Fair pay will lead to unfair results

Two weeks ago the Fair Pay Commission awarded a 4.1 per cent pay increase to the 1.3 million workers who earn the minimum wage.

While most countries have some form of minimum wage, Australia has a relatively high proportion of people actually earning it.  Whereas in the US and Japan the minimum wage is only one-third of average earnings, in Australia it is over half.

As a result, the proportion of people covered by the Australian Fair Pay Commission's decisions is higher than overseas.  The commission's importance has, however, tended to decline.  Its decisions now cover only 12 per cent of the workforce -- down from 20 per cent five years ago.

This decline stems from the general prosperity Australia has experienced in recent years.  It has been assisted by other policy moves, especially allowing businesses to terminate poorly performing employees or employees who can no longer be profitably employed.  Job prospects are harmed if employers think it is too costly to sack an under-performing employee.

Reducing an employer's costs of reversing a mistaken hiring decision brings an increase in jobs.  This allows inexperienced novices to develop work skills to become valued employees.

The increased wages required by the Fair Pay Commission's recent decision, though considerably higher than that recommended by employer groups, is in line with average wage increases.

Hence, it is not likely to mean an abrupt departure of outsourced jobs to India.  Even so, the decision carries unfortunate downsides.

The people earning the minimum wage tend to split 50-50 between two categories.

One category comprises those on the first step of the job ladder.  They very quickly acquire the skills to warrant and receive wage increases that take them above the minimum wage.

The second category comprises people who tend to stay on the minimum wage, though many change their jobs.

Some of these people are students and others whose interest is in earning a bit of money to bankroll other objectives.

Increasing the minimum wage, though ostensibly to benefit the poor, actually works to the disadvantage of those who cannot get a job.

An increase in the minimum wage damps down the demand for those at the margin of employment.  These are people without skills and the number of unskilled jobs is showing slow growth.

In an economic downturn, which almost everyone expects, employers are likely to be more cautious in taking on additional workers.  And a 4 per cent increase in wages will tip the balance for some.

Australia is better off seeing the minimum wage play a progressively reduced role in the economy.  In the bad old days of the 1970s, award rates covered the vast majority of workers.

The downside of that system was illustrated by the surge in unemployment that came with a recession.

The much reduced level of wage regulation we have seen in the past 25 years has been accompanied by lower unemployment, increased productivity and better job security.

Forcing higher wage levels during an economic downturn will deliver the cruellest blow to those who seek a job as a springboard to better-paid employment.

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No Doha deal better than a dud one

Free trade remains in Australia's best interests.  This week trade ministers descended on Geneva for negotiations to try to break the deadlock in the Doha Round of World Trade Organisation negotiations.  But if a good deal cannot be reached, no deal would be better than a bad deal.

The present bottleneck in negotiations surrounds the preparedness of the US and European Union to cut deep into their agriculture subsidies.  In exchange they want developing countries, led by India and Brazil, to reduce their tariffs on industrial goods.

But if a deal is struck in the next week it is likely to be short, because commitments to liberalise will be low.  In particular, the US and EU are likely to give little and developing countries will reciprocate.  Poor negotiating positions by the US and EU are driven by domestic politics and demonstrate why politicians should be kept away from trade policy.

At the last mid-term elections protectionist Democrats took control of the US Congress.  As a result, US Trade Representative Susan Schwab has her hands tied.  For political and protectionist reasons the Congress is unlikely to agree to a trade deal that would provide outgoing President George W. Bush with a moral victory.

And the official campaign for the US presidency has begun.  Lurking in the shadows is the prospect of a Barack Obama presidency.  To date Obama's trade positions have pandered to ignorant anti-trade populism.  But at least the US problems are cyclical.  The problems of securing a deal from the EU were entirely avoidable.

On July 1, French President Nicolas Sarkozy took on the rotating presidency of the EU.  Following his accession he launched a tirade against the EU's trade commissioner, Peter Mandelson, and his commitments to end export subsidies and reduce production subsidies.

As Mandelson admitted, Sarkozy's attacks make his job harder.  Because of Sarkozy's attacks it is now unclear what the EU negotiating position is and what Mandelson can commit to.

Negotiating a successful round is being bookended by difficulties.  The prospect of a global economic slowdown is also likely to cause a retreat to protectionism in the US and EU.  Populist politicians are likely to blame lost jobs on off-shoring and cheap Chinese labour.  However, there remains a slim chance it could be a wake-up call.  With scarcer funders the US and EU governments might finally realise the excesses of their subsidy programs.

All these factors make the successful conclusion of the Doha Round in the next week unlikely.  And that might be good news for Australia.

Core gains for Australia from the round stem from agricultural subsidy cuts.  Only deep cuts meet our interests.  And beneath the surface of the main negotiating issues are two concerning proposals.

In the committee dealing with intellectual property, the TRIPS Council, there are negotiations to expand the mandatory scope of geographic indications.  GIs are a questionable form of intellectual property that allows only select products to be branded based on their geographic origin.

Under present rules special GI status is provided for wines and spirits.  The EU wants to push it into agriculture.  The risk is Australia would no longer be able to export cheeses under their common names -- parmesan and cheddar -- like we cannot export Australian champagne.

Developing countries are also championing amended intellectual property rules related to the UN's Convention on Biological Diversity.  These changes would nationalise genetic resources, introduce international regulations on how to distribute commercial gains from innovation and increase the cost of innovation.

