The two faces of Haneef's defenders

Civil libertarians and many legal groups are guilty of hypocrisy in the way they allegedly defend justice in the Australian community.  Their double standards are demonstrated in the loud criticism of federal terrorism laws and dead silence over NSW occupational health and safety laws.

Federal terrorism laws conform to core justice principles.  NSW occupational health and safety laws intentionally breach them.  Now that the case against the terrorism suspect Mohamed Haneef has collapsed a clearer perspective can enter the justice debate.

Based on present knowledge, Haneef is a victim who's owed an apology and restoration of his good name.  The allegations against him that resulted in his detention proved to be false.

Prominent lawyers have claimed Haneef's treatment is a result of the design of federal terrorism laws.  They say the laws threaten the rights of all Australians.  This is wrong.  The terrorism laws secured Haneef's presumption of innocence.  The prosecutor had to prove the case.  Haneef had full rights of appeal to the High Court.  His detention was subject to approval from a magistrate independent of the prosecutor.  The magistrate eventually refused Haneef's continued detention.

The treatment Haneef endured resulted from a flawed investigation, not the terrorism laws.  But in lawyers attacking the terrorist laws and staying long silent on other more glaring legal injustices, the moral superiority they assume is demolished by their hypocrisy.

The NSW occupational health and safety laws demonstrate the point.  The laws are a political product of a deep-seated cultural hatred evident in the broad labour movement.

The cultural issues are exposed in a Business Council of Australia discussion paper, Making Work Safe, which refers to two streams of occupational health and safety laws in Australia.

The dominant stream, operating in most states and the Commonwealth, applies justice principles.  The other, operating in NSW, presumes the legally identified employer is guilty merely as a result of an occupational health and safety incident occurring.  Making Work Safe quotes academic papers which reason that corporations' lust for profits causes corporate managers to be neutered of their normal moral principles.  Managers are assumed to have no regard for worker safety and government must act in an oppressive, fearsome manner to scare managers into behaving safely.

It's an ugly, degrading view of humanity which in NSW holds such strong political sway that the Government assumes the authority to strip justice from occupational health and safety laws.

Occupational health and safety prosecutions are criminal actions.  Like anti-terrorism laws, occupational health and safety laws are intended to prevent and/ or punish deeds that harm other people.  But because of the severity of criminal sanction civilised societies realise that government must be restrained in its power over the individual or government will create victims.  Justice safeguards are built into criminal law.

The NSW laws are far worse than anything the legal community has alleged against the Federal Government.  The laws remove the right to presumption of innocence, deny trial before a jury in normal courts and prevent appeals to the High Court.

In the most high profile case since 2000 glaring double standards were exposed.  In the Gretley underground coalmining tragedy, four miners drowned.  The company drilled into a disused, water-filled mine after being given the wrong maps by the mines department.  Like Haneef, the company and managers were victims of circumstance.  Unlike Haneef they were denied justice and were convicted.

But the department was not prosecuted.  A union-owned labour hire company that under the law should have been charged, was not prosecuted.

The Government experienced some political pressure on the issue before the March election.  In typical "do-nothing" strategy, it pushed it off to yet another inquiry.  If libertarians, churches and lawyers were genuine in their defence of justice they would tell the employer haters in the union movement that hate has no place in a civilised society.  They would tell the Government to stop playing "stare down" politics and overturn its hate-inspired occupational health and safety laws.

What should be expected on past experience, however, is a steely focus on silence and a continued application of a conspiracy of hypocrisy.

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Cut-price drugs weaken industry

Oxfam Australia and other anti-business advocacy groups have long been antagonistic to the idea of patent protection for new medicines.

The prevalence of AIDS within the world's poorest countries has brought intensified demands on "unscrupulous big pharma" to reduce the price of drugs.

Oxfam evidently believes pharmaceutical firms are ripping off people in poor countries.

In Thailand (not, incidentally, a particularly poor country) the military government has already forced pharmaceutical firms to dramatically cut the price of anti-AIDS medicines.

Thailand has also licensed a government company to make and distribute copies of pharmaceuticals patented overseas.

My recent study, HIV/ AIDS Medicines for All?, examined these issues.  It found the company licensed by the Thai government is making unconscionable profits.

It also found other governments in developing countries exploited their citizens by taxing the drugs.

These concerns aside, forcing down the prices of patented drugs undermines the global pharmaceutical industry's incentives.

These incentives have proven to be invaluable in bringing an endless stream of new drugs.

Once discovered, a new remedy is often very cheap to produce.

But behind that new discovery are massive costs, including searching for the needles in the haystack that comprise the complex molecules of a new wonder drug;  costs of shepherding it through regulatory agencies.

And they include the costs of persuading a necessarily conservative medical profession of its merits.

There are hundreds of fruitless searches for every one that offers value, and years of trials before a success can be brought to market.

After that there are sometimes fewer than a dozen years during which it can be marketed before its patent expires.

It is a simple matter for governments to seize a patent or to require a cheap price, but the outcome brings a reluctance of companies to look for new formulas.

We have one home grown drug company, CSL, with a $16 billion capitalisation, and many smaller players such as Biota, Avexa, Starpharma, Peptech and Cytopia.

These are local start-ups developing intellectual property.

They hope to become either a global force in their own right or to forge a lucrative combination with one of the majors.

Pharmaceutical research and development is one area where Australian companies have enjoyed success and are optimistic about the future.

The industry is assisted by good domestic medical infrastructure, even though the dominance of government purchasing in new pharmaceuticals is a disadvantage.

Calls for artificially low drug prices are misplaced.  They rebound on the real interests of consumers and could abort the growth of some promising Australian businesses.

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Ideology is a health risk

Belief is a powerful thing.  Often belief in something can be sustained despite overwhelming evidence to the contrary.  In 1919, the Hungarian Georg Lukacs, one of the leading 20th century theoreticians of Marxism, discussed this phenomenon.  He celebrated the fact that even if every event of history proved that communism didn't work, communism would still be the "truth".  According to him, facts shouldn't be allowed to get in the way of ideology.

There are many modern-day examples of Lukacs's maxim in action.  For instance, there remains the belief that the solution to Africa's endemic poverty is simply more aid from rich countries.  The performance of those Asian countries that have liberalised their economies, against those in Africa that have not, is explained away as a "special case".

International aid agencies have proved notoriously reluctant to entertain a role for the free market.  And those agencies working in the health field have been among the worst.

In Sydney this week at an international conference on HIV/ AIDS, there was the latest effort to elevate ideology over evidence.  Such meetings are usually the arena for non-government organisations to plead for the abolition of the intellectual property rights held by pharmaceutical firms, and this week was no exception.

The argument is that the only way expensive medicines can get to the world's poor is if governments compulsorily acquire the patents for those medicines.  The medicines can then be produced more cheaply by governments.  Such proposals are not hypothetical.  Earlier this year the military junta government of Thailand did exactly that in relation to a number of AIDS and heart disease drugs.

The claim that saving lives is more important than the intellectual property rights of multinational companies is emotive, but it's wrong.  Many AIDS medicines certainly are expensive, and in poor countries they are beyond the reach of the majority of the population.  But while compulsory acquisition of patents will drive down drug prices in the short term, in the long term the effects would be disastrous.  When governments collectivise or nationalise private property they seldom bother to ask the obvious question.  What happens next?  If individuals and companies can't make a profit on an activity they won't undertake it.

Governments have no capacity to do what is required to produce new medicines.  In many countries with a high incidence of HIV/ AIDS, governments struggle even to ensure that roads are repaired.  It's not clear what makes people think that a government that can't maintain its roads can somehow develop the next generation of pharmaceuticals.

Instead of blaming the ills of the world on capitalism and its multinational companies, international development agencies could more profitably tum their gaze to the failure of government.  The World Health Organisation reported last year that taxes and charges could contribute more to the final price of a medicine than the manufacturer's price.  On top of this is the cost of regulatory delays.  South Africa, which has one of the highest rates of AIDS infection in the world, also has one of the slowest approval processes for new drugs.

The World Health Organisation could not have been more clear.  "It is very obvious that the elephant in the room is not the current price of drugs.  The real obstacle is the fragility of the health systems.  You have health infrastructure that is dilapidated, and supply chains that do not exist".  It doesn't matter whether medicines are expensive or cheap if they require refrigeration and there's no electricity available.

It is only beginning to dawn upon Australians that HIV/ AIDS is an issue for the region.  Twenty per cent of the world's 40 million cases are in the Asia Pacific region, with a rapidly growing proportion of our foreign aid budget being devoted to HIV/ AIDS prevention, particularly in Papua New Guinea.  At the Sydney conference, Foreign Minister Alexander Downer announced an increase of $400 million in the Australian government's spending on HIV/ AIDS, taking our total commitment to $1 billion over the next three years.

Such a move is laudable.  The only problem is that there is no guarantee that this money from the Australian taxpayer will not end up funding the campaigns of non-government organisations against free markets and property rights.  A major partner of Australian government aid agency AusAID is Oxfam Australia Oxfam Australia has been a vocal supporter of the compulsory acquisition of pharmaceutical patent rights.

It appears there might be a little way to go before evidence replaces ideology in the debate about international aid.

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New laws free the worker from the mob

The Howard Government has been attacked by unions and supporting academics for allowing small business to collectively bargain but denying the same right to employees.

If this were true the Government would be a two-faced political manipulator that hated employees and should be defeated at the next election.  At least that's how unions paint the Government.  But do the facts support the allegations?

Recently the Government made it possible for small businesses to collectively bargain when buying goods and services.  Groups of small independent supermarkets, for example, can now collectively negotiate bulk purchases of milk and any other items.

This is good.  It means that, together, small supermarkets can create buying power to match the dominant Coles and Woolworths.  It means small businesses can better compete on price.  It keeps big business more honest and ultimately we, the consumers, benefit from better prices.

In the past there have been heavy restrictions on doing this under trade practices laws.  These laws are designed to penalise businesses which collude to stop competition.

These consumer protection laws are necessary but sometimes the restrictions limit competitiveness.  That's why small business collective-bargaining laws have been introduced.

Small businesses that want to collectively bargain must obtain approval from the competition regulator, the Australian Competition and Consumer Commission, to ensure there's no price manipulation.

And just as importantly, if one group of small supermarkets wants to collectively bargain, the laws do not force other small supermarkets to join them.  Further, suppliers are not forced to negotiate with the buying groups.

The laws are designed to allow all businesses free choice in where and how they buy and sell.  These are the same rights that we as consumers have and it's what keeps competition and our economy fair and strong.

The approach of the Howard Government to collective bargaining for employees follows the same principles.  The federal laws allow a series of choices.  Employees can have individual agreements with their employer under AWAs or non-union or union collective agreements.  The Howard Government has introduced choice into employment agreement options.

In this respect the Government is not two-faced and is in fact totally consistent.  The criticism from unions and labour academics is wrong.

What unions allege is that employees are not capable of negotiating their own employment contracts and will always be exploited by employers.  Unions claim employers should be forced into collective agreements.  The Government replies that with proper legal protections, employees and employers benefit from individual agreements.

Unions want to take their agenda further.  They want laws where, if a majority of employees vote for a collective agreement, all employees must be forced into the collective.  And they want the employer to be compelled to negotiate and presumably enter the collective agreement.

Unions want to compel collective arrangements.

In arguing this way, unions and some academics are being two-faced.  They are no different from any big business that tries to manipulate competition and public opinion for selfish purposes.  They mask their desire for monopoly by claiming it's for the public good.

What is wrong is to have laws that force either model on everyone.

Unions can claim they protect employees.  But if they were genuine, they would not seek a business-type monopoly.  They would welcome employee and employer choice on agreements and compete to provide a top-quality service.

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Put the house price myths out to pasture

The Labor Party will hold a conference to finalise its housing policy in Canberra on Thursday.  Some people claim that the current high house prices are a result of a decade of interest-rate reductions that have made houses more affordable.

This is difficult to square with continued house-price increases in the face of more recent interest-rate rises, creating what the ALP has labelled "mortgage stress".

While affordability may increase demand and raise prices in the most sought-after areas, generally the effect of this is possible only where supply is restrained.  After all, interest-rate reductions did not lead to prices increasing for light planes, yachts or other costly durable goods.

Four of the five main housing industry groups last week jointly called for deregulation-based initiatives, including greater land release, reduced government charges and less red tape.  Housing supply comprises established and new homes, but it is new houses that are central to the new home buyer.

