Hidden dangers in altered Trade Practices Act

"Rudd to rein in business bullies" and "War on market thugs" were two headlines that accompanied the decision announced on Monday to amend the Trade Practices Act.  The decision will make it easier to prosecute companies engaging in "predatory pricing".

Predatory pricing is when a company lowers its price below cost with the intent of driving a competitor out of business, then recouping costs by setting prices even higher than they were before.

No company is keen on competitors taking business away from it and every company would like improved margins.

But predatory pricing is an astonishingly difficult tactic to employ.  It means the predator bleeds red ink while trying to knock out its rival and that no other company will seek to replace the vanquished rival.

It is not uncommon for businesses large and small to involve themselves in price cutting in general or to selected valued customers.  That's all part of the competitive process.

Among larger companies, newspapers, airlines, even cardboard box makers from time to time engage in pricing activity that is superficially predatory.  Companies are always trying to attract customers with specials and would normally be very pleased to knock out competitors.  Sometimes they offer free trials, an offer that is by definition below cost.

Nobody wants to prevent lower prices, and the Government is even trying to legislate for them in the case of petrol.  But, the Government argues, if a predatory action could be made to stick, the outcome would, by definition, be a net increase in prices over time.

Under similar pressure to help the underdog smaller businesses that are often less well equipped to engage in the competitive cut and thrust, the Coalition introduced the Birdsville amendment (so-called after the pub in which it was negotiated by Senator Joyce).

This was a compromise that required proof that the predator could recoup the lost profits from the battle.  This requires some likely entry barrier stopping another competitor offering a supply when a successful predator started raising prices.  Hence, to avoid too ready a recourse to bringing in the Government to side with the higher-pricing company in a competitive struggle, tests of the bona fides are in place.

Such measures are necessary to prevent the Australian Competition and Consumer Commission paralysing businesses with paperwork every time a competitive intensification emerges.

Because, the truth is, nobody has ever identified a successful case of predatory pricing.  The original example offered was Standard Oil in the US, but Standard Oil simply had lower costs than its rivals and its so-called predatory behaviour took place at the same time as it was losing market share.

The ACCC championed the case for it to be given additional powers to step in and dictate the terms of competition.  Welcoming the decision, ACCC chief Graeme Samuel said previously:  "We were always concerned about the ability to prosecute cases;  we've only had one success in 45 years."

So there you have it.  The ACCC has little faith in the market processes over which it has powers.  It wrongly attributes its lack of success in litigation to the dice loaded against it.

The amendments will provide further opportunities for the ACCC to flex its muscles and doubtless allow it to bid for a larger budget.  Small businesses now have a "permanent voice within the ACCC" that can be recruited against a competitor offering lower prices and can make a determination without any tests of its merits or practicality.

All of this is discomforting.  Giving the ACCC more powers to pursue companies that are pricing goods and services too attractively for the consumer will put a brake on competition.

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Not what he says, but what he does

Kevin Rudd should stop his Government's doublespeak on free trade.  In his recent address to the US Chamber of Commerce in Washington DC, he tried to convince his audience and the media that he was committed to free trade, but considering his Government's actions at home, his audience should be wary.

Rudd advocated for free trade, arguing his Government would make ''no retreat into protectionism''.  Embracing free trade means more than just not increasing tariffs.  It means eliminating tariffs -- subsidies and industry assistance packages that still exist.

Rudd clearly understands the contribution a successful conclusion to the Doha Round of World Trade Organisation negotiations would deliver for Australia and, more importantly, the world's poor.  He has spruiked the need for a successful outcome on his visits to Washington and Brussels, and is right to say that a successful conclusion would give the global economy a ''psychological shot in the arm''.

Most of the media focus on the Doha Round has focused on reducing agricultural production and export subsidies by the US and Europe and increasing market access for developing countries' agriculture products.  As a unilateral liberaliser, Australia can play a sanctimonious, honest broker in negotiations on agriculture.  But industrial products and manufacturing liberalisation is also important to global prosperity.  Since taking office, Innovation Minister Kim Carr has established three reviews that are likely to recommend anti-free trade measures -- an Innovation Review, a Review of the Australian Textile, Clothing and Footwear Industry and a Review of Australia's Automotive Industry.

The tragedy of the Government's doublespeak should not be lost on Finance Minister Lindsay Tanner.  In a speech to the Melbourne Institute last week, he attacked "producerism".  According to him, "producerism exists wherever the state implements regulatory and ownership arrangements that favour or protect particular producer groups at the expense of society as a whole", such as "tariffs, monopolies and other distorting regulatory regimes".  He is spot on.

Since taking office, the Government has appointed reviews that are likely to increase public subsidies through research and development funds, industry assistance and freezing tariffs.  The cost will come at the expense of Australian consumers, a competitive Australia and helping the world's poor.

Perhaps the Prime Minister would do well to stop listening to Carr and start listening to Tanner.

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It's not just yes or no to a republic

Kevin Rudd said he wanted big new ideas from his 2020 Summit.  One of those big new ideas was the republic.  Well, at least the Prime Minister got half of what he wanted.  The republic is a big idea, but it isn't new.  It's an issue that has been around since before Federation, and nine years ago we had a referendum about it.

According to media reports, 98 of the 100 people in the governance stream at the summit supported a republic.  This sort of result is not surprising, given the composition of the summit.  Neither is it surprising that the opinion of those who attended the summit is quite different from the rest of the community.  According to the most recent polls, fewer than 50% of Australians want a republic, with the rest either being opposed or having no opinion.

The summit gave the republican cause a big boost.  Although Rudd has said the republic is not a priority, there's now excited talk about a vote on it being held at the same time as the federal election in 2010.

Republicans have trumpeted that not only do they now have the overwhelming support of the nation's best and brightest, they've also reached agreement among themselves about how to get what they want.

The republican strategy that emerged from the summit is as follows.  First, there will be a vote to ask the electorate whether it wants a republic.  If a majority say yes, there will then be a few years of discussion about what sort of republic we should have.  Once a model has been chosen, there will be a second referendum to amend the constitution.

This so-called "two-stage" process towards abolishing Australia's link with the monarchy has been hailed by the republicans as simple and understandable.  The republicans say that in theory nothing could be easier than asking Australians whether they want a republic -- and, in theory, the answer to such question can only be either "yes" or "no".

But the problem with theories is that usually they don't match reality.  The problem with the suggestion that Australians should just give a yes or no answer is that the reality of constitutional politics doesn't easily fit such a tick-a-box solution.

Any government that offered voters only a yes or no vote on the republic would not be offering Australians a genuine choice.  It is disingenuous for anyone to claim that the debate about an Australian republic is about only two choices.  The debate is actually about three choices:  no change, "minimal" change (a republic with a president, probably chosen by the parliament), and "maximum" change (a republic with a directly elected president).

It's a little bit like asking a friend for a favour.  Only the very naive say yes when asked "will you do me a favour?"  A more sensible answer is "it depends".  And so it is with the republic.  Whether people support the notion of a republic depends on what sort of a republic they're offered.  It is dishonest to ask people whether they want a republic without telling them the consequences of their response.

Many Australians who favour the country becoming a republic (including many in both the Labor and Liberal parties) support the "minimal" option -- but they would not in any circumstances support the "maximum" change option.  Similarly, how should someone vote if they support a republic but only on the condition that a president was directly elected?  At the referendum in 1999 many people who held this view voted no when offered the chance of accepting the "minimal" option.

There is no straightforward answer to these questions and it does a disservice to the Australian public to pretend otherwise.  It's easy for 98 like-minded people at the 2020 Summit to raise their right hand to vote for a republic.  Inventing an entirely new method of government is a slightly more difficult task.

The demand of summit participants for the new and the different was a tendency not limited to the republicans.  Across the entire summit there were calls for numerous overhauls and restructures.  This sort of revolutionary sentiment was captured in the initial report of the summit.

The truth is that what we have in Australia at the moment is better than many of the alternatives.  And this particularly applies to our system of government.

What was absent from discussion at the summit was any acknowledgement that despite our challenges Australia is nevertheless a pretty good country in which to live, and we have a quality of life the envy of the rest of the world.  If anyone at the summit did in fact say this, then somehow the ABC managed to miss it.

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A liquidity crisis we had to have

In his April 15 Melville lecture, Reserve Bank governor Glenn Stevens noted that, beyond modifying the bank rate, central banks had traditionally sought to control liquidity by buying or selling only ''gold-plated'' securities.  He said the crisis had led some central banks to widen the range of securities they bought and sold.  But, he added, as yet no central bank had proposed buying the collateralised debt obligations (CDOs) of packaged mortgages of varying and unknown quality.  It is these securities that have been the root cause of the present financial crisis.

But the US Federal Reserve had already announced $US200 billion ($214 billion) to buy mortgage-backed assets.  The crisis has revealed the value of these to be, at best, suspect.  Extending the open-market window to such assets is clearly in Stevens's view not quite buying CDOs, but the difference must be very subtle.

Just days after the governor's speech, the RBA has been on a mortgage buying spree, at a premium of only 0.25 per cent above the cash rate, which has injected $1 billion into the market.