The consequence would be to remove the commercial incentives for the pharmaceutical and biotechnology industries to prospect for new medicines and treatments.

Boosting the pharma and biotech sectors has been made central to the Government's innovation review.  They may find their efforts are undercut in the WTO.

The EU has already stated they expect their GIs proposal included in the text of the final round.  In a text circulated last week the EU and developing countries have joined in alliance to support each other's intellectual property reforms.

The consequences of the proposed amendments to international intellectual property rules have not been fully considered.  Their inclusion is premature and dangerous.  Unless these intellectual property reforms are offset by deep cuts in agriculture subsidies there will be few gains for Australia from the round.

It looks as if the best outcome for Australia from the WTO is to wait and pray.  France's EU presidency will end and there is hope Republican candidate and staunch free trader John McCain will be elected the next US president.  If these things happen negotiations are much more likely to meet our interests.  There is a need to finish this round.  But, for Australia, no deal remains better than a bad deal.

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Co-operative deferralism

Co-operative federalism sounds good in theory.  In theory, after the election of the Rudd government Australia was going to have lots of cooperative federalism.  Wall-to-wall Labor governments were supposed to be able to agree to all sorts of things that were going to make life cheaper and easier for business.

So far it hasn't quite worked as everyone had hoped.  After meetings of the Council of Australian Governments the prime minister and premiers issue their press releases heralding new dawns of co-operation.  But as usually happens, the reality is different.

Take for example the issue of harmonisation of the country's occupational health and safety (OHS) laws.  OHS laws are important, but there's a fine line between ensuring employers maintain a safe workplace and having employers live in fear of draconian penalties for a minor breach.

Labor governments and trade unions never miss an opportunity to preach about employers' responsibilities.

Warnings about the dire consequences if ever those responsibilities are not fulfilled are hard to miss -- they're on billboards, on television, on radio, and in newspapers.  Even the banners that AFL football teams run through as they enter the field have been commandeered to get the message across.

After the COAG meeting a few weeks ago a grandly titled, 15-page "Inter-Governmental Agreement for Regulatory and Operational Reform in Occupational Health and Safety" was issued.  It proclaims that the federal, state, and territory governments are all committed to improving the health and safety of Australian workers and all governments are committed to working co-operatively to harmonise OHS legislation.

Importantly for business, the agreement is designed to "address the compliance and regulatory burdens for employers with operations in more than one jurisdiction".  So far so good.  The problem arises when you read what the state governments have signed up to -- which isn't much at all.  There was a hope from employers that a national OHS scheme would see the end of the OHS laws operating in NSW.

From what we now know, that hope seems pretty forlorn.  When business groups ask for harmonisation they should be careful what they ask for.

Harmonisation can just as easily produce bad law as good law.  A central feature of the NSW system is that unions can launch private prosecutions for breaches of the OHS regulations, and the unions get to keep the cash from the fines that employers pay.

In NSW trade unions have as much incentive to behave ethically as did tax collectors in ancient Rome.

Harmonising the country's OHS laws following the NSW model would provide consistency, but would be a disaster.

The OHS experience demonstrates how Kevin Rudd's co-operative federalism works in practice.

In practice, state government can veto anything they don't like.  Changes to the inter-government agreement can only be made with the unanimous agreement of the federal and state governments.

The incentive is huge for a recalcitrant state government not to agree to anything until it gets a sufficiently large pay-off in cash or kind from the commonwealth.

Harmonisation of national OHS laws is intended to come via "model" legislation to be developed "co-operatively".  But once this model legislation is drafted, there's no actual requirement on state governments to implement it.  All that states need to do to comply with the agreement is to "take all necessary steps to enact or otherwise give effect to model OHS legislation".

No one knows what "all necessary steps" means.  There are a few other "get out of jail free" clauses.  States need only implement the model OHS legislation "as far as possible having regard to the drafting protocols in each jurisdiction".

To avoid having to do anything they don't want to do, state ministers can rely on the convenient excuse of "drafting protocols".

And then there's the clincher.  In the words of the agreement:  "The adoption and implementation of model OHS legislation is not intended to prevent jurisdictions from enacting or otherwise giving effect to additional provisions, provided these do not materially affect the operation of the model legislation, for example, by providing for a consultative mechanism within a jurisdiction."

Translated this means that for all intents and purposes NSW can keep its OHS system and the other states can keep theirs.

If the experience of OHS reform thus far is anything to go by, real reform of federal and state relations is a still a long, long way off.

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Drums are beating for Iemma

Of all Labor governments across Australia, NSW seems to be the one tearing itself apart.  What's happening is critical to Labor nationally and to prospects for continuing economic development.  At the core is the NSW industrial relations system.

The Labor Left and the ALP have rejected socialism.  This critique is no longer disputed.  Leading left academics and Labor politicians informally buried socialism about three years ago.  The union movement also has changed.  Their control of billions of dollars in industry superannuation funds has turned many union leaders into high finance executives.  It's changed business in Australia.

ALP governments are strongly pro-free market.  But this does not apply in NSW.  Instead NSW Labor operates on family and "mates" -- connected tribalism primarily held together by the NSW industrial relations system.

The vision of socialist equality is the tribe's catch-cry but instead of serving the people, NSW Labor serves the economic and power self-interest of those who control tribal Labor.  This was once considered NSWLabor's political strength.  It's now its greatest weakness.

