.  Australia's Export Infrastructure Taskforce, page 18.

5.  José A. Gómez-Ibáñez, "Regulating Coordination:  British Railroads" in Regulating Infrastructure:  Monopoly, Contracts, and Discretion, The Harvard University Press, 2003.

6.  Productivity Commission, "Review of the National Access Regime.  Position Paper", 2001, p. 399.

Nuclear, not solar, power is the brown coal alternative

Every politician may now be a convert to some form of carbon restraint but few have thought through the implications.

Prime Minister John Howard has excoriated Peter Garrett for his previous remarks advocating a 20 per cent reduction in carbon dioxide emissions by 2020.  The PM, like other politicians including Mr Garrett since he became a shadow minister, favours the never-never land of 2050 as the reference base.

We now seldom hear claims that Australia's emission reduction will save the world or create vast, new sustainable industries.  Australia is no more likely to be a significant player in producing windmill blades or windmill technology than it has been in conventional thermal power stations.

Indeed, adoption of carbon taxes or carbon restraints will eliminate the only cost benefit that offers some promise of competitive advantage for Australian suppliers of the materials.

Similarly fanciful are the claims of new torrents of wealth flowing from the trading of carbon credits.  Any such income gains are at the cost of shifting into higher-cost energy and Sydney is unlikely to be favoured over Singapore, Tokyo, Hong Kong or many other cities as a regional trading centre.

But if a carbon-reducing policy seems inevitable, there are several reasons why a drawn-out phase-in period is to be favoured.

Firstly, any emission targets will be costly and deferring them will reduce such costs.

Secondly, the earlier the requirement to reduce carbon emissions, the more likely we are to face deadweight costs of scrapping existing plants prematurely.

Thirdly, the longer the delay, the less is the risk of incurring costs that might turn out to be unnecessary.  We hear no end of (unfounded) claims that all but a tiny minority of scientists now agree that global warming is real.

But the only solid empirical data remains that from satellite observations.  These have been available only since 1978, but the increase in temperatures has been far less than the forecast of 3 to 5 degrees over the next century by many climate models.

And the increases that have occurred are consistent with the solar cycles that are unrelated to human activities and have been around forever.  Postponing costly action allows for greater certainty to emerge.

Finally, there is no point in Australia or other developed nations taking action when China (soon to become the world's largest carbon dioxide emitter), India and other developing nations refuse to participate.  Without such participation, hardly any action by the developing world will reduce the level of emissions.

For the longer term, though, few politicians will face up to it -- substituting nuclear power for coal-based electricity generation is the only way a modern economy can make deep cuts in emissions.

Slogans such as "Solar, not Nuclear" are just that -- slogans.  No modern electricity system could cope with more than 10 per cent solar power.  This is because, besides solar energy costs likely to be double those of conventional sources, its variable nature makes a higher share unmanageable.

Of course, many of those mindlessly shouting the "solar, not nuclear" slogans say they would welcome a return to a more primitive economy.

When push comes to shove, however, even they wouldn't accept the implications -- such as downsizing homes to one-fifth of present size, no car transport, minimal air transport and no home heating or air-conditioning.  Nobody would cop such "improvements" to their lifestyles.

Given a change in political stance, to replace present coal-based plants with nuclear power by 2050 is a readily achievable option.

For Victoria, there is a particular cost in shifting away from the brown coal that supplies 95 per cent of its electricity.

Victoria's brown coal covers vast areas, is just beneath the surface and can be conveniently and efficiently transformed into electricity.  There is more than enough brown coal for Victoria to produce electricity at $0.04 a kilowatt hour to meet any demand for 500 years.  This places the state among the world's lowest-cost energy provinces.

With nuclear power, the cost of generating electricity rises by at least a third.  At present levels of consumption, that is an additional impost of $650 million a year.

Besides higher direct costs to the consumer, such changes would require a big industrial restructuring.  The industries that now rely on low-cost energy for their competitiveness would disappear and relocate to countries without a de facto tax on carbon-based energy sources.

For Victoria, it is not at all inevitable that the jobs directly and indirectly created by those industries would be replaced by new jobs in low-energy using sectors.  It is at least as likely that the jobs would disappear and the state would become an area of net employment loss and net emigration.

At the very least, competitiveness would need to be restored.  The State Government would have to move seriously towards downsizing its bloated bureaucracy, discontinuing its lavish transport subsidies and wiping out other costly imposts.