The prices of new homes can be dis-assembled into four components:  raw land, land preparation and development, the house itself, and government charges and taxes.  Raw land on the periphery of of urban areas is plentiful.  It is used for farming and is worth perhaps $5000 a hectare.

There are about 10 housing blocks a hectare, including allowances for factors such as schools and open spaces, so the raw land should be $500 a block.

Yet the housing land shortages created by government controls means a permit to build brings that land value to $50,000 in Melbourne and $115,000 in Sydney.

Sadly, our politicians don't seem to understand this.  Planning Mister Frank Sartor in NSW claims there are 33,000 approved lots "ready to go".  In fact, government-created land shortages in NSW have reduced new build levels by 40 per cent from their early 1990s levels.

The cost of the house itself is well publicised.  In every weekend paper, home builders offer fully finished homes on your own land.  These start at $110,000 and go up to $250,000 and more for the much vilified McMansions.

State and local taxes come on top of the regulatory impost misnamed as ''planning".  These measures, "development contributions", stamp duty and other taxes and regulatory requirements, can amount to as much as $122,000 a house in Sydney.  Even in other capitals such as Melbourne and Brisbane where they approach $40,000, they are an unfair and discriminatory charge on new home owners.

In fact, requiring development contributions is a fraudulent form of revenue raising.  The new houses' infrastructure, such as land preparation, roads, drainage, sewerage, and water, is provided by the developer and incorporated into the house price.  These land development costs that the buyer pays are $40,000 to $60,000 a block.

If we reassemble all the cost components, new houses on the periphery of our cities should sell from as low as $176,000 including goods and services tax.  Yet the median new-house price varies from $330,000 (Melbourne) to $535,000 (Sydney).  The cheapest land/ home packages are around $240,000 in Melbourne and $360,000 in Sydney.

The biggest culprit in this price augmentation is regulatory control of land together with taxes.  By creating an artificial shortage and heaping on other imposts and regulations, state governments transform the cost of a housing block of land on the outskirts of our major cities from an underlying $500 to over $230,000 in Sydney and $86,000 in Melbourne.

This also boosts established house costs.  There is an interconnectedness of house prices between new and old, suburb and suburb, and even from state to state.  When the supply of housing on the periphery falls below demand, the consequent price rises ripple across the urban area.

The effect diminishes with distance and is minor in the upmarket suburbs.  Escalating price levels are possible only where taxation or regulatory controls prevent supply adjustments.  And we have both these factors in spades throughout Australia.

We have no shortage of land, land developers, builders or bricks.  Yet regulations and taxes mean new house prices are between 33 per cent and 100 per cent higher than they should be.  Addressing these impediments to lower costs must be at the heart of any credible policy response.

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Take another look at the leaves

Why is it that over the past several months financial analysts and pundits seem to have been convinced that the Reserve Bank would increase interest rates?  There were even reports analysts were running a betting ring, with 100 per cent predicting a rise.  Wrong so far.  Interest rates are steady.

How could Australia's allegedly best financial brains be so wrong?

It's easy to understand.  Financial analysts generally predict the future by reading statistical tea leaves of the past.  They look at trend lines going back decades and assume (reasonably) that where a trend has been repeated often enough it's destined to repeat itself in the future.

Analysts have been looking at collapsing unemployment, which in May reached a three-decade low of 4.2 per cent.  Over the past 50 years, when unemployment drops, wages increase, creating wage-induced inflation.  Central banks' traditional response is to increase interest rates to cool the economy and keep unemployment at non-inflationary levels.  (It seems that pools of unemployed have been necessary to ensure economic stability.  Pity the unemployed!)

Financial analysts have been caught out.  Trend lines of the past have been broken.  Unemployment has headed south to a degree not thought possible five years ago.  At the same time, wage-induced inflation is absent.  Why?

In early June, Reserve Bank governor Glenn Stevens gave the first official indication.  He said that data on labour costs indicate that inflation should stay within acceptable limits.  This was contrary to Reserve expectations of a year ago.  He speculated that at least part of the explanation had to do with "changed behaviour in the labour market".  He observed that wages were increasing quickly in some sectors of the economy but slowly in others.  Overall, relative wages were increasing within the capacity of the economy to cope.  He said it had the appearance of a "text-book case of adjustment".

He said that this was due to changes in the way the labour market functioned, including increases in participation rates and rises in immigration.  He did not speculate on the politically sensitive area of changes to workplace relations laws.  It would be imprudent for a Reserve governor to comment on such matters.  But it would probably be foolish of financial analysts to ignore the central impact of the changes to workplace laws in containing wage-induced inflation.  The victory over wage-induced inflation is no accident.

For five decades a centrally controlled wages system pushed wage increases in one sector through to all sectors regardless of capacity to pay.  Traditionally, wages under the metals award would be adjusted upwards and passed on to all awards by administrative decrees of industrial relations commissions.

In the past decade this process has been driven more by industry pattern bargaining than award alterations.  Wage increases in one company would flow via enterprise agreements to other companies in the same sector, then onto other sectors.

The process was driven by a theoretical belief that wage "justice" was guaranteed by maintaining percentage differentials between industries and job classifications, administered by quasi-legal commissions.  But that system did not take into account whether individual businesses could pay.  Businesses unable to pay had to increase prices, creating the dynamic for inflation.

The more recent reforms to Australia's labour laws have neutered the system that secured this particular notion of wages justice.  A core conservative Australian value for 100 years has been ditched.

It's been replaced by a system guaranteeing minimum pay rates, but beyond the minimums, the system allows each business to pay according to capacity.

Flow-on effect is now mostly market driven.  Hence, we witness huge pay increases in the mining sector but only modest ones in the rural and retail sectors.

For financial analysts this is a new environment;  trends of the past can't predict the future.  Interest rate speculation has become more difficult.  It requires a detailed understanding of the micro operations of labour markets.

Risks exist.  Could the new system contain inflation if unemployment dropped to 2 or 3 per cent?  Who knows.  But it's fair to speculate that a return to a traditional system of administering wages justice would reintroduce wage-induced inflation.

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HIV/ AIDS medicines for all?

Backgrounder

There are few more important issues facing developing nations than the HIV/AIDS crisis.  HIV/AIDS destroys lives, consumes scarce resources, and provides yet another unneeded brake on the path to growth for many developing nations.

The developed world already has readily available medicines which can help alleviate the effects of HIV/AIDS.  The challenge is to make these medicines available to as many people as possible.  According to some non-government organisations, the reason why people are denied access to life-saving drugs is because of patent protections.  In fact, nothing could be further from the truth.

As "HIV/AIDS Medicines For All?" reveals, patent protections are not the reason why people in developing countries do not have the same access to medicines as those in developed countries.  Instead, much of the blame can be placed upon the all too familiar barriers of government regulation, taxes and tariffs that are mistakenly viewed by developing nations and their self-appointed advocates as the means to achieve prosperity.

We have long been an advocate for private property rights in all sectors of the economy, and we have been an active player in the debate on intellectual property.  Earlier this year we made a submission to the Department of Foreign Affairs & Trade inquiry into the inclusion of the TRIPS Public Health Amendment.  We have published numerous articles on intellectual property, the "fair trade" movement and public health policy.  We have also been active in the debate on intellectual property and parallel imports.

Intellectual property rights, like rights that accrue to physical property, provide a stable legal framework for innovation and development.  Unfortunately the campaign against patent protection is a threat not just to innovation, but to the health of millions of people in the developing world.

EXECUTIVE SUMMARY

The International AIDS Society Conference on HIV Pathogenesis, Treatment and Prevention to be held in Sydney, Australia in late July convenes at a critical time in the global fight against HIV/AIDS.  Over the last decade, as the AIDS crisis has continued to evolve around the world, the global health community has increased its efforts to determine how best to broaden access to life-saving medicines.  At the same time, the community understands the need to ensure that incentives remain for scientific research and development into the next generation of medical technologies.

Several international non-government organisations (NGOs) have blamed patent protections on HIV/AIDS medicines for pricing developing world patients out of the market.  Patents, they claim, are a barrier to access.  This claim has been amplified by the media.  And these NGOs have lobbied governments to break patents.

In response to these claims, the scholarly community has investigated the role that patents play in blocking access.  Several papers and reports have painted a much more complex picture than that typically reported in press accounts or found in NGO press releases.

As this paper demonstrates, patents do not serve as a significant barrier to treatment.  Moreover, there are several barriers to access over which policymakers and aid groups have some influence and yet which receive little attention in the media.  The patient community would be well-served by increased attention paid to these barriers.

For example, our research finds that government regulation, duties, taxes and tariffs can represent more than half of the final cost of medicines in the developing world.  These tariffs are illegal in developed economies, but continue to be imposed in developing countries at the expense of the world's poor.

Research also demonstrates that generic medicines are often as expensive or more expensive than patented drugs.  For example, one recent scholarly survey found that of 18 single dose AIDS medicines available in developing countries, 14 patent-protected drugs were either cheaper or in a similar price range to their generic counterparts.

Of particular interest to the media and the global policy community is the Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS) in the World Trade Organisation.  The TRIPS Agreement allows developing countries to break patents and issue compulsory licenses for medicines but only in times of "national emergency".

Thailand and Brazil have recently issued compulsory licenses for HIV/AIDS medicines.  Thailand has also issued a compulsory license for a heart disease medicine.  In both cases, the government claimed financial hardship prevented it from paying for innovator medicines and thus justified the breaking of patents.

Yet our analysis shows that the actions taken by the military government of Thailand are largely without merit.  To give one small illustration:  at the same time it claimed financial hardship and slashed its public health budget, the Thai military government also increased military spending by more than US$1.1 billion.

The actions by the Thai government are in line with a larger international effort to undermine intellectual property (IP) protections.  But one frequently overlooked aspect of this effort is that the failure to enforce patent protections is also contributing to the spread of counterfeit medicines.  These counterfeits pose a serious risk to global health by promoting resistance to HIV/AIDS medication, with worrying medical and financial consequences.

Undermining property rights through the issue of compulsory licenses will have a detrimental impact on investment that is vital to address the healthcare infrastructure and supply chain challenges developing countries face.

INTRODUCTION

This paper has been developed in the lead up to the International Aids Society Conference on HIV Pathogenesis, Treatment and Prevention to be held in Sydney, Australia, July 22-25 2007.  The core purpose of the paper is to educate interested parties on the issues and implications of policy decisions currently being made in relation to the development and distribution of HIV/AIDS medicines.

Since its inclusion at the end of the Uruguay Round of World Trade Organisation negotiations, the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement has required developing countries to introduce and enforce intellectual property rights regimes.  Non-government organisations have regularly condemned TRIPS for its requirement to encourage drug innovation and development through patent protections.  NGOs have claimed that patents keep the price of essential medicines high and thus inaccessible for the world's poor.

The TRIPS Agreement contains an allowance for countries to issue compulsory licenses and temporarily suspend patents in cases of "national emergency".  Following the recent action of the Thai government to issue compulsory licenses for three medicines, two HIV/AIDS and one heart medicine, there has been significant international debate about the legitimacy and applicability of compulsory licensing and the role patents play in the price of medicines.

This paper investigates the role patents play in setting the prices of medicines in the developing world.  It also considers other factors that affect prices and the implications of compulsory licenses on research and innovation, medicine prices and the subsequent impact on patient's health.

We have taken an interest in this policy area as part of its approach to develop evidence-based public policy solutions that deliver outcomes.  Too often public policy is developed and solutions are proposed that are not supported by evidence.  This paper highlights similar concerns in developing public policy solutions for access to HIV/AIDS medicines for the world's poor.

THE CAMPAIGN AGAINST PATENTS

In recent years NGOs such as Médecins Sans Frontières (MSF), known in Australia as Doctors without Borders, Oxfam International, and Knowledge Ecology International (KEI) have run international campaigns highlighting the limited access to essential medicines by the world's poor.

A core target of their campaigns has been IP rights and the WTO's TRIPS Agreement that requires WTO members to have and enforce IP rights regimes.  Their criticism of TRIPS and the obligations it imposes relates to enforceable patents on innovative medicines which they claim keep the price of medicines in the developing world high and hence undermine access.

Patents grant the innovator the right to exploit the patented medicine for a period of up to 20 years;  though due to regulatory approval processes, the period is normally halved.  By granting the innovator an exclusive right to manufacture a medicine NGOs have argued that the price of a medicine is kept artificially high and removes competition that would otherwise reduce the price of medicines in the interests of pharmaceutical companies at the expense of the world's poor.