Premier Morris Iemma seems to know this, as does Treasurer Michael Costa.  The battle is on to break the tribe and the fight is coming from within Labor itself.

Government in NSW is dysfunctional.  The ethics of good governance requires that when political leaders form government they keep a healthy disconnect between the administration of government and their political machine.  NSW Labor has ingrained the political machine into the administration of government.  The two function as one.  Consequently government in NSW is systemically corrupt.

Financial bribes and sexual favours for town planning approvals are a dramatic display of a sick system.  That a minister of the crown could actively engage in pedophilia in offices in Parliament House and no one in Labor admits to suspicion is hard to believe.  It arguably demonstrates the extent to which membership of the Labor tribe may give cover for bad, even evil behaviour, until it becomes publicly visible.

NSW tribal Labor functions on many layers.  Under ministerial patronage, government funds favoured union "training" schemes when no training could be identified.  Union officials receive access to confidential lists of apprentices and their employers, which are then used to intimidate business to leverage union membership.

More fundamental is the extent to which the public service has its managerial capacity neutered.  The transport, health and education systems all malfunction under the arrangements.  Complex webs of controlling committees appointed by Labor tribal operatives dictate to professional public servants.  Authority lines from cabinet to the public service are waylaid through Labor's political patronage circus.

What holds it together is the mask of legitimacy created by NSW industrial relations laws.  The laws sit above and beyond commercial law and the government itself.  Appeals beyond the Industrial Relations Commission are forbidden.  It controls criminal prosecutions under work safety laws.  It intrudes into commercial law.

Under these supreme powers, unions are the commission's sanctioned police.  They are occupational health and safety prosecutors.  They have powers to raid businesses and demand confidential commercial documents without court orders.  They can and do prosecute under trumped-up charges that would be thrown out of proper courts.

The system delivers political power to tribal Labor.  The price is heavily dysfunctional and massively expensive commercial outcomes for both private and government enterprises.

Iemma and Costa demonstrate awareness.  Dysfunctional service delivery cannot be fixed unless tribal Labor is broken in NSW.  On this the ALP's long-term political future in NSW rests.  But it requires massive upheaval.

The battle over electricity privatisation is more than a fight to achieve efficiency and rationality in the electricity system.  It's the big but essential nut to be cracked because tribal unions run the electricity system and will cause it to collapse in the near future.  Leave things alone and NSW will run short of electricity.  Electricity is one part of the much larger problem.

The stakes are high.  If Iemma and Costa succeed, they can reconfigure NSW Labor along the national ALP free-market model.  With less than three years until the next state election, the window is tight.

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Connies a nostalgic symbol of lost community spirit

The proposal aired in last week's Sunday Age to reinstate conductors to Melbourne's trams was greeted with unsurprising enthusiasm.  But the nostalgia for connies probably has little to do with the mechanics of tram ticketing and more to do with a general unease about 21st-century relationships.

Admittedly, the reported $12 million a year that it would cost to reintroduce tram conductors sounds a hell of a lot cheaper than the $850 million Victorians have already had to pay for the myki automated ticketing system.  For public transport users, myki is at the moment no more than a figment of the imagination.  And as the price of implementing myki keeps going up, it just ends up sounding more and more fanciful, like space elevators or underwater cities.

Bear in mind that once myki has its bugs ironed out, its high-tech cards available for purchase, a colourful and energetic promotional campaign blaring out of every Victorian television and it is finally -- finally -- switched on, myki will still cost a hefty $55 million a year to operate.  With a bill like that on the way, is it really any surprise that people are getting nostalgic for the humble old connie?

After all, this nostalgia could also be sound economics.  Conductors are as good a way as any to collect transport fees.  Every possible ticketing system -- Metcard, myki or conductors -- should be evaluated on its merits and compared with alternatives.  As the State Government pushes blindly ahead with myki despite its enormous cost and a three-year delay, there seems little indication that anybody has done that.

But it probably isn't the cost of conductors, or the ballooning cost of myki that makes so many people miss the connies.  As blog comments, reader contributions and subsequent opinion pieces have made clear, what people are most nostalgic for is human contact on the tram.

This is a feeling that would be easy to mock, but I won't.  Being frustrated by firms automating and depersonalising services isn't Luddism -- it is not the same as going on a machine-breaking rampage or fearing a robot rebellion.

Instead, the apparently widespread desire to return to the days of the connies seems to come more from a feeling that individuals are being left adrift in an ocean of overly complicated superannuation options, phone plans and credit-card loyalty schemes.  Unfriendly businesses are common.  On many customer service hotlines, the only way callers can escape the automated system and speak to a live human being is by becoming aggressive and abusive.  If anything is damaging our collective psyche, it is probably unresponsive telephone hotlines.

Of course, we should not overestimate how much people are secretly yearning for human interaction.  Many, if not most, people would prefer to do internet banking at home rather than traipsing off to their branch to deal with a disgruntled teller.  And it's far easier to pay bills online than read out your credit card number to a call-centre employee over the phone.

Similarly, not everybody likes the thought of having to track down a conductor on a crowded tram before their morning coffee has kicked in.  It's not entirely obvious, as Catherine Deveney contended in The Age on Wednesday, that reinstating the connies would be like finding your favourite watch that went missing 20 years ago, or discovering a long-lost dog on your doorstep.