Similarly, the Bank of England announced a new £50 billion ($107 billion) to £100 billion bail-out to buy securities, including ''own name'' mortgages that have no market.  These will be subject to a 5 per cent premium to the cash rate.

All these central banks are treading a dangerous path.  Their open-market operations (plus interest rate lowerings in the US) mean injections of liquidity into the economy.  The corollary is faster inflation.

Previous monetary injections with resulting inflationary outcomes are the root causes of the crisis that central bankers are desperately trying to quell.  The inflation from rapid monetary expansion in recent years was hidden in Australia, Britain and the US by the excess liquidity being channelled into housing.  This was combined with a restraint on housing land availability, which meant the excessive funds resulted in higher prices for existing dwellings rather than increased volume or quality.

House prices in the past six years rose 60 per cent in Britain and Australia and almost 50 per cent in the US.  In countries without housing land restraints, prices have been more moderate -- even falling in Germany.

Based on the underlying worth of land -- which is particularly abundant in Australia -- the excessive valuation of the average Australian dwelling is at least $100,000.  That amounts to $800 billion for Australia's 8 million dwellings.  In other words, two-thirds of Australia's household wealth is tied up in housing, which is overvalued on average by 25 per cent as a result of artificially created regulatory scarcity.

Central banks have caused the problem.  A heady cocktail of excess liquidity and land and planning restraints has artificially inflated housing prices.  This was a gigantic Ponzi game which has now crashed down to earth.  With luck, unwinding this may result in a mild recession;  but the activities of the central banks here and overseas bring a risk of a far more serious financial collapse down the track.

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How to plan for a fiasco

For more than 50 years the average Australian was able to buy their first home on the average wage.  Traditionally, the median house price was about three times the median household income.  Today, in Adelaide, Melbourne and Brisbane, the median house price is more than six times the median income;  in Sydney and Perth, it is more than eight times.

In 2006 former Reserve Bank of Australia governor Ian Macfarlane asked:  ''Why has the price of an entry-level new home gone up as much as it has?  Why is it not like it was in 1951 when my parents moved to East Bentleigh, which was the fringe of Melbourne at that stage, and were able to buy a block of land very cheaply and put a house on it very cheaply?  I think it is pretty apparent now that reluctance to release new land, plus the new approach whereby the purchaser has to pay for all the services up-front -- the sewerage, the roads, the footpaths and all that sort of stuff -- has enormously increased the price of the new, entry-level home.''

Until the 1970s, land was abundant and affordable, and the development of new suburbs was largely left to the private sector.  Our pre-'70s leafy suburbs of large allotments and wide streets are an enduring testimony to the private sector approach.

Enter state and territory government land management agencies which, since their inception, have been responsible for astronomical rises in land prices, leading to astronomical mortgage costs.  This escalation in land prices, in turn, has pushed up the cost of rental accommodation, road widening and key infrastructure projects, establishing schools, community centres and health services, and so on.

State and territory governments were spurred on by an urban planning cheer squad obsessed with curbing the size of our cities and pushing a policy of urban consolidation.  The case for urban consolidation was that it was good for the environment, stemmed the loss of agricultural land, encouraged people on to public transport, saved water, led to a reduction in car use and saved on infrastructure costs for government.

None of this is true.  By promoting urban consolidation while demonising growth, planners have inflicted enormous damage on the economy and society, and politicians and public servants should stop listening to them.

The economic consequences have been as profound as they have been damaging.  The capital structure of our economy has been distorted to the tune of many hundreds of billions of dollars and getting it back into alignment will take time.

California, birthplace of the sub-prime mortgage industry, is paying the highest price of any US state as the housing meltdown there persists.  By the end of the year, property values in that state alone will have fallen by $US600 billion.  California also has one of the strictest urban planning regimes in the world.  It and Florida, another highly regulated urban planning regime, account for about 70 per cent to 80 per cent of all sub-prime losses in the US.  Foreclosure losses, however, are significantly lower in low urban planning states such as Texas and Georgia.  Like most epidemics, the US sub-prime mortgage housing crisis can be traced back to this one source:  urban planning laws.  The credit crisis is the direct result of unprecedented house price inflation caused by urban planning policies.

In Australia, the housing affordability problem, mortgage stress and the rental crisis are all caused by the same thing.

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The market at work

While the US subprime crisis has gone international some perspective is in order.  In recent weeks some very large numbers have been estimated as the "true" cost of the crisis and a major economic meltdown has been predicted.

The betting market has a 72 per cent probability that the US will experience a recession this year.  Martin Feldstein -- immediate past president of the US National Bureau of Economic Research (NBER) -- has written that the US is in recession already.  This is a significant claim as the NBER is charged with dating the US business cycle.

The OECD has claimed the subprime crisis will eventually cost between US$350 billion to US$420 billion while the IMF estimate the eventual cost to be almost US$1 trillion.  To put these numbers into perspective, Australian Gross Domestic Product is about US$1 trillion.

The bad news is that economic growth in 2008 is likely to be low;  the good news is that this isn't the end of civilisation as we know it.

Comparisons to the great depression or the 1970s oil crisis are simply overblown.  Indeed the world has been in similar situations many, many times before and survived.

A paper presented by Carmen Reinholt and Kenneth Rogoff (PDF 40KB) at the recent American Economics Association conference shows, so far, that the current financial crisis has close parallels to 18 previous post-war banking crises in OECD economies.

The run-up in US equity markets and housing prices closely tracks the average run-up of previous crises while the slow-down in GDP growth also tracks the average of previous crises.  On measures such as public debt and inflation the US is in better shape than the average during previous crises.

That is not to say that the US does not have high levels of public debt, but the growth is public debt has lower than comparable economies experiencing a similar crisis.  In short, the Reinhart and Rogoff analysis suggests that the US is experiencing a stock-standard, run-of-the-mill, banking crisis.

The good news is that this crisis will pass.  Of course that statement is cold comfort during the crisis.  World financial markets are frequently buffeted by financial storms but the 2007-8 credit crunch will pass into history.

The real bad news is that all financial crises are associated with regulatory hang-over.  The last crisis gave us Sarbanes-Oxley.  The exact form new regulation will take remains to be seen.  The important aspect to crises, however, is that they clear out the economic and financial deadwood.  During a financial crisis those firms with poor strategy and non-viable business models are exposed.  Many fail.

While that may sound somewhat harsh, that is what is supposed to happen during a crisis.  Assets are re-organised and restructured into new configurations, new business models are developed, and the market moves on.

The real question is, why the hysteria?  If crises are fairly common -- say, 18 banking crises over the last 60 years -- why would we be overly concerned about yet another crisis?  There are at least three answers.

First, this time could be different.  This time the market mechanism may fail to self-correct and fragilities that have been accumulating over time may be too great to overcome.  This is always a possibility.  The ''this time it's different'' argument is very popular, but cool hard-headed analysis suggests that while the actual crisis trigger varies from crisis to crisis, the actual unfolding of the crisis is much the same each time.  If anything the number of failed US banks in the current crisis is much lower than the Savings and Loans crisis of the late 1980s and even the Great Depression.

A second possibility is that the hysteria is all a media beat-up.  John R. Lott Jr, author of Freedomnomics, has argued that some perspective is in order.  Economic statistics for the US, apparently, are slowing but nonetheless the economy remains strong.  Lott's argument is that a left-biased media is playing up the bad news as part of a plan to elect a Democrat to the White House.  He says this is a mirror image of the 2000 election campaign when the media covered up a recession to promote Al Gore.

There are, at least, two problems with this argument.  First, the NBER date the US recession from March 2001 -- so the factual basis of Lott's argument is weak.

The second, more serious, problem is that Lott is promoting a conspiracy theory on a grand scale.  Not only would the media (who themselves are not a single conscious monolith) need to participate in the conspiracy but the "smart money" in the betting market would also have to participate too.  Of course, that does not undermine the argument that the media may be left-leaning, but it does suggest that recession fears are more than just a media conspiracy.

The third possibility relies on a behavioural belief that Bryan Caplan documents in his recent book, The myth of the rational voter:  Why democracies choose bad policies. Caplan argues that people have a number of biases that inform their perspectives on life.  One of those biases is a pessimistic bias.  People have a tendency to overestimate the severity of economic problems and underestimate the performance of the economy.

It is true that the economy, both in Australia and in the US, has experienced some turbulence and volatility.  Yet responses to the crisis seem to be all out of proportion to the crisis itself.  Calls for greater disclosure, for example, ignore the fact that investors already have a lot of information.  One more piece of incomprehensible accounting data will not suddenly reveal all.  Calls for greater regulation of financial markets also ignore the fact that we have yet to see whether the existing, already onerous, regulations have failed.  There is no evidence to suggest that the financial system or economic order has failed to work as expected.

The bottom line is that people who make poor investments or have poor business strategies should lose their money.  Over the past year that is what we have seen.  It is not the end of the world, or the beginning of the next great depression.  It is the market at work.