These are big asks for a political establishment that cannot contemplate a first step of confronting the electorate with the need to convert to a power source -- nuclear -- that it has demonised.

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Chilling case of accessive regulation

Having been a touchstone in Australia's economic resurgence, the national access regime is now a ball and chain around the ankle of growth.

Following the Hilmer report in 1993, major facilities including ports, pipelines, telecommunications systems and railways were declared open.  Their owners, mainly governments, were required to allow private businesses to use the assets on fair terms and conditions.  This raised the curtain on a new arena of competition, bringing efficiencies and lower prices.

But the Hilmer report itself was uneasy about forcing firms to share their facilities.  It recognised that such powers could stymie new infrastructure development by making firms unwilling to spend shareholders' money on assets.  After all, nobody would build a house on the basis that, once completed, a regulatory body would determine its spare capacity, to whom it might be leased and the rental price of the lease.  Hilmer also recognised easy access to others' facilities might lead firms to focus unduly upon seeking that access rather than investing themselves.

These issues were exacerbated by a reinterpretation of Hilmer by the Keating government in enacting it as Part IIIA of the Trade Practices Act (there is also a parallel Part IIIB and IIIC for telecommunications).  Instead of it applying only to facilities that were "impractical to duplicate", the provisions became "uneconomical for another facility to provide the service".  This was much more accommodating to applicants and it prompted Stephen King (now an ACCC commissioner) to write alarmingly that the provision could cover up to 50 infrastructure facilities.

The Keating government clearly had similar concerns since it specifically excluded "production processes" or manufacturing from the provisions' reach.

The institutions created to administer competition policy set out to extend its ambit.  The recently created National Competition Council interpreted it as saying that now it was unnecessary for a competitor to build a second network if one already existed.  The newly empowered ACCC decided that it would not release facilities from its dorninium unless there were several competing between separate supply and market locations.  And the ACCC at the outset sought to reduce the extent of the inviolability of "production processes" by trying to bring gas feeder pipelines within the agency's ambit.

The current high-profile issues concern transport of coal and iron ore, as well as telecommunications facilities.  With coal, the regulatory arrangements have contributed to inadequate rail investment and the downturn in exports in the face of a world boom.  With iron ore, the regulators' aggressive moves to require BHP and Rio to share their rail lines are causing serious reviews of investments for new facilities to feed demand from China.

With telecommunications companies, it is resulting in the stand-off on broadband development.  Since Telstra will not spend the required $4 billion or more unless it has assurances about the conditions under which it might be obliged to share the network.

Concern about the "chilling" effects of the provisions on investment has mounted.  Various Productivity Commission reports (with which the regulators have habitually dissented) have warned against the "regulatory risk" created by the Part IIIA seizure of private property.  The May 2005 Exports and Infrastructure Task Force cited risks to export potential.

The more thoughtful politicians have recognised the regime's deficiencies.  ALP spokesman Martin Ferguson said in February this year that it was threatening export industries and creating investment disincentives.  Back in 2003, Industry Minister lan Macfarlane took the unusual step of rejecting the proposed regulation of the Moomba to Sydney gas pipeline, recognising that it was in competition with a rival pipeline from Bass Strait.

However, something more purposeful is required, since regulators have built their own agendas with well-resourced publicity machines to support them.

Preferably the law should be amended to grant assurances that where there are two or more facilities in competition, they are beyond the reach of the regulatory authorities, and where no facility is in place at present, any proposal to build one will not be subject to regulatory control.

Unless measures like this are pursued, we will find investment deferred with serious consequences to economic growth.

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Federalism could open locked land

State Governments used to have purchasing preferences to advantage local suppliers.

Such measures added needless costs and were always of dubious validity.

It took the competition reforms over the past decade to finally abolish them.

But not all competition between states is bad.

Competitive federalism in the European Union has been an important growth propellant.

Nations that have reduced taxes and regulations have bucked the EU's rather ordinary overall economic performance.

Low taxes and deregulation have been the Fairy Godmother transforming Ireland -- Europe's Cinderella -- from rags to riches.

Irish income levels are now considerably above England's.

Some newer EU members are following similar paths.

These include Slovakia where Porsche has located its new assembly plant and which is experiencing incomes growing at 8 per cent a year.

Other federal systems have seen comparable outcomes.

In California, regulatory excesses are undermining the state's advantages as a high-tech centre.