Think back to the heyday of government-owned public transport -- not all conductors were rays of sunshine motivated by nothing more than a love of commuters.  Sometimes they had bad days.  Not every conductor loved every minute of their job.  And some of them were -- to put it mildly -- miserable gits.  A small minority, certainly.  But it might be worth recalling that not every commuter-conductor relationship spun off into a lifelong friendship.

Sure, the ideal conductor helps parents with prams, directs tourists to interesting landmarks, and knows regular travellers by name.

But there isn't really any reason why fellow passengers can't lift prams or aid lost tourists.  There are dozens of people on the average tram.

Rather than hoping that conductors will somehow rebuild Melbourne's community spirit, why not look at what's holding that spirit back?  We will probably discover it is much more than dissatisfaction with ticketing machines.

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GST points the way for carbon tax

Ross Garnaut describes the dilemma of imposing a carbon tax on the trade-exposed emission-intensive industries as "truly dreadful problem".  His phrase is less catchy than Gore's "inconvenient truth" but is evocative enough.  Garnaut realises that energy intensive industries would depart our shores once they are hit with a tax which makes them internationally uncompetitive with rivals in countries without a carbon tax.

His solution is to exempt industries facing a "material" increase in costs from the tax by recycling back to them 30% of the revenues the tax gathers.  He speculates that "materiality" and its associated free credits might extend to aluminium smelting, sheep and cattle, cement and some aspects of steel manufacturing.

But this misunderstands the drivers of industry location.  Globalisation has created footloose firms.  Manufacturing everything from aircraft parts to zircon jewellery, these firms will switch location in response to very small cost differentials.  The logic of such decision-making is clear:  the impetus is profit maximisation from meeting consumer needs most cheaply.  If a firm obtains a profit equivalent to 10% of the costs of a good, a cost saving as small as 2% is material since it increases profits by 20%

Any firm that turned its back on such an improved return would pretty soon find itself out of business.  That's why Adidas scours Asia for the best wage and tax deals in setting up clothing and shoe facilities, why Lufthansa does its aircraft servicing in China, why Billabong sources from the Philippines and elsewhere in Asia.

The aim of taxation is to avoid "economic distortion", economists' jargon for needless and wasteful costs.  This is true whether the measures are for revenue gathering or, as is the case with emission taxes, to promote particular forms of production and consumption.

All imposts create incentives for their avoidance and shifting location is a proven means of accomplishing this.  It will remain so unless those like WTO chief Pascal Lamy have their way and the entire trading system is remodelled to incorporate a carbon tax levied at a common rate on every good and service sold.  At the very least, that prospect is a couple of world economic depressions away and, in the interim, firms will continue locating oblivious to its possibilities.

But the international dimension does point to a way ahead for political action on carbon emissions.  All taxes fall not on "business" but on individuals -- the customers, workers and shareholders of the firm and their suppliers.  The business entity is simply a vehicle through which income flows.  It cannot be sustainably milked.

The aim of the proposed carbon tax is to incentivise everyone to use less carbon dioxide emitting fuel.  The introduction of the GST brought a strong consensus among policymakers that a consumption tax levied at a constant rate was more efficient than the mix of measures we previously had.  Levied at a constant rate, a consumption tax was to end the discriminative imposts levied on goods rather than services.  It also avoided placing an impost on exports of goods and services.

In practice, the GST's principles were adulterated from the outset.  What we actually have is a consumption tax at several effective rates -- zero for food and much more than 10% for petrol, cars, alcohol and gambling.  Nonetheless, the GST recognises the short-sightedness of levying taxes on business -- as did the Commonwealth/state agreements to eliminate various state-based business taxes as part of the GST deal.

If we extended the GST principle to carbon, should a tax be put in place, we could apply a small surcharge on electricity and gas sales to the final consumer without this impacting upon business.  The surcharge would be passed on and reclaimed by businesses in exactly the same way as the GST is passed through.  That way it would have a neutral effect not only in terms of the tip of the iceberg that is Garnaut's "truly dreadful problem" but on the impacts that a tax would have on all productive sectors of the economy.

We are already levying quite a high additional tax on petrol, and it might be argued that we already have a tax on carbon with various regulatory and tax imposts like the Mandatory Renewal Energy Target.  These equate to something like a $10 a tonne tax on carbon dioxide, a level that some have suggested as being a sensible starting rate.

A tax approach that is modelled on the GST is of proven workability.  It would also facilitate the removal of the taxes if (some say when) catastrophic global warming turns out to be a myth.  It would also allow for the taxes to be ratcheted up if the evidence about global warming becomes more persuasive.  And, contrary to Garnaut's assertions, there is more to be gained by waiting than by precipitous early action.  As Garnaut argues, technology will improve and material wellbeing will be higher in future years, phenomena that suggest merit in delaying draconian measures.

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Submission to the National Review of Occupational Health and Safety Laws

1. INTRODUCTION

We have been an active participant in the occupational health and safety policy debate for several years.  We have, in particular, been a consistent critic of the New South Wales OHS laws, the philosophies that underpin those laws and the ways in which they are applied.

In summary, the NSW OHS legislation perverts internationally accepted principles of OHS regulation.  A properly developed OHS framework can work to fulfil the objectives of occupational health and safety policy which are to make the workplace safe.  Current NSW OHS legislation does not fulfil that objective.