Since 1999, the French NGO MSF has run its "Campaign for Access to Essential Medicines", focusing on increasing access for essential medicines in the developing world.  MSF has been particularly vocal in supporting a recent decision by the Thai government to issue compulsory licenses for three medicines, stating that "the lives of patients have to come before the patents of drug companies, and this policy needs to be expanded to essential drugs that are expensive and in short supply". ⁽¹⁾

In the lead up to the 2006 Toronto World Aids Conference Oxfam International added pharmaceuticals into its "Make Trade Fair" campaign.  It has since joined MSF's chorus arguing patents "push up the price of essential products like ... medicines ... (ensuring) vital drugs will be priced out of reach of poor people ... (and) many of these lives could be saved if cheap drugs were available". ⁽²⁾

KEI have also been active.  Following the announcement by Brazil to issue a compulsory license for AIDS drug efavirenz, KEI's Director, James Love, commented that it "is an important first step ... (and) we wish Brazil had done this in 2001, when it was first proposed". ⁽³⁾

TRIPS AND COMPULSORY LICENSING

There are many myths surrounding the role of TRIPS, patents and compulsory licensing, that distort debate and consideration of sound public policy solutions to the challenge of access to essential medicines for the world's poor.

During the Uruguay Round of General Agreement on Tariffs and Trade negotiations, the contracting parties negotiated the inclusion of the TRIPS Agreement under the newly formed WTO.  The TRIPS Agreement requires WTO members to introduce and enforce IP rights regimes.

Due to concerns about the potential impact of IP rights regimes on access to essential medicines, the TRIPS Agreement includes provision for compulsory licensing under Section 31 (b).  Compulsory licensing allows countries to waive patents following consultation with the patent holder in a "national emergency or other circumstances of extreme urgency or in cases of public non-commercial use". ⁽⁴⁾  Section 31 (f ) of TRIPS states that compulsory licenses should only be issued to provide products for domestic purposes.

Despite the flexibility afforded in TRIPS to deal with health crises, developing countries sought further clarification.  Following the 2001 Doha Ministerial of the WTO the Doha Declaration provided clarity to ambiguities in the text of the TRIPS Agreement on the issuance of compulsory licenses.  The Doha Declaration made it clear that each country was allowed to individually interpret a "national emergency or other circumstance of extreme urgency" and that this included HIV/AIDS. ⁽⁵⁾

Following further negotiations concluded in 2003, the WTO also allowed members who did not have the manufacturing capacity to produce compulsory licensed medicines to trade in generic medicines.  Technically all WTO members were entitled to do so, but developed country members waived their rights.  This amendment was implemented as an immediate interim measure and is currently under consideration for formal inclusion into the TRIPS Agreement.  Considering that the United States has already announced its support for the inclusion, it is expected to be included shortly.

The inclusion of compulsory licensing in TRIPS, and the clarity provided to their issuance, was negotiated with the expectation that WTO members would exercise this right sparingly.  Recent actions by the governments of Thailand and Brazil demonstrate otherwise.

Compulsory licensing by Thailand's Military junta In early 2007 the new military government of Thailand issued compulsory licenses for patented medicines under the "national emergency" provisions of the TRIPS Agreement.  The Thai government originally threatened to issue compulsory licenses for 14 medicines and subsequently issued them for three -- two HIV/AIDS antiretrovirals, Kaletra and efavirenz, and a widely-used heart disease medicine, Plavix. ⁽⁶⁾

The Thai government identified budgetary constraints as the primary reason for issuing compulsory licenses for these medicines.  In its issuance of a compulsory license for Kaletra the Thai government stated that "with this high price the budget allocated from the Thai government can only cover some patients ... if this ARV formula could be produced or imported, the lower price would help more accessibil(ity)". ⁽⁷⁾

The Thai Health Minister stressed the implications of cost stating "the move is permissible under international trade rules in the event of national public health emergencies ... we have to do this because we don't have enough money to buy safe and necessary drugs for the people under the government's universal health scheme". ⁽⁸⁾

Under its TRIPS obligations the Thai government was required to consult with the patent holder.  The pharmaceutical companies affected included Abbott Laboratories (Kaletra), Sanofi-Aventis and Bristol-Myers Squibb (Plavix).  Yet the Thai government did not consult with these companies, and all made efforts to consult with the Thai government following the announcement, with limited success. ⁽⁹⁾

Following the threat of the compulsory license for Kaletra, Abbott Laboratories offered to reduce the price of Kaletra to below the cost of any copy version currently available.  The Thai government turned down Abbott's offer and proceeded with the compulsory license.

Oxfam and MSF have been particularly vocal running campaigns in favour of the actions of the Thai military government and against retaliatory action of affected pharmaceutical companies. ⁽¹⁰⁾

The cosy relationship between Oxfam and MSF withthe Thai military junta is a marker for the credibility of these organisations.  MSF brands itself as an "international medical humanitarian organisation" and Oxfam claims to be "united for a more equitable world".  Yet they are now building close relationships and garnering support for a unelected, undemocratic military junta with scant regard for human rights. ⁽¹¹⁾

Thailand's action is setting a dangerous precedent.  Following the actions of Thailand, the government of Brazil has also now issued compulsory licenses for efavirenz, despite offers by Merck to reduce its price for the medicine. ⁽¹²⁾

SPURIOUS CLAIMS AT BEST

In issuing compulsory licenses for Kaletra, efavirenz and Plavix the Thai government cited a "national emergency" due to a lack of funds to purchase the patented medicines.  The Thai government has waived the patents and allowed the medicines to be produced by the government owned Government Pharmaceutical Organisation (GPO).  Despite its obligations under TRIPS to not issue compulsory licenses for profit, the GPO is a profit making company with a deplorable record of commitment to the public health of the Thai people.

In 2005 the GPO made a profit of US$35.5 million and reinvested only 0.5% of its sales revenue into research and development (R&D).  This compares poorly with innovative pharmaceutical companies that reinvest approximately 17.5% of their sales revenue in R&D. ⁽¹³⁾

Making profits from pharmaceuticals is a fair and reasonable enterprise.  But there is an inconsistency when a government agency is making annual profits of US$35.5 million, while the government concurrently argues it cannot afford medicines and must invoke compulsory licensing;  particularly when the estimated cost saving to the Thai government from these compulsory licenses is only US$30 million per annum. ⁽¹⁴⁾

Concurrently the Global Fund to Fight AIDS, Tuberculosis and Malaria, commonly known as the Global Fund, an organisation funded by primarily developed country governments to fight against the aforementioned diseases, offered to pay for the Thai government's needs for efavirenz from a World Health Organisation (WHO)-approved generics producer in India.  Yet the Thai government turned down the offer, preferring the Thai taxpayers foot the bill.

The Thai government has had a questionable commitment to prioritising health spending.  In 2003, government health expenditure was 3.3 percent of GNP, down from 3.5 percent in 1999, while total government expenditure grew from 54 percent in 1999 to 62 percent in 2003.  This compares poorly with other developing countries such as China with 5.6 percent, Cambodia with 10.9 percent and Vietnam with 5.4 percent. ⁽¹⁵⁾

The Thai military government has also cut health spending by US$12 million per annum.  If the government were in a tight financial spot this would be understandable, but at the same time they also increased salaries to military officials by US$9 million and defence spending by a third, or US$1.1 billion. ⁽¹⁶⁾

But these are not the limits to the questionable conduct of the Thai government.  In 2002 the Thai Auditor General reported that the GPO had stolen around US$13 million from the Thai government over the previous 4 years, by selling more than 60 percent of its medical products to the government above market price, in some cases by as much as 1,000 percent. ⁽¹⁷⁾

The GPO also has a terrible track record of protecting the health interests of the Thai people.  In 2002 the Global Fund provided US$133 million to the GPO to test its locally produced HIV/AIDS medicine, GPO-Vir.  In July of that year it was discovered that the GPO was issuing substandard medicines that were ineffective and promoted resistance to first-line treatment for HIV/AIDS patients.

By August of that year the Global Fund withdraw its financial support because the GPO had not achieved WHO approval and was not meeting international standards.  Yet, despite the relatively weak standards imposed by the WHO, the GPO has failed to meet their standards against every benchmark. ⁽¹⁸⁾

A WHO spokesperson made specific comment on the WHO's action stating that "drugs that are not WHO pre-qualified may not directly kill people, but they could foster resistance to aids drugs". ⁽¹⁹⁾  This appears to be precisely what has occurred in Thailand.  The WHO also recommended that the medicine not be sold outside of Thailand because it failed to achieve bioequivalence.

A bioequivelant medicine is one that is a true generic medicine and has been approved by the relevant regulatory agency such as the Therapeutic Goods Administration in Australia or the Food and Drug Administration in the United States.

A generic medicine is different from a copy or counterfeit medicine.  A counterfeit medicine has not gone through government quality and regulatory processes.  Without quality assurance processes, a copy or counterfeit medicine has the potential to include insufficient active ingredients which can promote resistance to effective medicines.  In some cases counterfeit medicines include dangerous substitutes for active ingredients that can be both ineffective and deadly.

The consequence of providing substandard medicines that do not achieve bioequivalence is that patients then develop resistance to the medicine, rendering it ineffective against their disease.  In the case of Antiretroviral medicines (ARVs) the use of substandard medicines promotes resistance from first-line therapies and requires patients to use second-line or third-line therapies.

First-line therapies are the cheapest and most common form of ARVs.  The cost of moving patients onto second-line therapies is significant and requires a higher level of care with supportive infrastructure and medical services, including specialist physicians, ongoing monitoring and potential hospitalisation.  By supplying medicines that promote resistance to shave costs, the Thai GPO is both placing the lives of patients at risk and creating a long-term financial problem to provide medicines to people infected with HIV/AIDS.

Estimates include nearly a ten-fold increase in the cost if patients are required to move to second-line treatments.  Drug resistance is also cumulative.  It is estimated that up to 45 percent of Thailand's AIDS patients are now drug resistant. ⁽²⁰⁾

It is clear that if the Thai government continues to use medicines that promote resistance, the real national health emergency has yet to hit Thailand, and it will not be able to allocate blame to patented medicines.

PATENTS ARE NOT THE PROBLEM

In relation to the Thai government, NGOs claim that IP rights are making medicines cost prohibitive for the world's poor.  This position is not supported by evidence.

The WHO maintains an Essential Medicines List (EML) that provides guidance on "a list of minimum medicine needs for a basic health care system, listing the most efficacious, safe and cost-effective medicines for priority conditions". ⁽²¹⁾  If IP rights were the source of the price problem for developing countries the WHO EML would be filled with patented medicines that are provided at unreasonably high prices for the population.  Yet a study conducted showed that of the medicines listed on the WHO's EML, 98 percent were not patented in poor countries. ⁽²²⁾

Undermining IP rights didn't increase Indian access The lack of enforced IP rights regimes also has a detrimental impact on foreign and local pharmaceutical companies developing medicines targeting local health challenges.

India provides a telling example of the costs of not having IP rights.  In 1972 the government of India passed laws that ceased patents on pharmaceuticals to drive down prices.  Despite the rhetoric, access to medicines did not increase because of the removal of patents.

India has the highest number of AIDS patients of any country in the world.  Much of the burden for financing medicines for India's AIDS patients falls onto the international donor community, not the domestic government.  Yet even without patents, only 12,000 of India's estimated five million AIDS sufferers were receiving AIDS medicines by the end of 2005. ⁽²³⁾

Instead of increasing access to essential medicines, abolishing patents for pharmaceuticals limited the growth of an Indian innovative medicines industry. ⁽²⁴⁾  India did become the centre of generic medicines with more than 15,000 generic pharmaceutical firms in 2002, ⁽²⁵⁾ but the benefit has not flowed on to Indians infected with HIV/AIDS.

Recently, India changed its regime to support IP rights for pharmaceuticals.  Since the introduction of IP rights local firms, such as Ranbaxy and Dr Reddy's, have begun R&D in medicines that primarily target the local population.  In the last five years, India has doubled the number of medicines approved by the FDA and is now the country with the single largest number of medicines approved by the FDA after the United States. ⁽²⁶⁾

GENERICS NEEDN'T BE CHEAP

A myth has been created that patents provide a monopoly for the inventor that drives up prices, while generics are a cheaper alternative to secure access to essential medicines for the world's poor.  Patents certainly allow the patent holder exclusive rights, but a patent holder's monopoly is tenuous.

A medicine that achieves the same outcome can be developed by different means without being in breach of a patent.  Only the precise formula for the patented medicine and the process for its application can be patented.