California is now seeing jobs migrating to neighbouring states where more liberal regulations have resulted in cheaper house prices.

Similar outcomes are possible in Australia.

In New South Wales planning restrictions have brought the average house cost to $480,000.

This is even more excessive than the $330,000 average in Melbourne and Brisbane.

Land development restrictions in South Australia have inflated Adelaide's house prices to levels above those of Melbourne.

The SA Minister has responded by requiring that 15 per cent of all new housing developments must be "affordable".

This will disadvantage other new home buyers and mean even higher average prices.

Over recent decades, planning restraints on land availability together with higher taxes have resulted in Australia's house prices doubling relative to wages.

House prices have risen from about three times the average level of family incomes to over six times family income levels.

A block of land fully serviced for housing on the fringe of all Australian cities should be no more than $60,000.

It is two to five times that much as a result of "planning" policies creating a shortage of land for housing.

In a delicious irony, Victoria's most senior politician-lawyer, Rob Hulls, has been caught in the intensification of the state regulatory web which he himself has weaved.

In buying a house in an area newly restrained from development, his wife, also a lawyer, now finds she cannot build on it.

Welcome to the Brave New World where land ownership rights are trumped by government controls!

The impending federal election has ignited policy discussion on housing.

Some Liberals are calling for a doubling of the First Home Owners grant.

Federal Labor is calling for increased regulatory oversight of existing funding.

Both proposals overlook the bonus available from deregulating land supply.

John Brumby has been trumpeting Victoria's lower housing costs.

His Queensland counterpart is to issue a major policy proposal on the matter in a few weeks time.

Land supply regulations in Australia's federal system open up opportunities for beneficial competition between the states.

It would be a wonderful bonus for those aspiring to home ownership to see state competition reducing restrictions on land use and bringing more affordable house prices.

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How to slash housing cost

In the bad old days state governments' purchasing policies advantaged local suppliers by granting them preferential treatment.

Such measures were always of dubious validity (after all, the Australian Constitution was supposed to be about freedom of interstate trade).  But it took the competition reforms over the past decade for these practices to be abolished.

This was not before time.  State purchasing preferences tended to fragment supply and add to costs.

But not all competition between states is bad.

Competitive federalism in the European Union has been an important growth propellant.  Nations that have reduced taxes and regulations have risen above the rather ordinary economic performance of the area as a whole.

This policy has been the fairy godmother that has transformed Ireland, Europe's Cinderella, from rags to riches.  Ireland has seen its average income levels grow to be a quarter above those of the United Kingdom.

Some of the newer EU members are following similar paths.  Slovakia, the location for a new Porsche vehicle plant, has adopted the Irish approach and has benefited from economic growth at 8 per cent a year.

These same elements are seen within other federal systems.  In California, regulatory excesses are undermining the state's advantages in spite of it being the centre of the world's hi-tech industry.

The state is now experiencing low average growth and a migration of jobs and people to neighbouring states where less regulation is bringing cheaper house prices.

Housing policies under Australian state systems offer similar opportunities.

In New South Wales, planning restrictions have so limited the availability of land for housing that the average new home in Sydney now sells for $480,000.  That price is even more excessive than the average of $330,000 in Melbourne and Brisbane.

Land development restrictions in South Australia also have had a severe effect in Adelaide where house prices are now above those of Brisbane.  The SA Housing Minister has required that 15 per cent of all new housing developments must be "affordable".  This can only further boost prices.  It means subsidies to the very poor paid for by the relatively poor new house buyer.

In Queensland, Treasurer Anna Bligh has introduced some modest measures to reduce taxation on houses.  She is reviewing other proposals for a statement to be issued next month.  But the state has experienced land price inflation similar to the rest of Australia.

This has caused house prices to rise relative to incomes:  20 years ago an average new house would have cost about three times the average level of family incomes while today it is more than six times greater.

The impending federal election has ignited policy discussion on housing.  Some Liberals are calling for a doubling of the First Home Owners grant.  Federal Labor is calling for increased regulatory oversight of existing funding.  Both these proposals entail increased government intervention in housing and they overlook the bonus available from deregulating land supply.

Taxation and government charges are partly to blame for this cost inflation, but the real culprit is planning restraints on land availability.

A block of land fully serviced for housing on the fringe of all Australian cities should be no more than $50,000.  This includes the costs of the raw land itself which should be only a few thousand dollars.