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The patriot Games

Is there anyone, anywhere, who believes Olympic bureaucrats when they declare that the Games are about athletics, not politics?  Even the athletes themselves -- standing upon the winners' podium, draped in their national flag and singing their national anthem -- must realise that the Olympics are actually undisguised geopolitics and taxpayer financed publicity stunts.

One need only look at the opening ceremony to realise that the Olympics are little more than an excuse for nation states to preen in front of each other like ostriches in mating season.

By August, the three largest totalitarian states of the 20th century -- Nazi Germany, the USSR and China -- will all have been Olympic hosts.  Certainly, China's appalling human rights record has improved since the Great Leap Forward.  But providing dictatorships with a pre-packaged marketing program is hard to reconcile with the Olympic charter, which argues that the Games are to reflect ''universal fundamental ethical principles''.

But everybody knows the torch relay has its origins in the Nazi Ministry for Public Enlightenment and Propaganda.  Everybody knows how the USSR seized upon the Moscow Games, proclaiming that it was an acknowledgement of their fantastic record of maintaining world peace.

The relationship between totalitarianism and the Olympics is old news.

The modern Olympics have always been a potent mix of late 19th century nationalism and elite athleticism.  The Olympics may now sparkle with the glitter of cutting-edge telecommunications infrastructure and high-performance sports apparel, but the Games have never quite shed their legacy of stern pseudo-militarism.

Even when peaceful liberal democracies host the Olympics, they are drenched with propaganda.  As everybody remembers from last year's federal election, democratic governments are always happy to spend gigantic sums on public relations.  The Olympics are a publicity stunt on a colossally expensive scale.

Few of the other justifications for staging the Olympics stack up.  Whatever jobs are ''created'' during the two weeks of events are quickly extinguished when the flame is.

Some Games supporters claim that staging the Olympics provides an opportunity to make much-needed infrastructure upgrades, particularly in transportation.  Those who still hold this view clearly haven't been to Sydney recently.

Others claim that the Olympic publicity encourages international tourism once the festivities are over.  But we only ever hear politicians predict tourism bonanzas when they can't think of anything else to say.  What potential visitors were unaware of the existence of Athens, Beijing or London until they heard that those cities would be Olympic cities?

Whatever economic spillovers hosting the Games can bring, they nowhere near justify the enormous cost.  If there is an economic benefit to staging the Olympics, then the economy hasn't heard about it.

Looking at the impact of the announcement in 1993 that Sydney would host the Games, a group of RMIT economists concluded that the stock market didn't budge at all.  Only building firms saw their values rise.

The two biggest beneficiaries of the Olympics are politicians hoping to bask in the loving glow of the international media, and property developers looking for stadium contracts.

In Beijing, Chinese taxpayers have to support an event designed to glorify the Communist Party that has ruled over them for more than half a century.

But boycotting the Beijing Games is no more likely to pressure China into repairing its human rights record than granting them the Olympics did in the first place.  There have been dozens of Games boycotts over the past century, and none have had any significant political impact.

In fact, political controversy has shared the stage with athletics at almost every modern Olympics.  Even innocent Melbourne in 1956 was marred by boycotts -- China withdrew because the Games committee recognised Taiwan, three countries withdrew because of Israel, and another three withdrew in protest at the Soviet invasion of Hungary.  When the USSR played Hungary in water polo that year, the match resembled a pub brawl.

Boycotts and underwater fisticuffs may be rarer since the end of the Cold War, but politics still infuses every aspect of the Games.

The official website of the Chinese Olympic Committee is unambiguous about Beijing's ideological content, advertising its National Fitness Program, which has been hard at work since 1995 ''promoting mass sporting activities on an extensive scale, improving the people's physique, and spurring the socialist modernisation of our country''.

In the same breath -- or, at least, on the same page -- the website laments the attempted politicisation of the Beijing Games by ''some Western forces'' and ''separatists''.

Remember the tedious controversy about non-Australian marching bands in the Sydney opening ceremony?  Every moment of the Beijing Games will be stage-managed to shed the best light on a dictatorship that has more than 4000 domestic political prisoners.

So, rather than pretending that politics can be hidden under the woolly feel-goodness of the officially prescribed ''Olympic Spirit'', we should encourage the Games' politicisation.

The Chinese Government is welcome to its publicity stunt, but while the country is under the full glare of the world's media, there is probably no better time for demonstrations and counter-stunts.

Despite their lofty ambitions, the Olympics have never brought world peace.  Nevertheless, if the press corps manages to outflank China's propaganda machine, they might be able to turn this expensive political advertisement into something good for human rights.

Don't forget -- it's not about the sport.

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Competition a loser in price regulation lottery

As consumers we all grumble about price rises.

For most goods and services, competition means rivals will undercut suppliers that try to raise prices above costs.  But where there is a single monopoly supplier these restraints don't apply.

Monopolies are rare.  They exist either where governments prevent new competition or, as with gas pipelines and electricity poles and wires, where there can be only one supplier.

Governments either nationalise or control the prices of such ''natural monopolies''.  Nationalisation is nowadays avoided.  Bitter experience shows that government-owned firms soon become high-cost outfits showing little innovation.

Pricing for gas and electricity is an important role for regulators.

In 1990 Victoria's state-owned gas industry had a bloated workforce of 5000 and over-engineered ''gold-plated'' facilities.  Under private ownership, the workforce has been reduced to just a few hundred and there has been greater discipline in capital spending.  As the Essential Services Commission has shown, this has brought lower prices while maintaining service standards.

This greater efficiency of private ownership has led governments throughout the world to prefer it over state ownership.

But determining the right price without competition presents real difficulties whether or not the service is government-owned.  Government regulators in the past often set prices too low, which initially favours customers but eventually leads to service deterioration.

Classic examples were the US and European rail systems which a century ago saw regulators progressively reducing prices.  This led to obsolete networks which could not compete with motor transport.  Only with recent price deregulations has rail shown some recovery.

In contrast to that experience, the price regulation of gas and electricity in Australia has been handled well.

The regulators have required price reductions of businesses that had grown fat and lazy under government ownership.  The businesses continued making healthy profits by cutting costs.

But at some stage, once all the fat is cut out, requiring further price reductions eats into efficiency.  They cause firms to stint too much on investment and start avoiding expansions into new customer areas.

In recognition of this, the national regulator has recently handed down stable prices to the monopoly Victorian electricity and gas transmission businesses of SP AusNet.

By contrast, the state regulator, the ESC, has further reduced the allowed rates of return from prices for gas distributors.  This is largely based on a view that previous settings over-compensated firms for gas demand reductions during market downturns.

The ESC's decision is well reasoned but regulatory price setting remains too much of a lottery.

It sometimes requires years to determine whether a regulatory pricing decision is right or wrong, though share price movements offer some early guidance.

In this respect, the share market reaction was sober rather than exuberant following the decision on SP AusNet, indicating the national regulator's views were widely shared.

Concerns about regulatory price cutting zeal have brought new inter-governmental guidelines, which place greater emphasis on ensuring adequate returns to regulated monopolies.

Even so, regulation of gas pipes and electricity wires remains too focused on restraining profitability, the very incentive business needs in order to innovate and pursue efficiency.

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A man to Labor's credit

At Kevin Rudd's 2020 Summit over the coming weekend, the handpicked participants can be guaranteed to praise the government for its foresight, its sagacity and its wisdom.  Participants will glow in the knowledge that they've been designated by the Labor government as being among Australia's thousand ''best and brightest'' people.  Perhaps some of the more thoughtful summiteers will ponder whether in fact they've been selected because they can be relied upon to agree with the government's policies.

Summit-mania has swept through the Canberra press gallery, the national parliament, and the federal bureaucracy.  Thankfully it doesn't yet appear to have engulfed the whole of the Labor ministry.  At least one minister appears to be more interested in doing his job than planning how to be photographed standing next to Cate Blanchett.

In the midst of the hysteria surrounding the collapse of stocklenders Opes Prime and Lift Capital, Nick Sherry, the Minister for Superannuation and Corporate Law, has so far been the voice of common sense.  As thousands of investors complain about the hundreds of millions of dollars they've lost, it would have been easy for Sherry to blame the previous government, order a royal commission, promise more regulation, and vow that stocklenders would never again go broke.  To his credit he's done none of these things.

He's resisted the temptation to grab media attention and play politics.  Instead what he has done is calmly and quietly state the facts about Australia's system of financial regulation.  He's emphasised that he won't be rushed into making any drastic or sudden changes.  He's acted exactly the way a minister for superannuation and corporate law should behave.

Sherry has spent the past few weeks pointing out that by and large financial regulation in this country works well.  And he's right.  It's not obvious that the failures of Opes Prime or Lift Capital were the result of inadequate regulation.  If you're searching for the cause of the companies' problems, you don't need to look too far beyond the collapse of the sharemarket.  If there has been some sort of management failure at the Australian Securities Exchange in enforcing its rules, then it isn't the regulations that failed.  It might be that the regulations have not been properly administered.  So far there's been nothing to justify a wholesale rewriting of the rules for the Australian Securities and Investments Commission and the ASX.  If investors' funds have been lost because of fraud, different or better regulation would not necessarily have stopped it happening.