More specifically, extensive evidence gathered on the way in which the NSW laws are enforced provides the conclusion that the processes governing NSW OHS laws are able to be corrupted, and could lead to corruption itself.  Existing NSW OHS legislation has resulted in innocent people being convicted.  Further, individuals and organisations who should have been prosecuted if the laws had been applied consistently have not been charged or prosecuted.

We are highly supportive of efforts to harmonise national OHS laws.  But model laws should not be based on NSW's OHS laws.  This submission discusses the evidence and reasoning behind our position and offers answers to some of the questions posed in the May 2008 Issues Paper.

2. EVIDENCE OF CORRUPTION OF THE NSW OHS LAWS

In October 2006, We released a report on the application of NSW OHS laws, The Politics of a Tragedy.  It includes a three-minute video clip which provides an overview of the issues.  The report is the result of a two-year investigation.

The report traces the Gretley underground coal mining disaster of 1996 in which four men drowned after drilling into a flooded disused mine.  The prosecution process and conviction outcome is explained in the report.  What the report highlighted was a glaring display of double standards in the prosecution process because of the failure to prosecute entities who should clearly have been prosecuted.

While our Gretley report is comprehensive, it is not complete because vital information known to the prosecutors and the NSW Government was not made public.  This vital information only become available late in 2006 after a Parliamentary demand for papers forced internal government files into the public domain.  These files, previously kept secret, strongly implicated a government department as a major contributor to the Gretley disaster.  The department was not prosecuted.  A union-owned labour hire company which employed three of the deceased men was not prosecuted.  Only the mining company which worked the Gretley mine and the managers of the mine were prosecuted.  Yet all three entities, (the mining company, government department and union owned labour hire company) exercised high measures of control at the worksite.  The sequence of events surrounding the prosecutions over the Gretley disaster leaves little doubt that there has been a cover-up which merits investigation.

Our Gretley report investigated later prosecutions of many other NSW OHS incidents and found that similar double standards occurred and that the application of justice in NSW was failing.  It concluded that the design and operation of OHS law in NSW deliberately and systemically distorted basic principles of justice and the rule of law and compromised Australia's international obligations under ILO OHS convention, C155.

For the purposes of this submission, the Gretley story and the evidence of OHS prosecution in NSW reveal significant lessons about the principles of OHS law that should be adopted in the quest for national harmonisation.

It needs to be understood that there are two different and opposing philosophical approaches to the principles that should inform the development of OHS legislation - and any discussion about harmonisation needs to take account of these approaches.

3. THE TWO OPTIONS FOR HARMONISED NATIONAL OHS LAWS

3.1 APPROACH ONE:  Practicable and reasonable control

The first approach is the one we support and is recommended as the philosophical approach that should underpin efforts at national OHS harmonisation.

This is the model that was developed following a massive coal mining disaster in the UK in the late 1960s.  The "Robens" report into the disaster made recommendations for the design of OHS laws which have become accepted as best-practice international principles.  They are also the basis of International Labour Organisation conventions to which Australia is a signatory.  Australia consequently has international legal obligations to incorporate these principles into its OHS laws.

The Robens/ILO principles approach OHS from a practical perspective.  The understanding is that everyone who is involved in work contributes in some measure to safe and/or unsafe work practices.  The chairman of a large company contributes to unsafe practices if he fails to allocate money for critical maintenance.  A cleaner contributes to unsafe practices if he leaves water on the floor in an office building, thus making the floor slippery.

In recognising the simple realities of human behaviour, the Robens/ILO principles require that OHS legislation in the first instance holds everyone involved in work to be responsible and liable for what they "reasonably and practicably control".  The chairman will and should be held responsible for what they control.  The cleaner will and should be held responsible for what they control.  If several individuals contribute to an OHS incident, each and every individual should be held liable to the extent they exercised "reasonable and practicable control".

This model requires everyone involved in work to pay attention to their actions and to ensure that those actions are safety orientated.  It is the model which has the best chance of focusing everyone's mind on safe behaviours.  It is the model that is applied in Australia under Victorian, Tasmanian, Western Australian, South Australian, ACT, Northern Territory and Commonwealth OHS laws.  There are variations in legislative terminology and design but the general principles are consistent.

For these jurisdictions, the principal task in the national harmonisation processes is to bring greater clarity, focus and consistency to the design of the OHS Acts around the Robens/ILO principle of "reasonable and practicable control".

3.2 APPROACH TWO:  "Everything is the fault of the employer"

Lying in a fundamentally opposite direction is a completely different philosophy toward OHS law which is alive and active in NSW.

This approach functions on a presumption that, under a capitalist system and in particular in corporations, the duty of all mangers, executives and owners is entirely to maximise profit.  This duty to make profits leads managers and others to suspend the normal promptings of conscience and duty.  In short, every manager and executive becomes amoral and will pay scant regard to matters of safety.  The role of OHS law, therefore, is to counter this by instilling such fear of retribution in managers, executives and others that they will operate and behave in a safe manner.

This need to instil fear within managers is the design fundamental of the NSW OHS Act.  It does this by:

• Not applying the "reasonable and practicable" test in the descriptions of the duties of care.
• Inserting in the duties of care the words "must ensure" safety.

This approach is only applied to "employers", not to employees.

The result is that for employers, managers, owners and others the requirement for a safe worksite is absolute.  That is, if an OHS incident occurs, then guilt automatically occurs.  It is a reverse onus of proof with a presumption of guilt.  The employer, manager, owner and others must "disprove" their guilt.  This is the first way in which the NSW laws aim to create fear in the minds of employers.