At Redlands, planning restraints have created a scarcity which boosts the cost of a block of raw land for housing to $80,000.  Land preparation costs increase this by a further $30,000.

Queensland, like other states, has ample opportunity to expand housing land supply and drive down excessive house prices.  Less than 0.1 per cent of the state's land is urbanised and, with less restrictive planning constraints, we could easily see new homes on the Brisbane edge at $70,000 less than present prices.

Australia's federal system opens opportunities for the states to offer different approaches to regulation and taxation.  Victorian Treasurer John Brumby was stung to respond to the tax reductions on housing that Bligh announced, claiming his measures were more effective.

This is the sort of competition between states that is healthy.

Many younger families are priced out of house ownership by regulatory measures on land use and by development contributions and other taxation impositions.

It would be a wonderful bonus for them to see state governments competing to reduce regulations and charges on new home building.

Bligh is scheduled to bring out a major new initiative on the state's housing policy next month.  Hopefully she will take this opportunity to slash the cost impositions caused by planning restraints.

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Media faces an unsentimental future

Media critics have made careers proclaiming how dangerous media moguls are for Australian democracy.  These critics now face an even more serious problem -- no media moguls.

If PBL -- which private equity now controls -- is anything to go by, we may see nameless, faceless, investors replace these personalities.

Private equity firms may be nameless and faceless, but they are ruthless.  CVC Capital Partners has already torn out the symbolic heart of the PBL empire, Alan Jones.  The relationship between Jones and the late Kerry Packer was not atypical -- the journalist under the mogul's patronage.

Press critic A.J. Liebling wrote that few journalists under William Randolph Hearst's tutelage would be employable elsewhere.

The Bulletin has long been made viable by a tacit acceptance of its unprofitability and its prestige as Australia's oldest magazine.  But sentimentality, as Jones and his audience have learned, is not a defining characteristic of private equity firms.  CVC will be looking closely at The Bulletin.

Private equity groups act when they see a company with good but underutilised assets.  They assume a big risk.  To make this risk pay off, private equity needs to cut fat and make money.  Typically, after a few years they exit, selling a more efficient company for an enormous profit.

If this is CVC's game plan, it picked a great time to get into the media industry.  CVC has given itself a five to seven-year window.  But by then, PBL will not just have to be a streamlined organisation, it will have to be radically different, if it is to keep up with the radical changes in the form and content that media consumers demand.

It took only 18 months for YouTube to go from a garage to a $US1.65 billion ($A1.96 billion) Google acquisition, during which the user-uploaded video website had firmly implanted itself in media consumption habits around the world.

The search giant quickly moved on to an even bigger acquisition this year, buying advertising outfit DoubleClick for $US3.1 billion.

The business of the media is to connect eyeballs with advertising.  YouTube and DoubleClick present new competitive pressures on companies that depend on both.  Given the pace of online innovation, how these companies will affect the market for media content is unknown.

Corporate responses to these changes have been mixed.  In the US, the media empires have already begun dramatically overhauling their structure and, in many cases, spinning off subsidiaries.

It is far easier to point out failed attempts to modernise businesses than successes.  The merger between America Online and TimeWarner, which was greeted by the US commentariat with fear and awe, is now an embarrassing failure.

In part, the struggle with modernisation is due to the dramatic internal and philosophical changes required.  For instance, Google's project to index all the information in the world forces media companies to rethink rapidly their relationship with their own content and the value received from it.  The chief executive of Macmillan book publishing this month demonstrated his confusion of the issues underlying new media by swiping two laptops from the Google stall at a publisher's expo.

Google Book Search has been indexing his company's books under the US "fair use" copyright exception.  But rather than giving Google "a taste of its own medicine", the incident was a cringe-inducing display of the chasm between "new" media and the old.  The CEO was devoted to the traditional business model on which his company was founded decades before.  Hopefully, as we move towards private equity, similar attitudes in Australian companies will be jettisoned.  The regulatory framework that has controlled the broadcasting sector for the past 50 years, for instance, has been a complex web of protectionism, restriction and government favours.

Relationships between press barons and governments have dominated Australian public policy.  But private equity groups have few political aspirations -- their only aim is to make money.

Politicians who have been used to trading favours with media moguls may have to adjust to a press less interested in politicking and more interested in marketing.  CVC hopes to make a big profit out of PBL.  To do so, PBL will not only have to be lean and efficient, but comfortable competing with all-new competitors in an all-new space.