Patents also don't provide the exclusive period of exploitation that is commonly perceived.  Under TRIPS countries are required to provide patents for at least 20 years.  A patent's priority date indicates the date it was filed.  A pharmaceutical's priority date is filed prior to application for regulatory approval to manufacture the medicine.  By the time regulatory approval is achieved the period for monopoly manufacture is reduced by half or more.

In the absence of patents NGOs suggest that generics will provide a cheaper alternative to patented medicines.  MSF's own numbers do not support this claim.  In 2005 the Hudson Institute completed a study of MSF's "Untangling the web of price reductions" report identifying the price differences between patented and non-patented medicines.  Out of the 18 single dose AIDS medicines listed in MSF's report, five were cheaper than the generic variety, only four were more expensive and the remaining nine were in a comparable price range. ⁽²⁷⁾

Table 1:  Prices of Single Dose AIDS Medicines

Single Dose ARV	Patented Drug Price (Transportation included)	Copy Price Range (10% Transportation included)	Comparability
Abacavir, 300mg	$887	$776 - $1,445	Same range
Didanosine, 100mg	$310	$161 - $456	Same range
Didanosine, 400mg	$279	$179 - $368	Same range
efavirenz, 200mg	$500	$361 - $482	More expensive
efavirenz, 600mg	$347	$381 - $519	Less expensive
Indinavir, 400mg	$400	$353 - $514	Same range
Lamivudine, 150mg	$69	$60 - $188	Same range
Lamivudine, 10mg	$82	$64 - $84	Same range
Nelfinar, 250mg	$1,036	$1,245 - $1,967	Less expensive
Nevirapine, 200mg	$438	$88 - $183	More expensive
Nevirapine, 10mg	$401	$93 - $153	More expensive
Ritonavir, 100mg	$91	$225 - $482	Less expensive
Saquinavir, 200mg	$1,059	$1,124	Less expensive
Stavudine, 30mg	$48	$15 - $66	Same range
Stavudine, 40mg	$55	$35 - $84	Same range
Stavudine, 1mg/ml	$35	$88	Less expensive
Zidovudine, 300mg	$212	$154 - $319	Same range
Zidovudine, 10mg	$223	$105 - $130	More expensive

Source:  Adapted from Adelman, C., Norris, J. & Weicher, S. J., ‘Access to Medicines: The Full Cost of HIV/AIDS Treatment’, White Paper, Hudson Institute, e2, May 2005, p9, modified from Médecins Sans Frontiéres , ‘Untangling the Web of Price Reductions: A Price Guide for the Purchase of ARVs for Developing Countries’, February 2005, pp10-12

The study also found that none of the fixed dose combination medicines were higher than the generic, and one was nearly a quarter of the price.

Table 2:  Prices of Fixed Dose Combination Medicines

Fixed dose combination ARV	Patented Drug Price (Transportation included)	Copy Price Range (10% Transportation included)	Comparability
Lamivudine (300mg) + Zidovudine (150mg) + Abacavir (300mg)	$1,241	$1,132 - $1,737	Same range
Lamivudine (150mg) + Zidovudine (300mg)	$237	$201 - $469	Same range
Lopinavir (133.3mg) + Ritonavir (33.3mg)	$550	$2,168	Less expensive

Source:  Adapted from Adelman, C., Norris, J. & Weicher, S. J., "Access to Medicines:  The Full Cost of HIV/ AIDS Treatment", White Paper, Hudson Institute, e2, May 2005, p9, modified from Médecins Sans Frontiéres, "Untangling the Web of Price Reductions:  A Price Guide for the Purchase of ARVs for Developing Countries", February 2005, pp10-12

The basis for arguing that developing countries will have greater access to essential HIV/AIDS drugs through compulsory licensing of generic HIV/AIDS medicines is questionable.

GOVERNMENT POLICIES INCREASE PRICES

Despite the rhetoric of NGOs, IP rights are not barriers for access to patented medicines.  One of the most important and most easily removable barriers for access to essential medicines for the world's poor is the removal of developing country government regulation, taxes and tariffs.

During the Uruguay Round of WTO negotiations developed countries agreed to remove all tariffs on pharmaceutical imports.  As developing countries were not signatories to this agreement, they are allowed to continue applying regressive tariffs on essential medicine imports.

The WHO has made it clear that improving access to affordable medicines requires "reducing taxes, tariffs and margins". ⁽²⁸⁾  In its Price, Availability and Affordability report the WHO has consistently pointed out that taxes and tariffs are adding significantly to the cost of essential medicines.  In its 2005 report the WHO noted that "due to the cumulative nature of price components, a small tax applied early in the distribution chain (such as an import tax) can have a significantly larger impact on the final price". ⁽²⁹⁾  The WHO reiterated this point in its 2006 report stating "One major finding was that taxes and duties levied on medicines, as well as mark-ups applied, frequently contribute more to the final price than the manufacturers' price". ⁽³⁰⁾

The global average for custom duty, value-added tax and other duties on pharmaceuticals averaged at 18 percent internationally and 14 percent in least developed countries. ⁽³¹⁾

A 2003 Boston University Study found that of the nine developing countries surveyed that medicines were increased by up to 68.6 percent of their cost in country. ⁽³²⁾  Table 3 demonstrates why these costs can be crippling to access to medicines.  The table quantifies these costs in percentages, disguising their compounding implications that are reflected in the "Total markup" row.

Table 3:  Examples of hidden costs on pharmaceuticals by country (%) of final cost

	Sri Lanka	Kenya	Tanzania	South Africa	Brazil	Armenia	Kosovo	Pune, India	Nepal	Mauritius
Import tariff	0	0	10		11.7	0	1	0	4	5
Port charges	4	8	1				4	0
Clearance and freight		1	2						1.5	5
Pre-shipment inspection		2.75	1.2
Pharmacy board fee			2
Importer's margin	25						15	25	10
VAT				14	18	20	0
Central govt Tax								4
State govt tax					6			9
Local town duty								1.5
Wholesaler	8.5	15	0	21.2	7	25	15	10	10	14
Retail	16.25	20	50	50	22	25	25	15	16	27
Total markup	63.97	54.22	74.3	74.05	82.38	87.5	73.64	81.94	48.08	59.26

Source:  Levison, L., "Policy and programming options for reducing the procurement costs of essential medicines in developing countries", Boston University School of Public Health, 2003

These countries provide indicative costs added to medicines before they reach their patient.  Some are avoidable, others are not.  Taxes and tariffs are particularly avoidable as they provide no purpose than to inflate the price of medicines to provide revenue to the government.  Table 4 identifies some of the most egregious application of duties and taxes imposed by developing country governments that inflate the price of medicines.

Table 4:  Duties and taxes on retail medicines

Country	Combined total duties and taxes
India	55%
Sierra Leone	40%
Nigeria	34%
Pakistan	33%
Bolivia	32%
Bangladesh	29%
China	28%
Jamaica	27%
Morocco	25%
Georgia	25%
Mexico	24%

Source::  Ahmed, K., Cudjoe, F., Davie, E., Kilama, D., Krause, M., Mejia, A., Mitra, B., Oplas, N., Simonetta, M., Stevens, P. (Ed), Tapia, J., Tse, M. & Urbach, J., "Increasing access to medicines" in "Fighting the Diseases of Poverty", International Policy Press, UK, 2007, p149

Despite duties, taxes and tariffs making a significant contribution to the cost of essential medicines, they are rarely the focus of NGOs.  If developing countries were focused first on their population's health and not fundraising, they would remove the taxes and tariffs applied to essential medicines.

Regulation also adds significant costs.  South Africa has one of the highest rates of HIV/AIDS infection in the world;  it also has a reputation for having one of the slowest approval mechanisms for regulatory approval for essential medicines.

South Africa's Medicines Control Council (MCC) has a reputation for unnecessary delays and inefficiency in the approval of medicines.  The MCC can take more than three years to give regulatory approval for medicines already approved by developed country regulatory agencies. ⁽³³⁾  These delays extend the period until patients can access essential medicines that have already proven to be safe.

Extended periods of regulatory approval also add to the cost of pharmaceutical companies, which is then passed on to consumers.  In many developing countries the absence of a commercial market places a disincentive to seeking regulatory approval, effectively denying the access of people in those countries to the benefits of the medicine.  Even if generic manufacturers supply medicines in their place, it reduces competition in the marketplace that would otherwise reduce the price of the medicines available.

Cheaper medicines needn't reach their destination Taxes and tariffs are not the only significant inhibitor to access to essential medicines.  Despite significant programs established by developed countries and donor organisations to deliver access, many never receive treatment due to poor infrastructure and corruption.

Many ARVs are not even patented in parts of Africa and Asia, yet more than 50 percent of people lack regular access to essential medicines due to poor infrastructure for their supply and use. ⁽³⁴⁾

The impact of poor infrastructure and poor health systems cannot be underestimated.  In July 2006 the WHO's HIV Division stated that "it is very obvious that the elephant in the room is not the current price of drugs.  The real obstacle is the fragility of the health systems.  You have health infrastructure that is dilapidated, and supply chains that do not exist". ⁽³⁵⁾

Poor healthcare infrastructure undermines the capacity for healthcare providers to deliver effective treatment.  ARV treatment requires close monitoring and surveillance over the lifetime of the patient.  Inadequate healthcare infrastructure makes this process exceptionally difficult.

Reliable supply chains are also essential.  Less developed countries often lack the basic infrastructure to distribute medicines effectively due to poor or limited road networks and limited access to electricity.  Poor road networks reduce the capacity for regular supply of essential medicines.  A lack of reliable electricity undermines the security of supply for many complex HIV/AIDS medicines that require refrigeration. ⁽³⁶⁾

Corruption also plays an important role in undermining the successful delivery of medicines.  As the example of the Thai GPO demonstrates, the GPO acts more in the interests of corrupt Thai bureaucrats and government officials, than in the interests of effectively delivering medicines to the Thai people.  Studies have shown in Guinea, Cameroon, Uganda and Tanzania between 30 and 70 percent of government medicines disappeared before they reached their intended patients. ⁽³⁷⁾

Ignoring these important issues does nothing to promote access to essential medicines.  Yet NGOs like MSF, Oxfam and KEI frequently ignore these barriers and focus on IP rights and promote compulsory licensing.  Sadly the cost of this position is routinely ignored, particularly when the impact will hit the world's poor hardest.

THE CONSEQUENCES OF IGNORING
THE REAL BARRIERS TO ACCESS

Ignoring the real barriers to access will not aid the world's poor.  But the alternative policy proposals by NGOs will also have a significant impact on their interests.  Compulsory licensing has a substantial effect on foreign direct investment (FDI), forcing pharmaceutical companies to reassess their pricing policies and a failure to enforce IP rights promotes the production and use of life-threatening counterfeit medicines.

THE COST TO INVESTMENT

Stable investment flows are essential to economic growth in the developing world.  The benefits of FDI to economic growth can ensure availability of capital to fund the infrastructure and supply chains necessary to bridge the current gap between the supply of HIV/AIDS medicines and needy patients.

Undermining IP rights will have the long term effect of undermining investment.  While issuing compulsory licenses for medicines in a "national emergency" may be accepted by the international investment community, issuing compulsory licenses without consultation and for non emergency medicines, such as Plavix, is excessive.

The compulsory license action of the Thai government without consultation of the affected companies has significantly damaged its reputation as a centre for FDI.  The US Chamber of Commerce completed a survey of business leaders that demonstrated that Thailand's economic policies and undermining of property rights is impacting on US investment decisions.  Thailand has also recently earned its place on the United States Trade Representative's Priority Watch List because of its compulsory license action citing a "lack of transparency and due process". ⁽³⁸⁾

In the Inaugural International Property Rights Index Thailand placed 40th out of the 70 countries indexed for intellectual property protection. ⁽³⁹⁾

IP rights are essential to economic development.  Physical property rights are an essential pillar for countries to grow economically.  IP rights are no different.  As the example of India demonstrates, IP rights are essential to driving investment to innovation and developing the IP-dependent industries in countries.

Where property rights are not enforced, goods and services fail to attract investment. ⁽⁴⁰⁾  Stifled investment stymies innovation and the optimisation of limited resources.  It ensures that individuals cannot prove their ownership and their access to credit is therefore limited.  The opportunities foregone are borne by individuals and society as a whole. ⁽⁴¹⁾  This is particularly true of solely IP-dependent industries such as pharmaceuticals.  This is why innovative medicine development is conducted in developed economies with strong IP rights regimes.