Likewise, Sherry has taken a sensible approach to another issue that has been dominating the headlines.  He's said that some ''relatively minor surgery'' might be needed to the Corporations Act in relation to the disclosure of short selling.  Thankfully, he seems to be contemplating making the least possible regulatory changes.  This is a big difference from what politicians normally do, which is to attempt to change the largest possible number of things in the shortest possible space of time.

It's been interesting to watch Labor's ministers in the midst of the global market turmoil.  Because they are still relatively new and trying to establish their economic credentials they are probably more reluctant to advocate new regulation than if coalition ministers had been in power.  Perhaps there are benefits to changing the government after all.

The refreshing attitude of Nick Sherry has even been extended to private equity.  In a speech last week he said he was broadly satisfied with the regulations covering the operations of private equity firms, and he saw no pressing need forchange.  He even acknowledged that ''private equity investors are an important element of dynamic and efficient capital markets ... they contribute significantly to the market objective of ensuring that capital is allocated to the most productive purposes''.  And just to make sure no one misunderstood him, Sherry went on to say:  ''Indeed, the potential for the investment of private equity funds in publicly owned companies should encourage company directors and management to remain focused on maximising returns on invested capital''.  This isn't a quote from Friedrich Hayek or Milton Friedman -- it is from a minister in the federal Labor government.

Labor hasn't always had such a welcoming approach to private equity.  In December 2006 Labor was in opposition, and private equity firms were trying to buy Qantas.  Labor in effect opposed the takeover and Labor MPs talked of nothing other than the potential job losses of its union members.  After 15 months and an election victory, times have certainly changed.

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AG to DSE: Dam or be damned

The Auditor-General's report Planning for Water Infrastructure in Victoria is prefaced by an unusually testy exchange between the Auditor-General himself, Des Pearson, and Peter Harris, the secretary of the Department of Sustainability and Environment.

This highlights the AG's finding that the department had been, at the very least, sloppy in its estimated costs of new water supplies and outcomes.  Clearly, the public exchange masks a heightened level of criticism.

The AG's comments call into question the competence of the Government's water policy procedures.  His first recommendation is to revise the plan entirely.  This is unusual since the scope of the AG's review is pretty much restricted to reviewing the operations of government agencies.

Water Minister Tim Holding claims the matter is simply a vigorous debate about a controversial issue on which the Government has made the right judgement.

Damning though the AG's report is, he was clearly pulling some punches.  Thus, in referring to the 2004 blueprint, Securing Our Water Future Together, he does not point out that it was founded on an approach, shown to be erroneous, that sought to balance water supply and demand by restricting supply, especially from northern Victoria.

The reduced-demand strategy came out of the green-left ideology most strongly championed by former minister John Thwaites.  It fell victim to the reality that industry and households do not value water savings as highly as environmentalists.

In June 2006, following a 20-year dearth of capital expenditure, during which time the population grew 30% and the drought continued, Melbourne's water availability was looking perilous -- despite restrictions and Government exhortations to use less.

The Government panicked.  It announced a $4.9 billion Victorian Water Plan.  This involved $3.1 billion for the desalination plant at Wonthaggi and $1.75 billion for the first stage of upgrading the irrigation infrastructure in northern Victoria together with the Sugarloaf Pipeline to send the water savings to Melbourne.

The AG's view was that the plan's preparation was a shambles.  It involved hardly any consultation with those affected by it, including government bodies with expertise such as Melbourne Water.

Although the AG examined the water infrastructure with rigour, he was not at liberty to examine approaches different from those that policy dictated the DSE must pursue.

Had he done so, he would surely have reached similar estimates of the costs and availabilities of alternative approaches to those I have calculated.  I have assessed costs and availabilities of water for Melbourne from a variety of sources, including from new dams in the Melbourne catchment area and the harvesting of flood waters, as well as desalination and the Sugarloaf proposal.  That analysis showed conclusively that the DSE approach was the wrong one.

I have estimated that new supplies can be sourced from rivers in the Melbourne catchment area -- including the Thomson/Macalister, Mitchell and Latrobe -- for 50¢-60¢ a kilolitre.  That's a lot less than Sugarloaf (estimated at 166¢ a kilolitre) and a fifth of the 300¢-plus a kilolitre cost of water from the Wonthaggi desalination plant.

Duplicating the Thomson Dam would offer other benefits of flood control and greater security for irrigators south of the Great Divide.

The root cause of the problem is an ideologically driven anti-dam water policy.  The DSE has been forced quickly to rectify a disaster years in the making and to do so with solutions other than those based on a new dam, to avoid embarrassing the Government.  It is now time to face reality and build a new dam.

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No Balance in Water Negotiations

Some years ago an irrigator in the Macquarie Valley explained to me that they had been giving back water for years as part of negotiated and then renegotiated water sharing plans.

He then asked me how much more water I thought the environmentalists would be asking for, before they had enough water for the environment.

My considered reply was that as long as irrigators took any water from the river they would be a target.  I believed it did not matter how much or how little water he took, it was that he took any water at all that was the issue.

When a level of two percent water extraction from the Fitzroy River in Western Australia was proposed a few years ago, this was considered too high.

In Far North Queensland it is accepted that no water at all be harvested from rivers because they are known as "wild rivers".

In southern Australia water must be given back to the environment because levels of extraction are generally considered too high whether this represents five or 35 percent of stream flow.

In short, there is little or no community support for irrigation.

Yet, combined with the use of the best crop varieties and appropriate fertiliser and pesticide inputs, irrigated agriculture is an efficient, reliable and sustainable way to produce food.

Globally world food reserves are at their lowest in 25 years and the prices of most food crops are at a record high.

Meanwhile, the Australian government is hell-bent on entering the water market and purchasing water from irrigators on the Murray River or its tributaries to send to South Australia.

New federal Water Minister, Penny Wong, has been claiming the water is for the river, but water levels in the main channel of the Murray River have remained high despite the drought all the way to the lower lakes.

The Australian Conservation Foundation (ACF) claims more water is needed for the Murray's mouth, but if it was really concerned about the river's mouth it would insist the barrages be opened to let the water run from the lower lakes out to sea.

In short, the Australian taxpayer is about to spend billions of dollars to buy back water, mostly because many environment groups don't like irrigated agriculture.

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Freedom to work: everyone's a winner

Proposals to restrict the weekly working hours of Australians reflect a confusion of moral principles, a disconnect from reality and a threat to social equity and cohesion.

Proposals of this sort have been around a long time.  Current submissions ask government to cap working hours at 48 hours per week.  Apparently the need for this has been identified in academic research which reveals that people who work more than 48 hours in a week suffer bad health.  Further, a "chronic culture of overwork" is bad for family life and the community.

The intellectual home of this academic argument is Europe.  There the prevailing view has been that labour law can be used to structure social behaviour to positive ends.  France is the leader with complex labour laws dictating how, when and where work can be done.  The law most symbolising French state control of working lives is the limitation on weekly working hours.  It's proven a disaster.

The laws have been so impractical that exceptions have been applied for many job types.  For example how do you limit the working hours of soldiers in combat?  Do you have them stop when under fire because they have reached 48 hours of work?  Plainly not!  And soldiering is the worst profession that could be thought of that damages personal health and family life.  It's perhaps an extreme and even silly example but it demonstrates the extreme and even silliness of the academic proposal.

On more mundane levels if working hours are to be capped does that mean that people who have worked 48 hours in one job must be banned from taking a second job?  Do people who are self-employed, now around one fifth of Australian workers, have to be stopped from working the hours they want?  Should the Prime Minister be told not to work more than 48 hours?

How would a 48-hour cap on working hours apply to the oil and mining industries?  Take a rigger on a gas platform off the north coast of Western Australia.  He works twelve hours a day for fourteen days straight then has fourteen days off.  That is, for two weeks he works 84 hours a week then for two weeks he does no work.  He commutes to Townsville where his family live, shares the parenting with his spouse, coaches a junior footy team on roster with another coach and indulges his passion for fishing with his kids.

Yet the research on "excessive" weekly working hours apparently would declare this lifestyle bad for health and socially "damaging".  But this oil rigger loves his lifestyle.

The problem with such research is that it's usually narrow and limited, incapable of taking into account the wide diversity of work/lifestyle blending that occurs in society.  Diversity has become everything and it's what makes for vibrant economies and strong communities.

When people have maximum capacity to decide how, when and where they work they invent new ways of doing things.  Individuals decide how they want to blend their lives with their work.  They make free choices.  Society, economies and work changes into forms not thought of before.  But this doesn't fit easily with some academic research it appears.

Too often research on work is stuck in a mental framework that assumes all work follows the traditional nine to five, five day a week pattern.  But this is only one way work now occurs.  And government policy that is built on such a disjoint from new work realities becomes socially dangerous.  France has found this out.