A.J. Liebling once wrote:  "The function of the press in society is to inform, but its role in society is to make money".  When private equity owns media, it hopefully can do both.

Can We Embrace Carbon Trading?

Prime Minister, John Howard, set up a joint government-business taskforce last December to consider the potential for a national carbon trading scheme.

The task force handed down their report on Friday and the Federal Government appears to have accepted its recommendations, which means the Coalition is now promoting an approach to climate change that is very similar to Labor party policy.

Under the scheme the Federal Government would determine a target or limit to how much carbon industries should emit and issue tradable permits up to that limit.

The Labor Party has suggested a 60 percent reduction in emissions by 2050.  The taskforce was reluctant to commit to a definitive target -- but the Coalition will have to sooner or later.

The assumption has been that agriculture will do well out of a national carbon trading scheme, being a potential source of carbon sequestration through, for example, tree planting.

Indeed one of the most amazing stories to emerge as a consequence of all the concern over climate change was the recent announcement by mining giant Rio Tinto that they have paid $1 million to a Queensland grazier to not clear 12,000 hectares of scrub.

The land was eligible for clearing under the state government ballot.

The Australian Greenhouse Office calculated clearing the scrub would generate 1.2 million tonnes of carbon dioxide emissions.

Now the landholder has a 120 year agreement giving the carbon credits to Rio Tinto, while retaining the right to graze the land.

But don't assume your bit of scrub is now worth anything in terms of carbon credits, unless you have a permit to bulldoze and a willing buyer.

The situation may or may not be different once a carbon trading scheme is in place -- which won't be for a few years yet.

There is a risk many farmers will get caught having to count their emissions including methane from cow flatulence and methane and nitrous oxide from fertiliser use.

What the proposed carbon trading scheme means for Australian agriculture will depend on how the detail is drafted.

Unfortunately there was no agricultural representative on the government-business taskforce set up last December.  But let's hope agricultural representatives are included when the detail of the scheme is eventually developed.

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Self-defeating exaggeration

Australia might not be perfect, but it is a pretty good place in which to live.  Most of us would regard ourselves as being fortunate.  Millions of people around the world, if they had a free choice, would choose to live here.

To most people, there is no conceivable way in which Australia's political system could be compared to that of Sudan or Zimbabwe.  Likewise, most would regard it as a travesty to consider our industrial relations laws as somehow being analogous to the treatment suffered by unions and their leaders in Colombia.  Last year in that country 70 unionists were murdered.

Yet exactly these sorts of comparisons have been made.  In the first case by Amnesty International, and in the second by the International Labour Organisation of the United Nations.

Last month Amnesty put Australia's policies on asylum seekers into the same category as the persecutions being carried out by the Sudanese and Zimbabwean governments.  While Australia's treatment of refugees might be open to criticism, it has absolutely no parallel with what is occurring in these locations.  In the words of Amnesty itself, in Sudan the army and its militias "kill, rape and plunder with impunity".  On the ILO's list of countries with the "world's worst labour regimes", Australia will appear, but not Colombia.

The tragedy of the approach taken by Amnesty and the ILO is that if they continue on such a course they will become irrelevant.  Given their past good work, such an outcome would be unfortunate.  But more significant than the damage to these organisations themselves is the message being sent to those who live under conditions of genuine tyranny.

By grouping Australia with Sudan and Zimbabwe, the implication is that Amnesty believes that stopping mass murder and mass rape is no higher a priority than getting the Howard Government to change its policies on asylum seekers.  Similarly, the ILO reveals that it regards the repeal of WorkChoices as being as important as preventing the assassination of trade unionists.

This demonstrates how any sense of proportion about democracy and human rights is now almost entirely absent from public discussion.  And nowhere is this trend more obvious than in Australia.

The latest example comes from journalist David Marr in his new Quarterly Essay entitled "His Master's Voice -- The corruption of public debate under Howard".  Marr catalogues a series of decisions by the Howard Government, ranging from the censorship of media discussion about terrorism to the prosecution of public service whistleblowers, which Marr believes has weakened our democratic system.  On some issues Marr makes valid points.  But in his eagerness not just to critique Howard but to condemn him, Marr oversteps the mark.

It is ridiculous to claim that because the Howard Government has not provided taxpayer funding for the arts up to a level that Marr deems appropriate that therefore democracy is imperilled.  Surely a bigger challenge to democracy arises when practically all taxpayer-funded artists are of one particular political persuasion.