Excessive issuing of compulsory licenses on non-essential medicines will not help Thailand or any other country in boosting its attractiveness for FDI.

THAI PRICES DOWN, AFRICAN PRICES UP

Thailand's compulsory licensing of medicines is clearly having a detrimental impact on its own country.  Its actions will also have an on-flow effect for other countries inflicted with large populations of people infected with HIV/AIDS.

Thailand is not the wealthiest country in the world;  but it is also not the poorest.  Pharmaceutical companies invest millions to develop medicines and scale their prices dependent on the capacity of the market to buy these medicines.  The cost of the investment is real.  Each ARV can cost up to US$500 million to develop. ⁽⁴²⁾

Medicines sold in rich developed countries such as Australia and the United States are sold at a price much higher than in LDCs.  This differential pricing structure is designed to ensure that the companies can recoup the cost of investment, while also recognising that essential medicines need to be provided at a reasonable price for consumers.

By undermining cost recovery through market segmentation, Thailand has acted to undermine the ongoing sustainability of providing affordable essential medicines to the world's poorest -- particularly those in Africa.

Thailand is a middle-income country and attracts a mid-tier pricing structure as a result.  Thailand has the capacity to pay modest amounts for medicines, those in Sub-Saharan Africa have a substantially decreased capacity to pay as much.

To take account of Thailand's actions, pharmaceutical companies will now need to redistribute lost revenue streams to the costs of people in other parts of the developing world.

An example from Europe demonstrates this well.  In the 1990s "parallel trading" (importing of goods currently available in a domestic economy) of pharmaceuticals occurred in the European Union as consumers tried to take advantage of cheaper prices in lesser developed EU members.  The consequence was that prices rose in the lesser developed EU economies to compensate for losses in those engaging in parallel imports.  Research showed that the differences in price gradually reduced from 30 percent to 10 percent. ⁽⁴³⁾

Thailand is not alone.  Brazil also recently issued a compulsory license for efavirenz.  Both countries are mid-tier economies with capacity to pay mid-tier prices.  They are setting a bad precedent for other developing countries.  If other mid-tier developing countries follow Thailand and Brazil's lead the cost of their short term benefit will be passed on to Africa's poor.

THE "OTHER" NON-PATENTED MEDICINES

By failing to enforce IP rights regimes, developing countries are also placing their HIV/AIDS patients at serious risk.  Failure to enforce IP rights has brought about the rise of counterfeit medicines and breaches of trademark that place patients at serious risk.  Flouting patents comes with risk, but at least true generics provide certainty for patients.

Counterfeit medicines make their way into the developed world, but their prevalence is highest in the developing world.  The WHO has reported that up to a quarter of all medicines in LDCs are counterfeit. ⁽⁴⁴⁾  The WHO defines counterfeit medicines as "deliberately and fraudulently mislabelled with respect to identity and/or source". ⁽⁴⁵⁾

As outlined earlier, counterfeit medicines do not go through the same regulatory and quality hurdles applied to generic medicines to certify bioequivalence.  The consequence is that they can often have insufficient or no levels of the active ingredients required by the patient.

In the process of breaching patents, counterfeit medicines often also breach trademarks and are branded as an innovative medicine.  The consequence is that healthcare providers do not know if they are providing a counterfeit medicine, and subsequently transfer that risk to the patient.

Counterfeit medicines can lack the active ingredients necessary to assist a patient.  The cost can be an increase in resistance and the need for a higher level of medical care and the costs that come with it.

Counterfeit medicines can also include toxic components or be delivered through inappropriate delivery systems.  In Haiti 89 people died after ingesting counterfeit cough syrup that included anti-freeze.  Similar incidents have occurred in Nigeria and Bangladesh.  Estimates in China place the number of people who die from the use of counterfeit or sub-standard medicines each year between 200,000–300,000 people. ⁽⁴⁶⁾

The costs of ignoring the real barriers to essential medicines through a fixation on IP rights are real.  The interests of the world's poor cannot continue to be traded off while ideological NGOs campaign against IP rights.

CONCLUSION

Despite the rhetoric of NGOs, the real challenges facing access to essential medicines are not due to excessive protection of patents.  IP protection plays a vital role in promoting innovation in public health.  Undermining patents can actually have a detrimental effect on developing HIV/AIDS medicines for the world's poor.  Moreover, weak property protections undermine the investment climate needed to promote the economic growth to fund the infrastructure to bridge the gap between medicines and their patients.

Enforcement of patent protections also combats the development and use of counterfeit medicines.  These counterfeits pose immediate health risks.  And they can breed and accelerate resistance to patented and generic medicines.  This acceleration of resistance boosts the subsequent costs of HIV/AIDS treatment.

Thailand's military government has a questionable record of prioritising public health.  Government spending in health has been woefully inadequate, particularly in light of significant pay increases for military officials and bureaucrats.  Instead of addressing funding gaps due to unjustifiable government spending policies, Thailand has chosen to pass the blame to pharmaceutical companies.

Thailand and Brazil's recent issuance of compulsory licenses for HIV/AIDS and heart disease medicines will do little to promote access to affordable medicines.  Instead their actions could hamper their own capacity to deliver medicines to their country's patients and also increase the costs for patients in poorer countries.

India provides compelling evidence that undermining patents doesn't yield improved access to affordable medicines.  MSF's own numbers also make it clear that patented HIV/AIDS medicines needn't be cheaper than their generic competitors.

The focus on patents is also distracting policy makers from the real priority of decreasing the cost of essential medicines.  Government duties, taxes and tariffs have a significant impact on the affordability of medicines.  These government-imposed costs are a regressive tax on the world's poor and should be removed to promote improved access to medicines.

Inadequate infrastructure and reliable supply chains also provide an ongoing challenge for developing countries in meeting the medical needs of HIV/AIDS patients.  Reckless compulsory licensing will undermine the investment environment necessary to promote the economic growth that can provide the capital to invest in improving this infrastructure and systems.

If NGOs are serious about improving the access to essential HIV/AIDS medicines of the world's poor, at the Sydney IAS Conference they should end their ideological campaign against IP rights and focus on the real barriers to affordable medicines.

---

REFERENCES

1.  Médecins Sans Frontières, "MSF Welcomes Move to Overcome Patent on AIDS Drugs in Thailand", 30/11/2006, cited on 01/06/2007

2.  Oxfam International, "Make Trade Fair:  Rigged Rules:  Patents", cited on 08/06/2007

3.  Love, J., "KEI Statement on Brazil Compulsory License on efavirenz", 04/04/2007, cited on 01/06/2007

4.  World Trade Organisation, "Agreement on Trade-Related Aspects of Intellectual Property Rights", World Trade Organisation, p333, cited on 13/06/2007

5.  World Trade Organisation, "Declaration on the TRIPS Agreement and Public Health", Doha WTO Ministerial Declaration, 14/11/2001, cited on 12/06/2007

6.  Bate, R., "Thailand and the Drug Patent Wars", Health Policy Outlook, American Enterprise Institute for Public Policy Research, n5, April 2007, p1

7.  Stevens, P., "Will compulsory licenses improve treatment for patients?", International Policy Network, May 2007, p3

8.  Bate, 2007, p2

9.  ibid, p4

10.  Oxfam International, "Make Trade Fair:  STOP Abbott pulling the plug on HIV medicines in Thailand", cited on 08/06/2007 & Médecins Sans Frontières, "MSF Denounces Abbott's Move to Withhold Medicines From People in Thailand", 15/03/2007, cited on 08/06/2007

11.  Human Rights Watch, "Asia:  Thailand", cited on 08/06/2007

12.  Merck and Co, "Merck and Co., Inc.  Statement on Brazilian government's decision to issue compulsory license for STOCRIN", 04/04/2007, cited on 15/06/2007

13.  Costigan, C., "Intellectual Property Rights & Pharmaceuticals in Asia", Presentation, Pacific Rim Policy Conference, USA, 23/05/2007

14.  ibid

15.  Norris, J., "The unravelling of compulsory licenses:  Evidence from Thailand and India", International Policy Network, May 2007, p3 & Stevens , P., "Will compulsory licenses improve treatment for patients?", International Policy Network, May 2007, p4

16.  Costigan, 2007 & Howard, P., "Thai-ing Up Innovation", National Review Online, cited on 01/06/2007

17.  Kate, D.T., "Safe at any cost?", Asia Sentinel, 24/01/2007, cited on 12/06/2007

18.  Bate, 2007, p3

19.  Kate, 2007

20.  Norris, 2007, p4

21.  World Health Organisation, "WHO Model List of Essential Medicines", March 2007, p3, cited on 12/06/2007

22.  Ahmed, K., Cudjoe, F., Davie, E., Kilama, D., Krause, M., Mejia, A., Mitra, B., Oplas, N., Simonetta, M., Stevens, P. (Ed), Tapia, J., Tse, M. & Urbach, J., Increasing access to medicines' in Fighting the Diseases of Poverty, International Policy Press, UK, 2007, p158

23.  ___, "Towards Universal Access:  Scaling up priority HIV/AIDS interventions in the health sector Progress Report", WHO, UNAIDS, UNICEF, April 2007

24.  Mitra, B., "From Property Rights to IPR:  Transition from tangible assets to knowledge economy", Pacific Rim Policy Conference, May 2007

25.  Morris, J. & Stevens, P., "Counterfeit medicines in LDCs:  problems and solutions", in Fighting the Diseases of Poverty, International Policy Press, UK, 2007, p205

26.  Ahmed et al, 2007, p160

27.  Adelman, C., Norris, J. & Weicher S.J., "Access to Medicine:  The Full Cost of HIV/AIDS Treatment", White Paper, Hudson Institute, e2, May 2005, p8

28.  WHO, "Globalisation, trade and health:  Access to Medicines", cited on 14/06/2007

29.  WHO, "Price, availability and Affordability:  An international comparison of chronic disease medicines", December 2005

30.  WHO, "Price, Availability and Affordability of medicines for Chronic Diseases", 2006

31.  Adelman et al, 2005

32.  Levison, L., "Policy and programming options for reducing the procurement costs of essential medicines in developing countries", Boston University School of Public Health, cited on 14/06/2007

33.  Ahmed et al, 2007, p145

34.  Stevens, 2007, p8

35.  Reaney, P., "Interview:  Creaking health systems hampering AIDS battle -- WHO", Reuters, 21/07/2006 cited in Norris, J., "The unravelling of compulsory licenses:  Evidence from Thailand and India", International Policy Network, May 2007, p8

36.  Ahmed et al, 2007, p142

37.  Filmer, D., Hammer, J. & Pritchett, L., "Weak links in the chain:  a diagnosis of health policy in poor countries", World Bank Research Observer, v15, n2, August 2000, p208

38.  United States Trade Representative, "Priority Watch List", 2007, p11, cited on 14/06/2007

39.  Horst, C., "International Property Rights Index 2007 Report", cited on 13/06/2007

40.  De Soto, H., The Mystery of Capital:  Why Capitalism triumphs in the West and fails everywhere else, Bantam Press, UK, 2000

41.  Wilson, T., "Fair Trade no substitute for Intellectual Property", Review, March 2007

42.  DiMasi, J., Jansen, R. & Grabowski, H., "The Price of innovation:  new estimates of drug development costs", Journal of Health Economics, v22, 2003

43.  Stevens, 2007, p7

44.  World Health Organisation, "Counterfeit Medicines", n275, 14/11/2006, cited on 09/06/2007

45.  ibid

46.  Morris & Stevens, 2007, p206

Moving in the Right Direction: Transport Reform in Western Australia

Occasional Paper

EXECUTIVE SUMMARY

As Western Australia continues its rapid growth, the state increasingly needs the transport infrastructure and services that enables individuals to move around the city of Perth and minimise the costs of congestion to both the economy and to the quality of life.

Three public policy issues stand out as the ones within the transport sphere that demand the most urgent attention -- the metropolitan rail network, infrastructure funding for road services, and the taxi industry.

Too often transport policy is driven by vested interests such as rail industry unions or the owners of taxi plates.  The guiding principle of Moving in the right direction:  transport reform in Western Australia is the desire to place the consumer as number one.  Whether a resident of Perth wishes to catch a train or taxi or drive their own motor vehicle, the reforms proposed here will make all three options just a little more attractive.