Some suburbs of Paris for example have become violent, no-go ghettos, directly as an outcome of massively high unemployment in black Muslim populations.  Growing EU and French recognition is that state imposed constraints on work are a primary cause of these social ills.  Yet in France the politics of commitment to their labour laws makes a pathway out seem impossible.

At the heart of the problem is a moral question.  Societies need rules to function.  All rules restrict individual freedom.  But we know that maximising freedom leads to happier societies.  It's a difficult balancing act.

Working hours fit into a category where maximum freedom will produce the best economic, individual, family and social outcomes.  Each individual should be unrestricted in the hours they choose to work.  Each person must have the right to mix and match their work-life balance which will change over time and circumstances.

Calls on the state to impose working hour restrictions, assume a moral authority to impose the traditional wage-slave like, work-life mix on everyone.  This is not a moral position that can be accepted.

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Ideas summit? More like a Labor love-fest

Its difficult to be sceptical about Kevin Rudd's summit of Australia's ''best and brightest''.  One of the Government's first announcements about the event was that Cate Blanchett would convene a session.  A little while later it was revealed that Hugh Jackman would be attending.  (We don't know whether Mel, Nicole, or Russell have been invited -- maybe they'll make a surprise appearance).

Obviously the Prime Minister's media advisers calculated that the sight of Kevin Rudd discussing the nation's problems with Hollywood celebrities would combat his image as a boring bureaucrat.  So far those advisers have been proved right.

There's nothing wrong with Labor (or the Liberals) having summits, conferences, and talkfests.  Sometimes it is useful to get experts together to debate policy, and occasionally a good suggestion might emerge.

But the timing of the summit is curious.  It was only four months ago that Kevin Rudd won an election after he promised he had all the solutions.  Obviously Canberra's 155,000 public servants can't provide the answers the Prime Minister needs -- if they could he wouldn't need a summit.

The problem with Labor's summit is that 95% of the participants will be in enthusiastic agreement that the Rudd Government is good, that the Howard government was bad, and that the solution to any problem is higher taxes and more government spending.

The Australia 2020 Summit is an exercise in pure and simple politics.  The summit will co-opt the country's elite into endorsing the Rudd Government's policies, and in the process the Howard government will be airbrushed from history.

The background papers for the summit give the game away.  Although the papers profess ''to tell an evidence-based story about how Australia is faring'', the evidence they provide is skewed to present the Coalition government in the worst possible light.  In among the more than 100 pages of material there's no reference, for example, to Australia experiencing the longest period of economic growth in its history.

If summit participants are to be encouraged to confront the challenges of the future they should at least be told about the conditions of the present.  It's impossible to consider indigenous policy without examining the results so far of the Coalition's Northern Territory intervention.  The background papers, however, make no mention of the intervention.

Similarly, social welfare reform is discussed without reference to the single biggest welfare reform in a generation, namely the introduction of ''mutual obligation'' and work for the dole.  And the list goes on.

Regardless of whether one agrees or disagrees with the Iraq war, you'd expect it would be in the section on foreign policy or there would at least be a reference to it.  Yet, bizarrely, Iraq doesn't rate a mention.

The summit's background papers cleanse Australian history of the 11 years of John Howard.  Trying to ignore the fact that Kevin Rudd's immediate predecessor ever existed might give some of the summit participants a warm inner glow, but such an approach doesn't make for good policy.

All governments play politics;  after all, that's the nature of politics.  It's naive to believe that when it comes to Labor's summit the laws of politics are somehow suspended.

The Australian media analysed and dissected John Howard's every move in an attempt to discern the political advantage he or the Liberals would gain.  In contrast, Kevin Rudd's summit has been breathlessly embraced as an exercise in bipartisanship nation-building that is above the day-to-day reality of what politicians do.

It's good politics for Labor to portray the Prime Minister as a leader boldly forging a consensus.  Bob Hawke made a career out of it.  But sometimes you can get too much of a good thing.

A measure of the health of a democracy is the extent to which there are differences of opinion in the public debate.  Under the Liberals, the ABC, the ACTU, and Australia's public universities guaranteed that opinions different from those of the government would be aired and disseminated.

Now, with Labor in power federally and in every state and territory where will those opposing views come from?  They're unlikely to come from a summit of 1000 hand-picked participants.  One can speculate on a participant's chances of success if they suggested at the summit that Canberra should have less power rather than more, or that there are bigger issues confronting the planet than climate change.

There are strong incentives for those at the summit to co-operate with Kevin Rudd.  He has an approval rating of 70%.  Brendan Nelson's is 9%.  Labor doesn't look like being dislodged from power across the country any time soon.  Given this stark reality, the question is how many of those attending the summit will be able to afford to disagree with the Government?

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Melbourne's public transport is on a road to nowhere

The report of Sir Rod Eddington into Melbourne's transport needs has opened up all the predictable responses from pressure groups favouring public transport modes and from cranks who loathe the Australian ''love affair with the car''.

Some do not want the city to be a big metropolis.  Others favour public transport because of greenhouse gas emissions from cars, apparently unaware of the Australian Greenhouse Office data showing that Melbourne's buses emit more carbon dioxide per passenger kilometre than the average car.

The report seeks to provide guidance into transport needs for the next three decades.  It recognises that all the heavy lifting has to be by road unless the city is to be throttled.  But to placate the public transport lobby, it suggests an equivalent amount, $9 billion, be spent on trams and rail as on roads.

The starting point of any analysis must recognise the small and declining role of public transport.  Cars account for 91% of passenger kilometres (from 89% in the mid-1970s) while public transport takes 9% (from 16% in the mid-1970s).

Not even the Government's carefully selected transport experts think these proportions will change much.  There has actually been a small increase in recent years in public transport's share of the journey-to-work market.  But much of this is spurred by greater parking difficulties and congestion causing longer car trips.  Making the city even more unwelcome to cars would defeat the purpose since this would cause businesses to seek out more car-friendly locations, thus reversing public transport's recent gains.

The report states with pride that Melbourne's tram network is the largest in the world.  Melburnians are attached to their trams but, let's face it, they are an obsolete transport mode.  They probably pay less than one-third of their expenses and use a lot of road space -- that's why throughout the world they have been replaced as major people carriers.  Trams account for little more than 1% of passenger miles, down from 2% in the mid-1970s.

Buses have advantages of greater flexibility over trams but their share of trips since the mid-1970s has halved to 2%.  One problem is that the bus companies have feudal privileges that shelter them from competition.  If people were permitted to establish bus routes without requiring a permit, the needs of consumers would be much better met.  But little is changing and the Stalinist planning of the SmartBus designed to orbit the city is doomed to failure in its ability to attract patronage.

It is tempting to see the Eddington report as a sales document.  It seeks to diffuse opposition by giving equally to public transport and roads.  It adds sweeteners such as ruling out road ramps into the inner city to placate a vocal segment of the population.  For good measure it throws in $60 million for bike paths.

One goal of this is allowing the road elements to gain early approval, especially since they will largely be toll funded.  This would allow the more costly elements of the public transport proposals to be put on hold.  There is hardly anywhere in the world where rail and tram lines are consumer funded and the report's ambitious suggestions would prove no exception.  The Brumby Government might march off to Canberra for a handout to undertake the job.

A more likely upshot is that the Government will opt for a less expensive means of increasing public transport capacity through route extensions and better signalling and equipment.

Trains, buses and trams worked well in the days before the car when cities were compact and origins and destinations were few.  A modern city has infinite origins and destinations made all the more difficult for public transport to serve by densities that are less than a quarter of what they were 50 years ago.

Mass transit such as trains can be effective in serving the dense corridors radiating from the city centre.  Buses are a useful supplement on less dense routes.  But only 10% of trips are to the city centre -- and far less than this in the case of the more distant suburbs.  If the city is to remain a major commercial centre, planners have to accept the people's preferences for the car and adapt the city accordingly, leaving public transport with only a residual role.

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Come on, Aunty, time to work out where you're at

Management guru Peter Drucker famously asked the chief executive of General Electric two simple questions:  ''If you weren't in the business you're in, would you enter it today?  If the answer is no, what are you going to do about it?''  Has our ABC ever asked itself these questions?

The GE chief took Drucker's questioning as an opportunity to radically restructure the company and re-examine its core business.  The ABC should use the challenges brought on by new media and the internet to do the same.

A poorly kept secret of Australian libertarian and conservative politics is that when we complain about bias, it's usually only because we faithfully watch and adore the ABC.

The network's nickname -- Aunty -- makes it seem more like a kindly relative who has cats and loves having you over for quiche than a major government program that employs 4500 people and receives nearly $1 billion dollars of taxpayers' money.

Aunties don't have to justify their own existence;  government programs do.  Certainly, the broadcaster has a charter.  But that charter consists of little more than vague platitudes towards diversity, community and "awareness of Australia".

Unfortunately, the reforms announced over the past month -- the introduction of a 24-hour news-gathering service, a few local websites, and some shedding of in-house production staff -- do little to clarify the ABC's proper role.

But that is hardly surprising.  In fact, in her 76 years of operation, Aunty has never really known what she is for.  Australia has public broadcasting primarily because our pre-WWII federal government didn't trust the commercial radio stations to sufficiently educate the lumpen masses on the finer points of Brahms and Shakespeare.