To ensure fear is effective and maximised, prosecutions are conducted in the NSW industrial relations arena where appeals beyond the industrial relations court are not permitted.  Appeals are not permitted because the presumption of guilt would prove offensive in normal criminal courts (where OHS prosecution should nonetheless occur).  That is, normal criminal courts apply a presumption of innocence and other protections against injustice -- features that would clash violently with NSW OHS law.

The final element in the inculcation of fear is the presence of an aggressive culture of prosecution by the government and the extension of prosecutorial powers to NSW unions.  At least one judge has made comment on this.

In his dissenting judgment in the Gretley case, Justice Marks said:

... one must query the bona fides of the prosecutor in terms of these proceedings. ... If the prosecution of offences is undertaken in an arbitrary, capricious and irresponsible fashion, the laws themselves are bought into disrepute for reasons that are obvious. ...

I would advisedly, characterize what has happened in these proceedings as constituting more than prosecution, and amounting to persecution of the defendants.

... I regard the conduct of the prosecutor as being, in all the circumstances, unacceptable and as having compromised the processes of this Court.

[Newcastle Wallsend Coal Company Pty Limited @Ors v Inspector McMartin [2006] NSWIRComm 339 at 758]

Our investigations, detailed in our report The Politics of a Tragedy, have found that persecution rather than prosecution is intentional and systemic.  This persecution is consistent with the philosophy and design of the NSW OHS Act, namely, to instil fear.

3.3 Choice in national harmonisation

In harmonising Australia's OHS laws, it must be clearly understood that these two opposing approaches offer no "middle ground".  There is a clear choice between the two and no "negotiated settlement" designed to appease both approaches is possible.

The Robens/ILO approach recognises the realities of human behaviour in the work situation and seeks to ensure that all people are safety-focused.  This is the approach consistent with Australia's international obligations.  It creates cultures of safety.  It is the approach that we support.

The NSW approach focuses exclusively on the employer, managers and others as the entities that always cause OHS incidents.  It assumes that they will always be at fault and it seeks to intimidate them into safe behaviour.  It is an Act based on retribution against a predetermined class in society.  In this respect it is "tribal", assuming that some people in society are morally good and others are evil.  It is an approach that distorts justice and ignores the truth about the ways in which people behave at work.  It sends a signal that some people in the workplace are totally responsible for safety while others (employees) have a lesser responsibility.  This creates unsafe work cultures.

3.4 A note on Queensland

Queensland has a similar legislative design to NSW in terms of its "duties of care".  However, important differences exist.

• The defences available under the Queensland Act provide "reasonable and practicable" as a defence and, in their application, appear to be effective in this respect.  The NSW Act claims to have a similar defence but this has proven to be of no practical value.
• Prosecution in Queensland takes place in normal criminal courts with full rights to appeal.
• There is no evidence of a culture of persecution in the prosecution process in Queensland and unions do not have the right to prosecute.

4. UNDERSTANDING THE CULTURE OF
SAFETY AND ITS REVERSE:  THE CHOICE

The key objective of OHS law must be to construct a legal framework in which cultures of work safety prevail.  The second objective must be to enable effective prosecution where people have failed in their responsibilities to safety.

The first objective, achieving safe cultures, prevents injuries and deaths.  Prevention is the preferable pathway.  It will save the most people from the most harm.

Both the Robens/ILO model and the NSW model provide for prosecution.

But the Robens/ILO model, because it assigns responsibility and liability to everyone in proportion to what they control, is the model that has the greatest chance of creating safe work cultures.

The NSW model, because it assigns responsibility and liability selectively and in unequal measure, diminishes the opportunities for cultures of safety to thrive.  People who have imposed upon them artificial responsibility for things they cannot control will look to create processes which avoid accountability.  Conversely, when people see that others have had imposed upon them absolute measures of responsibility, they may well assume that they have a diminished need to act responsibility towards others.

It is in the area of creating cultures of injury prevention that the NSW model fails most decisively.  In effect, the NSW Workcover Authority must work against its own State Act to develop safe work cultures.  It is a daunting task.

But what is also disturbing is the culture of aggressive war against the "bosses" which the design of the NSW OHS Act encourages within the prosecuting authorities.  This has led to corruption of the very processes of prosecution.  The fact that, in the Gretley case, the union-owned employer of three of the deceased workers was not prosecuted points to a clear corruption of the integrity of prosecution.  The fact that the government department responsible for supplying the incorrect maps which led to the deaths was not prosecuted, also points to the corruption of the processes of prosecution.

If the wrong choice is made in the national OHS harmonisation process and a system modelled on NSW is used, Australia risks the emergence of diminishingly safe work cultures and the corruption of the processes of prosecution.

5. ON UNIONS AND TRIBALISM IN THE OHS DEBATE

In the OHS debate, Australia suffers from a perverted atmosphere.  It is assumed that businesses/employers cause accidents and injuries and it is assumed that unions are the protectors of workers against business.  In this respect the debate is conducted along "tribal" grounds.  It is a situation that is wrong and which works against the interests of achieving safer work practices.  It has unfortunately found legislative expression in NSW -- witnessed, in particular, by affording unions the high moral mantle of prosecutor.