To address these three policy areas Project Western Australia makes the following key recommendations:

PROJECT WESTERN AUSTRALIA -- KEY TRANSPORT RECOMMENDATIONS Privatise Perth's metropolitan rail network Ensure that private sector funding (public private partnerships) is considered as an option to pay for any future major greater metropolitan road projects Allow greater competition in the taxi industry

INTRODUCTION

Perth is a prosperous city which provides its citizens with an enviable lifestyle.

However, like all cities, the provision of efficient transport infrastructure and services is fundamental to both Perth's (and Western Australia's) economic prosperity and quality of life.

Perth's population is rapidly approaching 1.5 million (approximately 74 per cent of the total WA population) and is projected to reach 2 million by 2030.

Population growth is a clear indicator of prosperity, but as population and the economy grow there are obviously also challenges presented.  One of these is the need to maintain high rates of mobility for both people and goods.  Already there are estimates that the aggregate cost of congestion in Perth will double from $0.9 billion in 2005 to $2.1 billion in 2020.

The focus of Moving in the right direction:  transport reform in Western Australia is the need to provide transport infrastructure and services that enables individuals to move around the city of Perth and minimise the costs of congestion.

Three public policy issues stand out as the ones within the transport sphere that demand the most urgent attention.

Western Australian taxpayers have invested heavily in Perth's rail network in the past twenty years and it is essential that the maximum possible return on that investment is delivered.  This means providing a market-driven rail system that provides a service that customers want to use.  Enticing people to rail reduces road congestion.

Western Australian road users have often had to wait longer than they needed to for much needed road infrastructure improvements.  Bickering between the state and Commonwealth about levels of road funding has often produced unnecessary delay.  However, the refusal by the state government to give proper consideration to private sector funding of road projects has denied motorists an extra option for getting needed works done.

Perth's opportunity to gain the status of a truly "leading city" is hindered by a number of factors including housing affordability, shop trading hours, the availability of a full range of hospitality and entertainment venues and, in the transport area, by the fact that Perth has fewer taxis per head than other Australian capitals.

Note:  There are many issues involving freight transport that are also crucial for Western Australia.  These issues include third party access to private rail lines in the Pilbara, the future of the grain lines, the operation of the east-west rail corridor, the development of port capacity and road links between ports and intermodal facilities.  Rather than make this paper too broad, these issues will be considered as part of our on-going work.

PART ONE
METROPOLITAN RAIL REFORM

HISTORY AND BACKGROUND

The railways came to Perth later than they came to the eastern states.  While the first railways operated in Melbourne and Sydney in the 1850s, Perth's first railway (Fremantle-Perth-Guilford) opened on 1 March, 1881.

A by-product of this later development was that, whereas in other states rail tended to start as a private sector operation, in Perth services have always been provided by the state government, initially by the Department of Works and Railways and from 1890 by Western Australian Government Railways (Westrail from 1975). ⁽¹⁾

While there were never private companies running trains in Perth there were private trams.  Indeed of the four Western Australian locations that had tram systems -- Perth, Fremantle, Kalgoorlie and Leonora -- all, except Fremantle, were originally private sector initiatives. ⁽²⁾

In Perth, an Act of Parliament authorising the building of tram lines was passed by the Western Australian Parliament in 1885.  However the first line did not begin operating until 1899 when a group of London investors backed Perth Electric Tramways Ltd and the company was able to build and commence operations on a line along Hay Street from East Perth to Thomas Street, West Perth.  Tram services were later extended to a number of other suburbs by Perth Electric and other companies.

The WA government decided that it wanted control of the network, nationalising the Perth Electric network in 1912 and all others by 1914.  The government never matched the initial private investment of the private sector and after years of deterioration the last tram line in Perth closed in 1958.

The Kalgoorlie Electric Tramways Limited which opened in 1902 had close links with the Perth Electric, but unlike Perth, the Kalgoorlie operation was to remain privately owned for most of its life.  It was taken over in 1949 by the Eastern Goldfields Transport Board, which promptly closed the system in 1952.

Passengers waiting to board tram car No. 35 on route 30 to Claremont.  c.1930

Despite its slightly different beginnings the history of the Perth suburban rail network followed a similar pattern to that of most other Australian capital cities.  From strong patronage in the early-mid twentieth century there was gradual decline which in the case of Perth reached its symbolic low with the closure of the Perth-Fremantle line from 1979 to 1983.

However, from the 1980s onwards Perth has followed a different path.  While Sydney, Brisbane and Adelaide have essentially muddled along with long-standing policy settings essentially intact, Perth is, with Melbourne, the only city to have undertaken significant change.

Where in Melbourne that involved radical change to the ownership structure, in Perth it has involved significant taxpayer-funded capital investment.

First, there was the electrification of the entire system announced in 1988 and coming on-line in 1991.  This complete refurbishment of the system means that with the oldest infrastructure and rolling stock dating from the early 1990s Perth has the most modern system of any Australian capital city.

In the same period the government built the northern suburbs line (announced 1989, completed 1992) that provided a rail service as far as Joondalup.

The combined impact of the electrification and the building of the northern line was that the number of annual boardings went from under 10 million in 1990-91 to over 20 million by 1993-94.

The next substantial injection of capital into the rail system is the New MetroRail Project which is currently nearing completion.  The scope of the project is:

• Extension of the northern suburbs from Joondalup to Clarkson
• Extensive works between Perth and Kenwick
• A new spur line from Kenwick to Thornlie
• A new southern line from Perth to Mandurah, including two new underground CBD stations.
• The purchase of 93 new rail cars.

The cost of this suite of measures is significant -- $1.618 billion.

There was a vigorous public debate about the relative merits of this expenditure versus other possible transport solutions.  (There will be some discussion of the detail below.)

Since 1 July 2003, responsibility for operating all of Perth's public transport has been with the Public Transport Authority (PTA).  As well as operations this agency is responsible for the planning and delivery of new infrastructure projects.

The PTA has been a comparatively well run public sector agency, however, as many other jurisdictions have shown, it is hard to consistently maintain high standards in the public sector.  Only the discipline of the profit motive can sustain the long-term customer focus that transport systems need.

Perth now has a unique opportunity -- to have its modern rail infrastructure and rolling stock operated with the best private sector management.

That combination would almost certainly gain Perth the number one position in metropolitan rail in Australia.

Train travelling on the Joondalup Line (now Clarkson Line)

WHY PRIVATISATION?

For many people it is taken for granted that the delivery of public transport services is something that is done by government.  And yet in many places around the world it is being recognised that involving the private sector can deliver many benefits.

Indeed, in one sense, privatisation has already come to Perth's public transport system.  The integrated network of bus services under the Transperth banner are provided by three separate private bus companies under ten separate contracts and in terms of passenger growth the contracted out bus service has been outperforming rail.  The ferry service across the Swan River is also provided by a contract with a private company.  There are also numerous contracts in place for the provision of ancillary services such as facilities management and cleaning.

Privatising the rail network is just a logical extension of the current model.  However, in another regard, it is a radical policy.  Fixed rail tends to be the flagship part of any public transport network and so its transfer to the private sector would indicate a dramatic shift in the economic management of public transport.

It is often perceived that privatisations are only undertaken to deal with a crisis in a public sector entity.  That is not the case with the rail services provided by Transperth.

According to a World Bank study, from the 1980s onwards, Westrail "was probably the most efficient of the government railways in Australia".  This is probably still the case, although the level of competition for the title is far from strong.

There are a number of areas of concern that privatisation would address:

1) Increase patronage

It is striking how in the past two years public transport patronage in Melbourne has grown much faster than in any other Australian city.  Given the huge investment in Perth's rail system and the booming nature of the city the question has to be asked -- why has the patronage growth in Perth failed to match that of Melbourne?  It is particularly relevant given that fares in Perth are probably the cheapest in the country.

The opening of the new southern line and associated CBD works will deliver a significant one-off increase to patronage.  The challenge is to ensure that once the existing excitement wears off the on-going service provided continues to maintain existing customers and attracts new users to the system.

2) Improve service delivery

With the massive capital investment into its modern fleet and infrastructure, the on-time performance of Perth's public transport system should be clearly the best in Australia and yet in 2005-06 only 87% of trains arrived within three minutes of schedule.  However, to be fair to the PTA, three minutes is a more rigourous standard than most Australian systems apply and in recent years the New MetroRail project has contributed to some disruption.

3) Instill financial discipline

In the three years from 2002-03 to 2005-06, total recurrent expenditure on the Perth system increased from $291.6 million to $514.2 million.  While there was some legitimate component of gearing up for the cost of New MetroRail, it is still a cause for concern.

The fact that for most journeys Perth's public transport is cheaper for customers than that of the other major capitals means that taxpayers are contributing a greater share of recurrent funding to the Perth system, as well as contributing the massive amounts of capital that have gone into the rail network in recent years.

4) Avoid planning panaceas

There is a real concern that, rather than focusing on rail as a customer-driven service, the WA government has been used it as a vehicle for planning and land use policies.

Land use policy in Western Australia was discussed in Fixing the crisis:  A fair deal for homebuyers, our submission to the Inquiry into Housing in Western Australia.  The submission found that:

Over long periods of time, and in differing economic conditions, Western Australians have continued to express a strong preference for their own home, often in a new suburb, on a relatively large block of land.

Further, despite two decades of high investment in public transport, Perth still has one of the world's highest levels of car ownership and for most people for most journeys the private car will continue to dominate.

Where rail can gain market share is in trips to the CBD and surrounds for both employment and major crowd generating events.

The key question for a customer focussed railway is how to win converts from cars.

When the northern line was built in the early 1990s common sense applied and large carparks were built at stations in a bid to attract previous non-users to give rail a try.

In the intervening years between then and the planning of the southern line there had been a philosophic shift away from park and ride towards feeder buses.

Convincing motorists to forsake their car to give the train a go will be hard enough without effectively doubling the size of the challenge.

The new southern line will provide highly competitive journey times, however, there is no doubt these will be diluted for people who also use buses, no matter how well coordinated timetables are and how efficient are the interchanges.

The issue is not to stop people using their cars all together but to shift them out of their cars for the long distance journey to work that contributes to congestion.  Rail provides the best way not to have to widen the Mitchell and Kwinana Freeways but discouraging people from driving to their local railway station does little to address any congestion problem.

A public sector agency can happily go along with the latest planning fad.  A private rail operator with a strong incentive to grow patronage will want to ensure that potential customers are not being driven away by being forced to walk from their homes to a bus stop on a 40 degree summer's or a wet winter's day.

It will always be hard to assess how many customers will have been driven away by the planning fad but hopefully introducing pragmatic private operators will stop future attempts at social engineering.

5) Improved industrial relations

One of the key benefits of most privatisations is an improved industrial relations environment.  In the case of rail it would mean direct negotiation between employer and employees and mean that rail workers do not have to balance their potential productivity-based pay rises off against public sector salary policies applying to nurses, teachers, police etc.

Summary

Perth is booming and needs more than ever to have a fully modernised transport network.  A private operator of Perth's metropolitan rail network would ensure that the benefits that the massive capital injections into the network are locked in and further improved upon.  The addition of a private operator will also mean there is the potential to be able to add capital themselves to future investments.

Privatisation should deliver better value for taxpayers and improved services for rail users.

Figure 1:  WA Public Transport Authority growth, 1996-2006Source:  Public Transport Authority

PRECEDENTS FOR PRIVATISATION

Obviously, in considering whether to head down the privatisation path it is important to consider what the outcomes have been of other similar privatisations.

The three most relevant examples are the two WA transport privatisations of the past 15 years -- Perth's metropolitan buses and Westrail Freight -- and the example of Melbourne which in 1999 became the first Australian city to privatise rail operations when it franchised its trains and trams.

Despite considerable misinformation, all three demonstrate that positive outcomes can be achieved by increasing private sector involvement.

WA Rail Freight

Westrail Freight was sold in 2000 as a vertically integrated intrastate rail freight business.  The value of the transaction was $585 million.

The purchaser was the Australian Railroad Group (ARG) -- 50:50 joint venture between Wesfarmers and Genesse & Wyoming.  In 2006, ARG's ownership changed with the below rail business (WestNet Rail) being sold to Babcock & Brown and the above rail operation to Queensland Rail.