Since everybody in parliament agreed that Britain's BBC was really cool, the government set up an Australian version.  But unlike the original BBC, the ABC has tried to be "for all Australians" and tried to compete with commercial broadcasters, adopting an uncomfortable mix of highbrow and lowbrow programming.

But a core foundation of liberal democracy is that the government should not do anything that society can do itself.  The government should not directly compete with the private sector.

What then would the ABC be doing now if it took Drucker's advice?

There seems little reason for the network to have a commercial arm -- should the ABC be directly competing with bookstores?  Why, too, should it be broadcasting highly popular sporting events when there is no lack of private networks willing to do so?  As a rule, the ABC should never out-bid another broadcaster for programming.

ABC director Mark Scott argued that not only can the network provide local news and commentary to remote and rural communities, but it could also provide a digital ''town square'' for community engagement.

Among public broadcasting advocates, this view is popular -- it is a convenient way to imagine a role for the ABC far into the online future.  But it is again indicative of the ABC's drifting purpose.  Why should taxpayers be paying the government to imitate the thousands of bulletin boards and forums that already pepper the internet?  And genuine communities are built by individuals, not governments.

There are, unquestionably, roles for which the ABC is necessary.  Government is responsible for broadcasting political events such as Parliament.  And the ABC has an enormous back catalogue of Australian history it should be immediately digitising.

Its cultural role needs to be examined in the context of the entire broadcasting market -- in particular, the Australian content regulations that apply to commercial channels.  If government is convinced that artificially promoting Australian culture is vital even in the age of media abundance, then that may be a task for public broadcasting alone.

But these are unasked questions.  The ABC is seen by commentators from the left and the right as a sort of gift from the government for the politically obsessed, rather than a major public policy initiative of the Federal Government.

All media organisations across the world need to go through similar soul-searching.  But because the ABC is insulated from the punishing winds of the market, it has consistently avoided tough decisions about what services it should provide.  If it is to adjust to the future, that will need to change.

Fair taxes on mining leave rich legacy

Victoria was built on the back of the mining industry.

Today the industry's contribution is more modest.

It is dominated by brown coal mining and mainly-offshore gas and oil, and is about the size of the dairy industry.

Earlier mining activities mean the Victorian industry is unlikely to play a leading economic role again.

However, aside from bankrolling the state's modern economy, mining in Victoria has also left other important legacies with on-going benefits.

The first of these is Melbourne's hosting of BHP Billiton and Rio Tinto, two of the world's most important mining companies.

Secondly, and related to this, is the continued importance of the skills originally developed to service the local mining industry -- skills that have found a ready market around the world.

The original search for mineral wealth in Australia owed much to our legal environment.

Australia offered those who found a deposit the security that they could develop it, facing low and known levels of taxation.

These conditions were clarified in the 1850s, following the Eureka Stockade revolt against mining taxes.

Other places around the world, notwithstanding high mineral prospectivity, failed to match Australian mining development.

Lawlessness continues to be a barrier in some places.  Compared with the situation in many African countries, the Kelly Gang look like some ill-disciplined schoolchildren.

Other countries have introduced risks of mineral expropriation.

Zimbabwe is the outstanding example.

The government there confiscated mineral leases which, together with its destruction of property rights in general, transformed a resource-rich economy into an international basket case.

South Africa has also faced criticism for its ''black economic empowerment'' regime, which some investors consider is moving along the road to expropriating their mining properties.

Elsewhere, with the collapse of the Soviet bloc, new under-explored mining areas opened up.  Much of this has proven to be unsatisfactory.

Russia has wrestled ownership of successful oil discoveries away from Shell and is in the process of taking similar steps against BP.

Some other former Soviet bloc governments markedly upped mining tax rates once a successful development had been proved.

Newmont Mining was Uzbekistan's largest foreign investor.  Having discovered and developed a major gold mine in the 1990s, in 2006 it was hit with a major tax increase and saw its assets seized.

A similar situation is panning out in Mongolia, a sparsely populated country the size of Queensland.

The government there has introduced a 68 per cent ''windfall profits tax'' on some mines and is changing the terms previously negotiated with others, including one partly-owned by Rio Tinto.

''Windfall profits taxes'' will undermine investor confidence unless those affected are convinced they are one-off.

In the 1980s Margaret Thatcher got away, as British prime minister, with imposing a windfall tax on North Sea oil, but no government of ex-communists, as is the case with Mongolia, would have sufficient credentials to repeat that.

A mineral deposit once discovered is often very valuable, presenting huge temptations to acquisitive governments.

Nonetheless, this killing of the goose that lays the golden eggs seldom pays off.  The Australian experience demonstrates how honest dealing by governments brings solid wealth creation.

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Wheat marketing reform

Submission to the Senate Rural and Regional Affairs and Transport Committee Inquiry into the Wheat Export Marketing Bill 2008 and Wheat Export Marketing (Repeal and Consequential Amendments) Bill 2008

1. BACKGROUND TO THIS SUBMISSION

We are pleased to have the opportunity to make a submission to Senate Rural and Regional Affairs and Transport Committee Inquiry into the Wheat Export Marketing Bill 2008 and Wheat Export Marketing (Repeal and Consequential Amendments) Bill 2008, hereafter referred to as "the draft bills".

We are supportive of the deregulation of wheat export marketing.  We have been an active participant in the wheat marketing debate for some years, and has consistently argued for the dismantling of the single desk.  We therefore supports the intent of the draft bills.  However, we are committed to full deregulation of the wheat export industry and note the draft bills fall short of this objective.

The following reports and opinion pieces, amongst others, are available on our website.  They provide additional information if required.

• Backgrounder:  The politics of wheat, March 2008

• "Wheat change is coming:  time to help not hinder", February 2008

• "Cronyism buys into wheat sales", October 2007

• "Time for the single wheat desk to go", August 2007

• "Time for wheat to cut against the grain", May 2007

• "Ingrained prejudice", May 2007

• "The wheat monopoly bred arrogance before kickbacks", October 2006

2. THE DRAFT BILLS

While not the full deregulation found in other grain markets, the government's policy is a significant step towards full liberalisation of wheat export marketing.  Potential exporters will apply for a license to export from Wheat Exports Australia (WEA).  There will be no single bulk exporter.  As a result, there will be no national pool by AWB.  Also, there will be no legislated buyer of last resort since all wheat will be sold at a market price.  This new legislation will therefore deliver the higher grain prices to growers forecast in many studies over many years.

The draft bills set up a potentially heavy-handed licensing scheme offering little benefit to growers.  Additionally, the draft bills mandate infrastructure access undertakings by port facilities owners who apply to export wheat.  This provision is likely to cause underinvestment in port facilities leading to increasing inefficiency and lack of international competitiveness over time.

Other features of the draft bills are positive and deserve support.

3. THE NEED FOR REFORM OF AUSTRALIAN WHEAT MARKETING

3.1. WHEAT IS A MAJOR EXPORT EARNER

Wheat is the dominant winter crop grown in Australia, in non-drought years wheat plantings are about 13.4 million hectares compared to 4.5 million hectares for barley and 1.3 million hectares for canola.  On average Australia exports 75 percent of the wheat crop.  Australia is the world's second largest wheat exporter.  Major markets include China, Iraq, Indonesia, Japan, Korea and Egypt.  In the last non-drought year, Australian wheat exports earned $3.591 billion.

3.2. GLOBAL DEMAND IS CHANGING

The Grains Research and Development Corporation (GRDC) has repeatedly drawn attention to increasing specialisation in international wheat markets and the need for Australian farmers to move away from producing traditional commodity varieties.  Market research has also highlighted the strengthening North American competition in varieties traditionally dominated by Australia such as Udon noodle wheat.

Increasing competition and changes in demand suggest Australian wheat growers will be best served by increased specialisation and the development of new varieties for niche markets.  The current national pool system is not conducive to innovation because wheat growers are another step away from their customers.  All market signals are filtered through the single desk holder who may, or may not, adequately assess and predict market trends.  As a result, the single desk system introduces an unnecessary additional level of risk into wheat marketing.

3.3. WHEAT IS INCREASINGLY PRODUCED BY LARGE GROWERS WHO WANT DEREGULATION

ABARE data shows over 80 percent of the national wheat crop is produced by large wheat growers and the proportion grown by the biggest farmers is continuing to increase (Figure 1 below).  The Productivity Commission estimated only "ten percent of Australian farm businesses now produce over 50 percent of output".  At the other end of the scale, small-scale wheat growers, who are particularly concentrated in NSW and Queensland, now only produce four percent of the wheat crop despite comprising one third of all wheat growers.

Western Australia is the largest wheat producing state despite having only 18 percent of wheat growers.  The WA industry has undergone the largest degree of specialisation and concentration in recent years so that the average wheat-growing farm in WA is now 1½ times larger than in NSW and 2½ times larger than in Victoria.