But the realities of work do not fit this simplistic black/white view of the world.  Work behaviour is far more complicated and grey than this.  Unsafe work practices can occur with anyone at anytime.  Most people intend to behave safely.  Most OHS incidents occur because of conspiring sequences of events.  Well-intentioned people make errors of judgement, mistakes, lapses of concentration or have inadequate knowledge or information.  Sometimes OHS incidents are the result of reckless and unacceptable behaviour.  But it cannot be presumed or predicted who will act unsafely simply because of their status in the work environment.  Bosses, workers and union representatives are people who equally have the capacity to behave safely or unsafely.

The Review into national OHS laws spends considerable time in the Issues Paper asking who should be embraced in the OHS responsibility loop.  But the discussions and questions leave a gaping omission by not discussing or asking how unions should, like everyone else be apportioned responsibility and liability.  This omission is reflective of, and consistent with, a culture which pretends that unions don't have liability for their actions in like manner to the rest of the community.  In the OHS context this works against a proper comprehension and resolution of safety issues.

The reality is that unions and their representatives are an intimate part of the processes and cultures of work.  Unions seek to influence and even control work processes (either directly or indirectly).  They do this through industrial instruments, committees on which they sit and via direct influence with and over workers on work sites.  Sometimes their influence and control can significantly exceed that exercised by managers.  Whether that influence and control is positive or negative is not relevant to considering the design of OHS laws.  Rather, it is the fact that unions have measures of control over work which is central to the OHS issue.

As a consequence, we believe that unions should specifically be referred to in a model OHS Act as having responsibilities and liabilities under the duties of care.

6. DUTIES OF CARE

The most important key to resolving the OHS problems we have identified is to ensure clarity and consistency under the duties of care provisions of the model Act.  This is the first and necessary step to achieving national consistency.

6.1 Victorian Model

The Victorian OHS Act of 2004 is arguably the best model upon which the national model should be developed.  It most appropriately allocates responsibilities and liabilities to all participants in work situations within the consistent scope of what people "reasonably and practicably control".  The only omission is unions.

Sections of the Victorian Act which demonstrate the consistent application of "reasonable and practicable control" include:

PART 3 -- GENERAL DUTIES RELATING TO HEALTH AND SAFETY

Division 1 -- The Concept of Ensuring Health and Safety

20. The concept of ensuring health and safety

(1) To avoid doubt, a duty imposed on a person by this Part or the regulations to ensure, so far as is reasonably practicable, health and safety requires the person --

(a) to eliminate risks to health and safety so far as is reasonably practicable;  and
(b) if it is not reasonably practicable to eliminate risks to health and safety, to reduce those risks so far as is reasonably practicable.

21. Duties of employers to employees

(1) An employer must, so far as is reasonably practicable, provide and maintain for employees of the employer a working environment that is safe and without risks to health.

24. Duties of self-employed persons to other persons

(1) A self-employed person must ensure, so far as is reasonably practicable, that persons are not exposed to risks to their health or safety arising from the conduct of the undertaking of the self-employed person.

25. Duties of employees

(1) While at work, an employee must --

(a) take reasonable care for his or her own health and safety;  and
(b) take reasonable care for the health and safety of persons who may be affected by the employee's acts or omissions at a workplace;  and
(c) co-operate with his or her employer with respect to any action taken by the employer to comply with a requirement imposed by or under this Act or the regulations.

26. Duties of persons who manage or control workplaces

(1) A person who (whether as an owner or otherwise) has, to any extent, the management or control of a workplace must ensure so far as is reasonably practicable that the workplace and the means of entering and leaving it are safe and without risks to health.

27. Duties of designers of plant

(1) A person who designs plant who knows, or ought reasonably to know, that the plant is to be used at a workplace must --

(a) ensure, so far as is reasonably practicable, that it is designed to be safe and without risks to health if it is used for a purpose for which it was designed;  and
(b) carry out, or arrange the carrying out, of such testing and examination as may be necessary for the performance of the duty imposed by paragraph (a) ...

28. Duties of designers of buildings or structures

(1) A person who designs a building or structure or part of a building or structure who knows, or ought reasonably to know, that the building or structure or the part of the building or structure is to be used as a workplace must ensure, so far as is reasonably practicable, that it is designed to be safe and without risks to the health of persons using it as a workplace for a purpose for which it was designed.

29. Duties of manufacturers of plant or substances

(1) A person who manufactures plant or a substance who knows, or ought reasonably to know, that the plant or substance is to be used at a workplace must --

(a) ensure, so far as is reasonably practicable, that it is manufactured to be safe and without risks to health if it is used for a purpose for which it was manufactured.

30. Duties of suppliers of plant or substances

(1) A person who supplies plant or a substance who knows, or ought reasonably to know, that the plant or substance is to be used at a workplace (whether by the person to whom it is supplied or anyone else) must --

(a) ensure, so far as is reasonably practicable, that it is safe and without risks to health if it is used for a purpose for which it was designed, manufactured or supplied ...

31. Duties of persons installing, erecting or commissioning plant

(1) A person who installs, erects or commissions plant who knows, or ought reasonably to know, that the plant is to be used at a workplace must ensure, so far as is reasonably practicable, that nothing about the way in which the plant is installed, erected or commissioned makes its use unsafe or a risk to health.