The current WA government has consistently criticised the privatisation.  Minister for Planning and Infrastructure, Alannah MacTiernan, said in 2003:

The Westrail privatisation was a real doozey.  It will go down in history as one of the great debacles of privatisation. ⁽³⁾

Her views are directly contradicted by the most authoritative study of the outcomes of the Westrail Freight privatisation.  Undertaken by the World Bank in 2005, the study found that there had been increases in earnings since privatisation "in direct contrast to pre-privatisation WestRail whose margins and operating statistics appeared to be in decline at the time of sale".  It also won interstate contracts.  Overall, the World Bank concluded that the privatisation should be "considered successful". ⁽⁴⁾

Perth's metropolitan buses

The first motor omnibus operated in Perth in 1903, running on a route from Victoria Park to the city (Barrack Street).  It was the forerunner of a number of private bus companies that developed routes and operated services as the Perth suburbs expanded.

These companies competed for passengers on various routes, the most intensive rivalry being on the Stirling Highway route between Perth and Fremantle.

In 1926 several small companies merged into a single company -- the Metropolitan Omnibus Company.  Over the next 30 years, Metro (as it was popularly known) became one of the biggest bus companies in Australia and several other companies were established to serve new suburbs as Perth gradually grew.

In 1958 the state government nationalised the bus services as part of the same decision-making process that saw trams withdrawn from service.  For four decades the government maintained its monopoly before, in the mid 1990s, the Court government decided to progressively contract out the operation of bus services by competitive tendering of a number of franchise areas.

It was a limited privatisation as the government retained ownership of the bus depots and the bus fleet.  The buses still operate under the Transperth brand.

There are three bus operators in Perth:

• PATH (part of Australian Transport Enterprises)
• Southern Coast (part of Veolia Transport Australia)
• Swan Transit (part of Transit Systems Australia)

Under private operation patronage has grown more rapidly on Perth's buses than it has on the government operated rail system.  A key advantage of private management has been improved industrial relations that have seen less industrial action and a more customer focused staff.

Melbourne's trains and trams

The largest privatisation of passenger transport services in Australia was completed in Melbourne in 1999.  Two private operators each took over half of both the metropolitan train and tram networks.

In 2002, one of the operators departed and the contracts were renegotiated, resulting in single operators for the whole of the trains (Connex) and trams (Yarra Trams).

We recently completed a study of the performance of Melbourne's privatised public transport system.  Victoria's public transport:  assessing the results of privatisation found that privatisation can be rated a reasonable success.  Key outcomes have been:

• Patronage has risen strongly -- 37.6% on trains and 25.5% on trams.  Some of the problems the system is now experiencing (e.g. over-crowding) are problems of success rather than failure.
• Some improvements in reliability and punctuality, more consistently in trams than trains.
• New services have been introduced, resulting in an 11.4% increase in the overall number of service kilometres.
• Commuters no longer experience the huge inconvenience caused by strikes and stoppages that historically plagued Melbourne's public transport.
• 65 new trains and 95 new trams have been introduced into the system.
• For taxpayers, it has not delivered the anticipated gains, instead producing a break-even outcome.
• Risk was transferred to the private sector, although some returned to government in the re-franchising
• The highest safety standards have been retained.

There seems little doubt that, on the basis of this performance, Victoria's state Labor government later this year will announce that private operation will be continued in Melbourne.

UNDERTAKING PRIVATISATION

Having established that privatisation can potentially deliver significant benefits, it is also important to note that Western Australia has two significant advantages that have not been available in other jurisdictions such as Victoria.

Firstly, it can learn from the experience of others and secondly, it has a new network that does not need major additional capital expenditure.

A private operator should be sought through a competitive tendering process where tenderers make an offer, the financial component of which would be asking for the amount of subsidy they would require to operate the system.

While other larger systems (and Perth's buses) have been split into different franchise areas the Perth rail network is of a size that can be tendered as a whole.

The Western Australian government should set up a unit comprised of select personnel from the Department of Treasury & Finance, the Department of Planning & Infrastructure and the Public Transport Authority to prepare for the contracting out of the metropolitan rail system.

In order to make sure that the privatisation is done correctly it is important not to rush the process.  It is recommended that the final part of the process not be undertaken until the second half of 2009 so that at least a full year's data from the operation of New MetroRail is available and also that the new Smart Rider ticketing system is bedded down.  This time scale also has the added advantage of placing it in the aftermath of, rather than lead up to, the next state election.

The contract would be for a period of between 8 and 12 years.

The Public Transport Authority (PTA) would be retained as a coordinating body.  The PTA would still set multi-modal fares and could mandate and fund further extension to the network that the state government may decide are required.

In the same way that private bus companies provide services under the Transperth banner, the metropolitan passenger rail services would be provided under a contract that specified the service levels that needed to be provided.  There would be an Operational Performance Regime which would provide benchmarked standards of reliability, punctuality and other key service criteria.

A key element of the privatisation will be ensuring that every aspect of asset management responsibility and risk allocation are clearly defined.  As a general principle, the more risk that can be transferred to the operator the better, but only if there are clearly enunciated rules for what happens if a private operator fails to meet its obligations or gets into difficulty.

PART TWO
PRIVATE SECTOR FUNDING OF ROAD INFRASTRUCTURE

THE FUNDING SHORTFALL

In 1969, expenditure on roads made up 12 per cent of the Western Australian state budget.

By 2006, this figure percentage had fallen to four per cent, as other funding priorities consumed an ever greater percentage of the state budget.

It is not as if the roads task has got any smaller -- in the past four decades the road length for which the state government is responsible has risen from 10,000 km to almost 20,000km.

Main Roads WA estimates that the gap between road funding needs and the actual delivery of the required roads outcomes is almost $400 million in 2007/08.

There are three possible funding solutions for upgrading WA's key road network:

• Increased state funding
• Increased federal funding
• Public private partnerships (PPPs)

The Western Australian Government does not seem keen to increase its own road funding and while the Commonwealth will hopefully provide the state with a greater share of Auslink 2 funds, than it did with Auslink 1, it needs to be remembered that Auslink, the key Commonwealth roads' funding program, only put funds into identified Auslink corridors which leaves out many important potential road infrastructure developments in WA.

Road PPPs do not necessarily mean that road users pay tolls.  There can be "shadow tolls" that the government pays to the private investor.  PPPs to build roads and user tolls are related topics, but they can be considered separately.

REASONS FOR CONSIDERING ROAD PPPS IN WA

In December 2002, the Western Australian Government produced its policy position on Public Private Partnerships.  Entitled Partnerships for Growth:  Policies and Guidelines for Public Private Partnerships in Western Australia, it expressed a very similar policy for the use of PPPs as the ones articulated in other states.

Although the term "Public Private Partnerships" is relatively new, governments in Western Australia have for many years been working with the private sector to deliver infrastructure and associated services.  Examples include:

• Mining companies that have joined with government to create entirely new communities in remote locations;
• Property developers which have provided community facilities in new residential developments, ahead of the arrival of government infrastructure;  and
• The engagement of private designers, builders and facilities managers for the construction and operation of government buildings.

Since the policy was announced PPPs have been used for the Exhibition and Convention Centre and the law courts, but not for roads.  The minister responsible for roads, Alannah MacTiernan commented that:

We put out a policy document on PPPs in 2003, in which we articulated the circumstances under which we would contemplate PPPs.  We did not believe they had a role in certain core functions, but we did believe there was a place for them and they would be considered on a case-by-case basis. ⁽⁵⁾

There are those who seem to believe that whatever the project is, it should be debt-financed by government.  However, by having a policy of considering the suitability of PPPs for its capital works, a government is provided with a potential extra means of funding plus an extra discipline in assessing whether projects provide value for money.

Good PPP policy 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 a good way of assessing whether a project will deliver value for money.

The alternative proposed by critics of PPPs is to have projects debt-funded by government.  In times of prosperity, like the present, when state governments are awash with funds due to the general prosperity and booming tax revenues, their economic management skills have never been severely challenged.  However, it has always been a mistake to view benign economic conditions as prevailing indefinitely.  Thus, the recent re-entry of some state governments into debt-financing to fund infrastructure is a worrying trend, especially as they are doing it at a stage of the economic cycle where project costs are high.

One constantly hears people query why governments no longer pay for the amount of infrastructure they used to directly fund.  The answer is pretty simple -- the massive increase in government spending on recurrent programs.  Those who would like to see more direct government funding of infrastructure projects should perhaps be forceful advocates of cutting recurrent government spending.

Until that happens, governments need to have the full range of funding options available to pay for capital works and that includes PPPs.

The biggest road projects currently in WA are:

• New Perth-Bunbury Highway ($630 million)
• Mitchell Highway extension ($171 million)

Without having completed a detailed assessment it is impossible to say whether these could have been delivered as PPPs, but one would like to think that this was at least considered as a possibility and that all future major road projects are also viewed as possible PPPs.

Tolls

It has been a constant mantra of the current WA Government that road tolls are not to be considered.  Former Premier Geoff Gallop referred to "our determination not to go down the path of boosting our revenue through poker machines and toll roads". ⁽⁶⁾

A position paper on a WA Government website makes it clear that this remains the position:

Western Australia doesn't reap billions of dollars from the community in poker machine taxes and toll roads.  This makes it tougher for WA, compared to other states, to balance the budget and deliver the key services. ⁽⁷⁾

It is perhaps surprising that the state with the nation's most entrepreneurial reputation is the most reluctant to go down the path of the developing business of toll roads.

Toll road businesses in other states are doing very well.  Sydney's Westlink M7 saw its June quarter revenue rise 20.7 per cent to $38.2 million compared to the corresponding previous period while Melbourne's CityLink saw revenue in the June quarter rise 9.7 per cent, to $85.7 million, compared to the previous period, with average daily traffic volume up by 3.7 per cent.

PUBLIC PRIVATE PARTNERSHIPS INTERSTATE AND OVERSEAS

The increasing use of private sector funds to finance key infrastructure is a growing worldwide trend.  As the Reason Foundation stated in the United States context:

...the major highway funding shortfall is a key reason governments are increasingly turning to long-term PPPs to deliver new transportation projects. ⁽⁸⁾

Many European countries have also embraced PPPs in the process changing the way they set spending priorities and manage their roads.

Australia has a long history of private sector investment in roads, through public private partnerships (PPPs), with 11 contracts signed over the past 20 years.  Currently there are nine road projects in operation, equating to over $12 billion of infrastructure being delivered by the private sector.  Major completed road PPPs include the Western Sydney Orbital and Melbourne's City Link, while Queensland is now also embracing the model.

A recent review of Australian road PPPs found that continued investment by the private sector into Australian roads, and the Government's ongoing support of public private partnerships (PPPs), is critical to the nation's sustained economic prosperity.

Ernst & Young's inaugural review, Private Finance and Australian Roads, found that:

PPPs have delivered much needed road infrastructure and are essential to the future economic growth of Australia.  Even with all the criticism targeted at the Cross City Tunnel, the NSW tax payer has incurred no cost and Governments continue to achieve positive commercial and operation outcomes from PPPs

The Australian toll road PPP market continues to evolve, particularly around risk allocation, payment mechanisms, revenue sharing and the approach to protection around competing routers.  While recently completed transactions show private sector accepting more risk and receiving better value for money, there is scope for new payment mechanisms around availability, safety and congestion, as well as shadow tolls, to be considered if the model is to grow into its full potential. ⁽⁹⁾

Incidentally, PPPs potentially have a role in rail as well as road.  In New South Wales a private sector consortium will provide Sydney with passenger rail carriages for the next 30 years.  The contract valued at up to A$8 billion has been awarded to the Reliance Rail consortium, which is comprised of Downer EDI, AMP Capital, ABN Amro and Babcock & Brown.  Under the contract the consortium will design, construct and maintain a total of 626 carriages in the largest PPP contract in Australian history.

To date New South Wales has undertaken the two largest PPPs, while Victoria has been the state to most actively use the PPP financing method with 16 projects underway, ranging from the Melbourne Convention Centre (A$367 million) to the Eastlink tollway(A$2.5 billion).  In total, Victoria's PPPs are valued at around A$4.5 billion and represent around 10% of the state's infrastructure budget.

PART THREE
TAXI DEREGULATION

The availability, cost and quality of taxis is a key element of the transport mix in any city.

While all Australian capital cities have issues with their taxis, Perth's problems, especially in relation to taxi availability, are more critical than its interstate counterparts.

"Perth's taxi ratio the worst in nation" The West Australian, 11th October 2006 The truth behind Perth's late-night taxi crisis has emerged with new figures showing there is just one cab for every 1111 people -- fewer taxis per head of population than any other major Australian city. The Australian Hotels Association and the Safer Northbridge committee claim the chronic shortage has forced a blowout in waiting times, with patrons forced to queue for up to three hours during peak periods in Northbridge and Fremantle. In Brisbane, the ratio is 888 people for every taxi, 900:1 in Sydney, 940:1 in Melbourne and 1097:1 in Adelaide.  The Perth ratio will drop to one cab for every 1012 people in the metropolitan area when an extra 130 taxis are introduced before Christmas.