Larger farmers have greater capacity to manage pricing risk through financial instruments such as forward contracts, futures and swaps.  As a result, they are less reliant on pools.  Perhaps one indication of the change in pool use is that now over 50 percent of wheat delivered to the national pool is by grain traders not farmers.  Farmers are selling their wheat to domestic traders who on-sell it to the pool.

Organisations such as the PGA of WA and the Eastern Wheatgrowers Association who represent larger, specialist growers are pro-deregulation.  They can see the benefits from being able to enter into highly vertically integrated contracts with overseas buyers for specialist varieties and from trading their own grain.  Similarly, these growers are already experienced users of financial hedging instruments such as futures, options and swaps.  The opening of the export grain market will reduce the risk of these instruments because Australian prices will trade more transparently in line with global prices allowing Australian growers to minimise basis ⁽¹⁾ risk.

Figure 1Source:  ABARE

3.4. SINGLE DESK DELIVERS NO PRICE ADVANTAGE TO FARMERS

Not even the ITS Global study of 2006, funded by AWB, found any evidence of price premia being achieved for growers through the single desk.  Estimates of the cost to growers of the current monopoly vary.  A recent estimate by Graincorp of the costs to growers is between $9 and $15 per tonne in direct costs from inefficiencies in the entire wheat export chain.  Additional costs will come from opportunities foregone by individual growers achieving spikes in spot pricing or better prices for specialist deliveries.

Moreover, there is a strong perception among international grain traders that the AWB has driven down grain prices through its aggressive chasing of market share.  It is without dispute that the Cole Commission took as evidence a letter from AWB to the Iraqis selling wheat below international prices.

3.5. THE CURRENT LEGISLATIVE LIMBO IS THE WORST OF ALL WORLDS

Under the current legislative arrangements, the veto over wheat exports will transfer to the WEA on 1 July 2008.  In theory, they will be able to issue export permits for specific markets and tonnages as occurs now.  However, the WEA will be required to act in accordance with the interests of the national pool.  The national pool is run by AWB and the existing legislation will still require this to occur.  AWB has made it clear in its evidence to the Senate Standing Committee on Rural and Regional Affairs and Transport enquiry into wheat marketing that it cannot run a national pool without volume certainty.

It is logical that no operator can offer indicative prices for a pool without some idea of the quantity expected.  Pool operators hedge the risk that wheat prices may be lower at harvest than quoted for the pool price by using futures and options.  It is not possible to do this unless the operator has an idea of what the volume will be.

If the current legislative arrangements are allowed to stand, the WEA can only achieve the legislated objective of supporting the national pool by guaranteeing volume to the pool.  The only way to do this is to restrict export permits and force growers to deliver to the pool through lack of alternatives.  In practical terms the current legislation will force the WEA to deliver an effective veto back to AWB as the pool manager.

4. A REBUTTAL OF COMMON MISCONCEPTIONS ABOUT GRAIN MARKETING

4.1. THE SILO RECEIVER IS NEVER THE ONLY BUYER

Even for a farmer with no on-farm storage the local silo receivals centre is never the only buyer of wheat.

Furthermore, no farmer is forced to take the daily-posted local silo prices.  Farmers can warehouse their wheat and usually have a period of approximately six weeks before they start paying storage fees or they can freight it (at additional cost) to other receivals points offering better prices.  As a result, there is no reason for a farmer to receive below the prevailing world price on the day he or she chooses to sell.

If, on the day the wheat comes off the header and into the silo, the offered price is lower than the farmer will accept, he or she has a number of choices.  First, the wheat can be warehoused waiting for the price to pick up, second, the wheat could be sold forward by some months or even years with the price received being the futures price that day less warehousing costs.  In either case, there is no chance of futures losses or washout costs because the wheat is already in the silo.  The decision will come down to whether the individual farmer has a view the price will pick up enough to compensate for the storage costs.

Moreover, the perceived monopoly of Graincorp on the Eastern Seaboard or CBH in the West ignores on-farm storage and domestic user storage such as feedlots.  If storage costs at silos are too high, other silos or grain storage bags and bunkers will be built.

Proponents of the view that deregulating export wheat will in some way cause the grain accumulators to force farmers to accept below market prices assume farmers are unable to check the prevailing world price.  This information is already delivered to any farmer who requests it from multiple vendors and in a variety of ways, including SMS, email and fax.

4.2. RECEIVER OF LAST RESORT HURTS GROWERS & IS REDUNDANT

Many farmers retain the mistaken impression that the national pool operator (AWB) is required to buy all wheat at pool prices.  This is not the case.  The national pool operator is required to receive all wheat delivered to it;  however, there is no requirement to pay for it.  In practice the national pool operator sells the wheat for whatever it can get and eventually (perhaps as long as 2 years later) pays the farmer.

In the past the market for poor quality wheat was very limited.  Millers have no use for it and the domestic feedstock market was undeveloped.  Changes to domestic demand mean feedlots will buy even shot and sprung wheat now.  The farmer will not receive ASW pricing, however he or she would not have got that from AWB either and by selling to a buyer with a use for the wheat rather than delivering to someone who does not want it anyway, the farmer is likely to achieve a better price.  The major difference will be growers will need to make a few phone calls rather than one to find a buyer.

In recent years, poor finishes to the season have resulted in large swathes of crops cut for hay.  In the past, the traded hay market was localised and relatively limited.  However, one of the results of the entry of relatively large, professional operators into the hay market has been the development of new domestic markets for hay.  The market for poor quality wheat is similar to hay in that it is unplanned, undesirable and delivered to other farmers.  There is no reason why specialist buyers of poor quality wheat will not emerge in the same way they have for hay.

4.3. POOLS WILL STILL EXIST ALONG WITH MANY MORE OPTIONS

ABB estimates over 80 percent of the barley produced in Australia is still delivered to pools despite the total deregulation of the domestic and export barley market.  In a similar vein, there are already a number of regional wheat pools, such as that run by Southern Quality Produce in Victoria.  AWB and other major grain buyers have indicated they will run regional pools.  For farmers who prefer the cash flow structure of a pool many market participants have indicated these products will be available

One concern expressed by some is that regional pools can be closed at any time, leaving those farmers who harvest later or who have not committed at the time of delivery, unable to sell their wheat.  These claims are misleading.

• The current AWB national pool is really a series of pools that open and close now.  AWB, as pool manager takes a view as to the likely direction of grain prices and may close a pool if world prices start moving lower.  The usual reason given by AWB is to protect the returns of growers who have already delivered to the pool.  Therefore it is already the case that a national pool with a high estimated pool price can close at any time and be replaced by a national pool with a lower estimated pool price.
• The issue with pools closing is really one of farmers wanting multiple no-cost options available.  Many of the farmers who gave evidence at the Senate Committee hearings on these draft bills said they did not deliver to the national pool last year (or the year before that) because better prices were available for domestic sales.  Farmers deliver to the silo at harvest then wait to see whether the pool is a better option than a domestic sale.  While there is a national pool this is a low risk option, the worst that can happen is the national pool reopens with a lower estimated return.
• The imminent demise of the national pool has already driven innovation.  At least one pool for next harvest is already operating that allows a grower to insure for production risk.  The grower can commit to the pool with certainty knowing if the crop fails, the maximum washout cost is $20 a tonne.

4.4. GRAIN TRADERS CANNOT DRIVE PRICES DOWN

A common, but completely erroneous, belief among single desk supporters is that multiple buyers will drive down prices.  The logical absurdity of this position requires robust rebuttal.

At the moment, there is the situation of many sellers and a few buyers.  The laws of supply and demand dictate that where there are many sellers (too much supply) and few buyers (insufficient demand) the price will be low.

In the future, the number of wheat buyer will increase.  Already, even at the local silo level, buyers for the domestic market such as Glencore, Louis Dreyfus, Graincorp and ABB offer daily prices in each port zone to all comers with wheat that meets their specifications.  In the future, these buyers for the domestic market may also buy for the export market so they will want higher tonnages and new export-only buyers will enter the market.  The greater the number of buyers, the more they have to outbid each other to get the sellers to deal with them.  Without collusion, which becomes impossible once there are more than a few participants, it is the buyers who compete to drive the price up not down.

Currently at harvest, supply increases to the point where there are many sellers but only one buyer, AWB.  The buyers for the domestic market progressively fill their books and then offer prices below that of the pool.  This is not "grain-traders driving down the price" but the simple operation of supply and demand.  Once the domestic market is full, the only place grain traders can deliver their excess grain stocks is the pool so the pool price becomes the upper limit for grain prices.  Far from claims the pool acts as a floor price, in a normal year the pool price is the ceiling price.

In a deregulated market, there is no limit on how much Australian grain can be exported.  Grain traders can sell any grain they buy either domestically or internationally.  They no longer have to deliver excess grain to the pool.  The pool price acting as a ceiling is removed to the advantage of growers.

4.5. INTERNATIONAL BUYERS WILL PLAY THE GRAIN SELLERS OFF AGAINST EACH OTHER

Related to the wrong idea above that multiple buyers can somehow dampen prices, is the claim once these grain traders become sellers themselves and have to sell the wheat to the major international buyers then the single desk buyers will play the grain traders off against each other so that the wheat sells for a lower price.