Contrary to what Marr might think, the Victorian police were not being "undemocratic" when they attempted to locate and arrest those who perpetrated violence at the G20 protests in Melbourne last year.  In his defence of the protesters, Marr asks rhetorically "how much trouble do we allow demonstrators to cause?"  The implication from this question being that demonstrators should be allowed to cause at least some trouble.  What he ignores is that there is nothing democratic about terrorising shoppers in Collins Street and hurling barricades at police.

He takes the Howard Government to task for overturning the Northern Territory's euthanasia laws, arguing that to do so is "profoundly undemocratic:  Australians endorse euthanasia overwhelmingly".  So they might.  But a majority of Australians also support the reintroduction of capital punishment.

Howard's opponents have manipulated concepts such as political freedom to such an extent that they are now meaningless.  Principle has been sacrificed in favour of political point-scoring.  Any decision taken by the Coalition with which those opponents disagree is interpreted as an assault on democracy.  Such a strategy is clever.  It is far more powerful for the PM's critics to claim that he threatens the fabric of our liberal democratic values than for them to simply say that they disagree with him.

But in the long run the strategy is self-defeating.  After a while, when the public sees through the exaggeration, it will stop caring.

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Brave policies doing the business

Why is it that we seem to be experiencing a miracle economy?  What's happening today was thought impossible just 10 years ago.

In the 1990s unemployment was stuck at around 8.5 per cent.  There was a view that if unemployment dropped below about 6 per cent, labour shortages would always push up wages and cause inflation.  To stop inflation governments increased interest rates to slow economic growth and keep unemployment high.

It was policy that entrenched social injustice and poverty by ensuring a large unemployment pool of hundreds of thousands of people.  It was the ultimate in unfairness because the most vulnerable people suffered the most.  But this was thought necessary to control inflation.

However, look at today.  Inflation is at a controllable 2.5 per cent and predicted to drop.  Interest rates are stable.  Unemployment is down to 4.6 per cent with Queensland on 4 per cent and trending lower.  In comparison wages have gone up by 4.1 per cent nationally with a 5.1 per cent increase in Queensland.

This is miracle stuff.  We are progressively eliminating the injustice of unemployment, pay packets are gradually rising more than inflation and interest rates are manageable.  Why?  Let's not be foolish.  This is no fluke.  It's not happening because Australia is just lucky and the economic good fairy has waved a magic wand.  It's the result of good government policy that's taken political bravery.  There are many elements to the policy but the most recent item of importance is the workplace relations changes.  To understand this it's necessary to understand what happened inside firms under the old system.

The old system controlled wages from a central point.  If people inside a firm wanted a wage increase they had to have an argument with the boss.  The system literally required employees to lodge written "disputes" about wages before anything could be discussed.  The process was slow and ugly.  What resulted was a system where wage increases were decided by bickering and ignored the ability of businesses to pay.  Businesses had to push up prices or risk seeing profits turn into losses.  Because this happened right across the economy, inflation increased.

The reality is that wages can only go up without causing inflation when wage increases don't kill business profits.

If wages increase but profits are still strong, companies won't increase prices because they fear competitors will steal their sales.  It's a tricky balancing act.

This is why the labour reforms of the past few years are so important.  If employees want wage increases they no longer have to have a formal argument.  They can go to the boss individually and state their case.  Or employees can still go as a group if they want.  It's a faster process and much simpler.

In implementing this new system there have been problems.  There was a flaw in the laws that enabled greedy bosses to decrease workers' wages.  But the Government says it is fixing this.  Even with the problems the facts so far are clear;  wages are increasing while inflation is under control and unemployment is going down.  Yes, there are people who would say this explanation is wrong.  But these people are not offering other reasons.

Meanwhile we need to get on with the business of doing business.  In undertaking direct negotiations managers need to learn to talk with their staff, something the old system discouraged.  Employees need to learn to talk with managers.  And we have to learn to do this as individuals.  It's perhaps strange because the old collective culture told us this was impossible.  But many people seem to be getting on with the job.

At the next election the political decisions are perhaps more important than we have seen before.  We have to judge if the new individual workplace arrangements are delivering the miracle economy.  If we say this is nonsense and reject the new system, we must ask ourselves, will we be inviting inflation and high interest rates to return?

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