Along with the limits on retail trading hours and the proscriptive liquor licensing laws, the undersupply of taxis is a key contributor to why Perth sometimes struggles to reach the "leading city" status to which it aspires.

Just as the policy on shopping hours has been determined by certain retail traders and the licensing laws by certain existing licensees, the policy on taxis has been determined by existing taxi licence plate holders.

HISTORY AND BACKGROUND

The original Swan Taxis was established in 1928 and for sometime was one of a number of competing Perth taxi companies.

In the 1950s, it grew by amalgamation and expansion so that, by 1960, Swan Taxis Cooperative had purchased its last two major competitors and in doing so increased its fleet to almost 400 taxis.

Some years later Swan Taxis purchased White Top and Coastal Cabs of Fremantle, thus producing a situation where the entire metropolitan region, including the rapidly developing industrial area of Kwinana was now fully serviced by the Swan Taxis Cooperative.  In a marketing ploy, Swan Taxis relaunched the Coastal Cabs name in Fremantle and Rockingham in 1998, as they had also done with Yellow Cabs earlier in the 1990s in Perth.

Even before it had achieved its industry dominance, Swan was seeking to restrict entry into the industry.  The history section of the company's website records the following:

In 1954 the then Minister for Transport decided to issue 150 taxi plates for the princely sum of seven shillings and six pence each.  This large influx of additional and largely under utilised taxis on the road led to frustration in the industry which sometimes saw as many as 50 cabs queuing for business on city ranks. ⁽¹⁰⁾

The company history also notes with delight the 1964 establishment by the state government of the Taxi Control Board (replacing previous regulation by the Police Traffic Branch) which it says was "a popular step as it provided the industry with the opportunity to control its own destiny".

And the industry certainly did control its own destiny, ruthlessly ensuring that the industry was run for its existing members rather than in the interests of potential new entrants or customers.

It did this by restricting access to licenses which meant that over time the number of taxis became less and less appropriate for a city of Perth's growing stature.  For not only was the city's population growing faster than new licenses were being issued, it was also a period when disposable income was increasing, peoples travel needs were becoming more diverse, attitudes to drink driving were changing and tourism was opening up a whole new market of potential cab users.

The failure of the taxi industry to keep pace with the needs of a growing city reached its climax in a 14 year period when no new taxi plates were issued at all.  In a period of growing population and growing demand taxi users and potential users suffered while the holders of existing licenses saw the value of those licences rise rapidly.  Successive state governments were effectively increasing the wealth of a small section of the community at the expense of everyone else.

The prospect of a challenge to this cosy relationship was raised with the introduction of National Competition Policy (NCP) in 1995.  The National Competition Council included taxis as an area that needed to be assessed by state governments.  The Western Australian review found that:

Restricting plate numbers leads generally to a sub optimal number of taxis in the market as complaints from the industry, if plate numbers are too high, are likely to be more vocal than those from consumers if there are too few taxis... Regardless of the sophistication of the models used, it is highly unlikely that the market optimal number of taxis will be reached in a regulated environment.

The review recommended that there be a taxi plate buyback.  The Court Government took no action on the recommendation while the then Labor Opposition supported the concept of a buyback.  The Macquarie Bank expressed interest in providing financing to fund what was estimated at being a $200 million buyback.  There was strong opposition from both the Taxi Council of WA (representing 800 owners) and WA Taxi Association (representing 3000 drivers) and finally in August, 2003 they got their way with the Government dropping the buyback plan the day before a mass rally against the proposals was due to be held at Parliament House. ⁽¹¹⁾

The WA Government was not alone in its failure to deregulate -- only the Northern Territory undertook significant reform (see below).  The NCC has continued to argue that reform is needed.  In a speech to a 2005 taxi conference Alan Johnston, a Director of the NCC argued that the taxi industry stood "out like a beacon" among industries when it came to the need to deregulate and he believed that the industry and most states had been unable to establish that restrictions were in the public interest -- rather they were in the interest of industry stakeholders such as plate holders.

While the WA Government backed down on major reform, Minister for Planning and Infrastructure, Alannah MacTiernan has continued to take more action on behalf of taxi consumers than most state ministers around the country have done in recent decades.

In December, 2003 the Taxi Act was amended to allow licenses to be leased rather than sold by tender and soon after 48 lease licences were advertised.  It was then announced that a further batch of licences would be made available annually.

The Government announced that its leasing scheme had three objectives:

• To give drivers the opportunity to be owner-operators
• To meet increased public demand for taxi services and
• To reduce cost structures, therefore reducing pressure on fares.

As a result of the Government's measures, between 2003 and 2006 there was a 27 per cent increase in taxi numbers meaning that, as of March 2007, there are 1,398 metropolitan taxis and 447 country taxis.

The Department for Planning and Infrastructure, which regulates the number of taxi licence plates, has produced a break down of the licensing arrangements for the 1,398 metropolitan taxis.  (See Table 1.)

Table 1:  Metropolitan taxis, Perth

Conventional Taxis	923
Area Restricted Taxis (Armadale/Gosnells, Kalamunda/Mundaring, Wanneroo)	14
Multi Purpose Taxis (wheelchair accessible)	32
Peak Period Restricted Taxis (Friday and Saturday Nights)	88
Leased Conventional Taxis	176
Leased Peak Period Restricted Taxis (Friday and Saturday Nights)	106
Leased Multi-Purpose Taxis (Wheelchair Accessible)	51
Leased Area Restricted (Armadale/Gosnells, Kalamunda/Mundaring, Wanneroo	8
Total	1398

Source:  Department of Planning and Infrastructure

A limited number of new leased plates are made available each year.  The current rates for conventional taxi plates (lease term 8 years) are $250 per week with 10 year terms and cheaper rates for other lease types.

The taxi industry regularly complains about the leasing of plates, but the Minister points out that they have little to complain about as values have continued to increase from $202,796 to $229,936 since leasing was introduced. ⁽¹²⁾

In an excellent speech Minister MacTiernan delivered at the Australian Taxi Industry National Conference in April, 2006 entitled "Can we make a regulated industry customer driven?", she took on a number of the sacred cows of the taxi industry.

She began by criticising the Taxi Industry Association President for leaving the customer out of his list of drivers of the industry and said that "the demand for preservation and indeed enhancement of plate values is putting the cart before the horse".

Since that conference speech the Minister has also backed up her rhetoric to some extent by announcing in March this year that the Taxi Act would be amended to allow the issuing of up to 20 new taxi licence lease plates each month for 12 months.  The aim is to get the job coverage rate at least back to 2003 levels.

As part of the amendments to the Taxi Act, the Minister also introduced provisions to make it a serious offence with a $5000 fine not to have issued plates attached to an operating vehicle.  "As of right" licensing would remove the need for this sort of draconian legislation.

The service quality figures are remarkably poor.  (See Figure 2)

Figure 2:  WA taxis, percentage of passengers not picked upSource:  Talking Taxis, Number 4, 2007

In making her March 2007 announcement of additional leased taxis the Minister acknowledged that even with her reforms "Perth's ratio of taxis to population remains the lowest among Australia's major capitals".  She further commented:

It is in the best interests of the industry, as well as the community, to have sufficient taxis on the road, otherwise the demand for deregulation will grow. ⁽¹³⁾

Well the time has undoubtedly been reached when consumers of taxi services do deserve to experience the benefits of deregulation.

DEREGULATION PRECEDENTS

Deregulation of taxi industries has been shown to have enormous benefits for consumers.

It has been undertaken in many cities around the world, in countries as diverse as the United States, United Kingdom, New Zealand, Japan, South Korea, Netherlands and Sweden.

Given its reputation as the home of big government, Sweden makes an interesting example.  Its taxi industry was deregulated in 1990, with its government accepting that the best service for the lowest economic cost would be supplied by a deregulated taxicab industry subject to free market forces.

In the past thirty years deregulation or partial has occurred in many U.S. cities including San Diego, Seattle, Phoenix, Portland, Sacramento, Kansas City, Milwaukee and Indianapolis.

Dublin

In Ireland taxis had been regulated since 1978 and the restriction of the supply of licenses had driven up the price to 90,000 Irish pounds by 2000.

In that year the Irish High Court ruled that the existing regulation infringed the rights of people to enter a sector for which they had the training and skills and the right of the public to purchase the services of such persons.

The Irish taxi industry was forced to deregulate and in Dublin the results were particularly striking.  Within two years the number of taxis on the road had trebled!  Consequently passenger waiting times were drastically reduced -- the proportion of people waiting for more than five minutes for a taxi fell from 75 percent in 1997 to 52 percent in 2001.

The price of a taxi license fell to approximately 5,000 Irish pounds and with overall market entry costs falling by 74 percent, the cost base for the industry was reduced which, in time, lowered fare rates.

There was also no drop in standards, or in the quality of service.

Despite the successes of deregulation, previous license holders have had some success in diluting its impact.  Existing license holders will be compensated for the losses they incurred as a result of the fall in the price of licenses.  Moreover, a new taxi regulator and Taxi Advisory Council have been established to oversee industry standards, license fees and stakeholder interests.

Darwin

As noted earlier, the prospect of deregulation in Australia was raised by the introduction of National Competition Policy (NCP) in 1995.  The National Competition Council included taxis as an area that needed to be assessed

The Northern Territory was the only jurisdiction that actually went down the deregulation path, implementing its new policy on 1 January, 1999.

The number of taxis in Darwin rose from 87 prior to deregulation to a peak of 137 before plateauing at a figure slightly below that.  After the first two years of the new system it was found that there had been "reduced waiting times and improved service, with consequent reductions in complaints to the regulator". ⁽¹⁴⁾  There were also beginning to be examples of fare discounting and niche marketing.

UNDERTAKING TAXI DEREGULATION

In an ideal world the government would issue taxi licences to anyone who wanted one subject to suitability checks and the payment of a modest administrative fee.

Yet, given the lengthy history of taxi regulation getting to that ideal position is not a simple exercise.

What is clear, however, is that the fact that historically governments have pursued poor policies should not be a reason to continue to disadvantage consumers and potential new operators of taxi services today and into the future.

There are two extreme positions that could be adopted -- full compensation to current licence holders and no compensation at all.

Governments are naturally reluctant to spend the significant sums of money required to buy back licenses at their full current value.  In the cases of New South Wales and Victoria this cost would be approximately $1 billion each, while in WA it is still a very significant $200 million plus.

On the other hand, a decision to deregulate without compensation, while delivering a much better result for taxpayers, would clearly impose significant hardship on many taxi licence investors who would feel that they had invested in taxi licences in good faith and, while they may have no legal right to compensation, there is probably a moral obligation to ensure that they do not lose the total value of their investment in one fell swoop.

The move to deregulation needs to identify a position somewhere between these extremes.  There are a variety of ways this can be done, through issuing extra licenses each year for a number of years and gradually reducing the cost at which they are offered.

As well as benefiting consumers deregulation would also be of massive assistance to drivers particularly those seeking to become owners.  They would no longer need to take out a massive loan to fund a plate purchase.

As for those who argue that their taxi plate(s) are their superannuation policy, there are many other normal investments that do not rely on artificial regulation such as property or shares that would be far more suitable.

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REFERENCES

1.  Public Transport Authority website, www.pta.wa.gov.au

2.  Marc Fiddian, Australasia's Tramways (Melbourne, 2002)

3.  Hansard, 22 October, 2003

4.  Williams, Greig & Wallace, Results of Rail Privatisation in Australia and New Zealand (The World Bank, Washington, 2005)

5.  Estimates Committee Hansard 20 May 2004

6.  Geoff Gallop, Speech to WA Busines News Breakfast 22 June 2005

7.  Our Fair Share:  The GST Debate

8.  Reason Foundation, Policy Brief No. 58

9.  Private Finance and Australian Roads, Ernst & Young, June 2007

10.  www.swantaxis.com.au

11.  An interesting sidelight to the debate about deregulation in the early years of the Gallop Government was the role of Brian Burke as a lobbyist.  See Paul Omodei, Media Release, 9 November, 2006

12.  Talking Taxis No 4, April 2007

13.  Media release, 5 March, 2007

14.  Rex Deighton-Smith, Reforming the Taxi Industry in Australia, National Competition Council Discussion Paper, November 2000 p. 11