Proponents of this view argue in this case there is only one buyer (insufficient demand) and many sellers (too much supply) so the laws of supply and demand will drive the price lower.  But this is a misguided analysis that leaves out the total picture.  No international buyer is the only buyer.  Even the single desks of India, Iraq, and Pakistan etc. compete against each other in the international wheat market.  So there is never only one buyer for a load of wheat.  If a single buyer will not buy at the world price grain traders will find others who will.

4.6. LIKELIHOOD OF REPAYMENT NOT POOLS DRIVES BANK FINANCE

Many farmers borrow to plant their crop.  With escalating fertiliser and chemical prices on the back of some very poor years, an increasing proportion of farmers will need to secure their borrowings against some surety before the banks will lend the money.  In the past, some banks have relied on estimated national pool prices as the basis on which they budget projected returns.  This has led to some to claim banks lend against the pool return yet this is not correct.  Banks may use pool prices in their estimation of returns but the decision whether to advance borrowings is based on the overall financial viability of the farm.  After all, even the best-projected prices are insufficient security if there is substantial production risk due to drought.

The Australian Bankers' Association has recently reiterated, "banks were keen to reassure grain growers that access to finance would not be impaired" by changes to wheat marketing arrangements.

5. SOME CONCERNS WITH THE DRAFT BILLS

5.1. LICENSING NOT TRANSPARENT & DISCOURAGES GROWER EXPORTING

In releasing the draft bills the minister, The Hon. Tony Burke said, "We want to have a regulated but competitive market which gives growers the opportunity to sell to reputable traders.  This includes informing wheat farmers about the changes and ensuring appropriate checks and balances are in place to protect growers' interests." ⁽²⁾

The proposed licensing system is the mechanism to identify reputable traders and protect growers' interests.  However, as it now stands the licensing system is unlikely to achieve its objective.  There are a number of unintended consequences likely to arise from the draft bills.  In addition, the entire licensing system is contrary to the positive deregulation initiatives announced by Finance Minister the Hon. Lindsay Tanner and add needless costs.

5.1.1. Basis of assessment not transparent & discriminates against smaller operators

The most robust and transparent licensing system is one that operates from a publicly available set of criteria.  Appropriate criteria may include financial probity and capacity to finance wheat exporting, export experience of agricultural bulk commodities and high standards of corporate governance.  The draft bills require the WEA to have regard to these sorts of criteria but does not require the WEA to publish specific measures.

As it now stands, the WEA is required to "have regard to", 17 specified criteria, including the catch-all "such other matters (if any) as WEA considers relevant".  There is no indication of whether all 17 criteria must be adhered to or how each criterion should be interpreted.  The result of this is to create a large degree of unaccountable bureaucratic decision-making.  Moreover, neither potentially accredited accompanies nor wheat growers have any way of assessing for themselves whether they think the interpretation is reasonable.

To take just two criteria as examples, the WEA is required to have regard to "the record in situations requiring trust and candour of each executive officer of the company".  How is this provision to be interpreted?  Business dealings, particularly at the executive level require high levels of trust and candour on a daily basis.  Is the regulator meant to collect evidence, perhaps email traffic or board minutes, to determine the executive's record?

Similarly, the WEA must have regard to "the financial resources available to the company".  This is unclear on a number of levels.  Does it mean capacity to raise money?  If the company is a publicly listed company, the financial resources available to it include the capacity to issue additional stock as well as debt.  Or does the provision relate to retained earnings, a traditional definition of resources available to a company?  Will the WEA require statements from accountants, bankers or auditors to evaluate this criterion?  Clearly, this provision alone has the potential to add significant costs to exporters.  It could stop smaller companies from undertaking the accreditation process.

5.1.2. Stops growers exporting their own grain

The accreditation process as it now stands makes it unlikely any single grower or group of growers could get accredited.  While a single grower or a few neighbours could easily from an export company, it is difficult to imagine how such a company, with no trading history, could possibly meet the business record requirement.  In the same way the financial resources assessment and risk management arrangements are unlikely to pass any meaningful test.  Moreover, the point raised above in relation to the large costs the process could place on applicants is likely to preclude any small grower group from applying.

Hence, the draft bills set up a process that enables large companies, even those with no grain trading experience to become accredited but growers are effectively precluded from exporting their own grain.  This is anomalous.

5.1.3. The licensing regime does not protect growers' interests

Growers need two things from wheat exporters, a large number of them to compete for the grower's grain and confidence they will receive payment for the grain delivered.  The licensing system as it now stands delivers neither.  As discussed above, the potential for the WEA to apply expensive and prescriptive licensing requirements will limit the number of accredited exporters hence reduce the pool of exporters buying grain from growers.

This legislation creates moral hazard because it gives the impression to growers that accredited companies are safe;  after all the government has assessed them as sound and worthy of accreditation.  Yet the legislation offers no guarantees against the possibly catastrophic result of grain markets moving in such a way to drive an exporter bankrupt, potentially overnight.  Accredited companies could still fail and leave growers out of pocket but the very existence of the accreditation process gives growers a sense of security without actually providing any real protection.  Instead, growers should assess for themselves who they think is a suitable grain buyer to do business with as they do already for other commodities and domestic wheat sales.  Growers are not consumers in need of protection from the unscrupulous, but business men and women who can make their own commercial decisions and the draft bills should reflect this.

Recommendation:  remove the 17 criteria for accreditation and replace with a requirement that the WEA licenses applicants who meet the single criterion of being a corporation under Australian law.

5.2. ACCESS TO PORT FACILITIES

The draft bills mandate an access regime for port infrastructure owners who also want to become accredited wheat exporters.  The ostensible reason for this is to prevent port infrastructure owners from acting as monopolists to the disadvantage of potential competing exporters.  The apparent fear embodied in the draft bills is that Graincorp, CBH and ABB will deny other exporters equal access to their bulk handling port facilities.

The creation of an access regime is flawed.  Optimal infrastructure is provided when firms hold full control over their own investment decisions and can provide access at the most economically advantageous rate.  The imposition of an access regime is by definition designed to force infrastructure owners to provide access at lower prices than would occur through voluntary contract.  In the short term, this has the effect of lower costs for users and higher demand for services.  However, over the longer term the effect is to stymie incentives for additional investment to either expand facilities or to upgrade them to achieve greater efficiencies.

The outcome in coal terminals is instructive where BHP's Hay Point facility is not subject to access undertakings while Dalrymple Bay and Port Waratah are:

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

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

Even greater delays are being experienced in expanding the facilities serving Port Waratah, the rail capacity to which has been increased following Commonwealth Government intervention. ⁽³⁾

The bulk grain export facilities at Australia's ports are claimed by some to hold natural monopolies.  Over the expected lifetime of such facilities, this assertion is unsupportable.  Firstly, grain exporters always have the option to freight the grain to another port as growers do already.  Secondly, as has been shown by the development of additional port capacity for coal and iron ore, new port facilities can always be constructed.  In all cases, there is a price where the grain will be processed through a port facility.

Furthermore, it is in the commercial interest of port facility owners to maximise the throughput through their facilities.  Port infrastructure is a volume business and port owners will price their facilities to ensure maximum throughput.

One of the more curious aspects of the access provisions in the draft bills is the key beneficiary of any access requirements will be AWB.  The reason for this is as the current single desk holder AWB currently has the best-established international networks of buyers for Australian wheat.  Until very recently, AWB by definition held a 100 percent share of Australian export wheat sales.  Even with the small amount of export permits AWB is still dominant in export sales.

If AWB gets mandated access to port facilities at below commercial prices, it gains an advantage over its new exporting competitors.  The port infrastructure owners must continue to bear the full cost of their facilities while the dominant exporter gets cheaper access.  Far from encouraging competition, mandating access undertakings inhibits the capacity of port owners to compete.

Lastly, the proposed access provisions ignore current commercial realities.  With one small exception, AWB does not control port facilities yet has successfully negotiated port access for decades.  Port facility operators make their money from infrastructure utilisation and will continue to do so even if they begin to export wheat.  Notably, the new permit export holders under the current export arrangements are not all infrastructure holders and they have been able to successfully negotiate access at mutually agreed prices.

Recommendation:  Delete all reference to access requirements in the legislation and rely on the operation of the Trade Practices Act and contract law to regulate commercial disputes in relation to port access.

6. CONCLUSION

We will continue to support full liberalisation of Australia's wheat export marketing as in the clear best interest of both growers and the nation.  However, these draft bills are a very positive step along that deregulatory path and the government is to be congratulated for bringing these reforms forward.

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ENDNOTES

1.  Basis is the difference between wheat prices in Australia and the global price with both prices expressed in the same currency.  Basis exists due to supply and demand changes between domestic and international demand.

2.  Press release 5 March 2008 "Draft wheat export marketing bill released today".

3.  Richard J. Wood, 2007.  "Economic regulation of transport facilities".  Speech to Lloyd's List Events Conference, Melbourne, 6 June 2007