6.2 Model "duties of care" clause for unions

Consistent with the Victorian approach, a clause encompassing unions could read as follows:

Duties of unions and union representatives who exercise control or part control over workplaces

A union or a union representative who has, to any extent, control of a workplace must --

(a) ensure so far as is reasonably practicable, that persons are not exposed to risks to their health or safety arising from the conduct of the undertaking of the union or union representative.
(b) co-operate with the employer of the workplace with respect to any action taken by the employer to comply with a requirement imposed by or under this Act or the regulations.

We recommend that a clause of this nature covering unions in the duties of care be included in the model OHS Act.

ANSWERS TO SPECIFIC QUESTIONS IN
THE NATIONAL REVIEW ISSUE PAPER

The focus of this submission is the resolution of appropriate duties of care in a model OHS Act.  In answering specific Issues Paper questions (below), we are addressing questions relevant to the duties of care within the context of our comments above.

SCOPE, APPLICATION & DEFINITIONS:

Q14:  Which terms are critical for achieving national consistency?  How should they be defined in the model OHS Act?

The terms "reasonable and practicable control" contained within the Duties of Care should form the centrepiece for a model OHS Act.

DUTIES OF CARE -- WHO OWES THEM AND TO WHOM?

Q16:  Should the model OHS Act include a "control" test or definition?  If so, why and what should it be?

A definition of a control test would be helpful.  The definition used in the Victorian OHS Act should be considered as a model.

Q17:  What should the role of control be in relation to determining who is a duty holder, the nature of the duty, the extent of the duty and the defences?

"Control" within the framework of "reasonable and practicable" should be the centrepiece of the legislation expressed in both the duties of care for duty holders and defences.

Q23:  How and to what extent should the model OHS Act specify an employer's duty of care?

Q24:  To whom should these duties be owed?

Employers should have a duty of care commensurate with what they reasonably and practicably control.  The duties should be owed to everyone who can be affected by the work activity.  The same should apply to all others involved in work activity.

Q25:  How, and to what extent, should the model OHS Act specify the worker's duties of care?

Employees should have a duty of care according to what they reasonably and practicably control.  That duty should include ensuring their own safety and the safety of any others who may be affected by their work.

Q26:  Should the model OHS Act include duties of care for persons who are not performing work (eg. visitors to and workplace, members of the public)?  If so, what should the duties be?

Yes.  No-one can or should be kept out of the OHS liability requirements but accorded liability according to what they reasonably and practicably control.  Visitors, members of the public and others should be included under the duties of care provisions, with wording probably modelled along the lines of duties of care for employees.

A specific, duties of care clause should be created for unions and union representatives.  See our earlier comments.

Q31:  Do current provisions for persons in control of a workplace clearly express who owes a duty to whom, and under what circumstances the duty is owed?  If not, how could this be clarified?

This is the core cause of confusion in national OHS Acts because duties of care are expressed differently and, in the case of NSW, give rise to widely different OHS legislative outcomes.  Achieving national consistency and clarity on the duties of care is the first and most necessary step to achieving national harmonisation.  In fact, without consistency and clarity in the duties of care, national harmonisation is arguably not possible.

Q32:  Should the model OHS Act specify that persons in control of a work area or a temporary workplace also have a duty?  If so, to whom?

A work area or temporary workplace should be adequately covered if the duties, as discussed above, are framed appropriately.

"REASONABLY PRACTICABLE" & RISK MANAGEMENT:

Q37. Should a test of "reasonably practicable" be included in the model OHS Act?

Yes.

Submission to the Senate Inquiry into the National FuelWatch (Empowering Consumers) Bill

SUMMARY

The proposed national FuelWatch scheme should not be enacted into law.  The scheme itself has no demonstrated benefit to Western Australian consumers and would constitute a reduction in competition in the retail petrol market.  The ACCC analysis is fatally flawed, and the ACCC itself has refused to allow its analysis to be independently scrutinised.  The only other body that has access to the ACCC data -- the Australian Treasury -- has recommended against a national FuelWatch scheme.  The evidence that is publicly available suggests that greater competition in the WA fuel market lead to improved prices, not the decreased competition that followed the introduction of FuelWatch.

INTRODUCTION

"The Australian people are being enticed towards a Fuelwatch scheme because you have told them it will bring down the price of petrol.  You base that on the premise of an econometric model.  The model was devised, tabulated and constructed in your office and nobody but the people inside your office have had anything to do with it."  Senator Barnaby Joyce, Senate Estimates, Thursday 5 June 2008.

This submission shows that the proposed national FuelWatch scheme has not been adequately analysed by the Australian Competition and Consumer Commission (ACCC).  The modelling that has been undertaken is sub-standard and incomplete.  The ACCC has proposed a scheme to fix prices, retard competition and thereby harm consumers on the basis of analysis and information that either does not exist or is not in the public domain.  The ACCC motives for doing so are entirely unclear -- this is especially troubling as the ACCC has reversed its long-standing position that the Western Australian FuelWatch scheme was not worth extending to other parts of Australia.  When challenged on this point, all Graeme Samuel could do was quote John Maynard Keynes;  "When I find evidence that I was wrong, I change my mind.  What would you do?" (Senate estimates 5 June 2008, pg. E57).  At the very least, Mr Samuel should produce that evidence.

The FuelWatch scheme was introduced in Western Australia in January 2001.  The purpose of the scheme is to provide certainty to consumers as to petrol prices for a fixed period of time.  In practice, service stations are required to notify FuelWatch of their prices for the next day.  On the following day, beginning at 6am the service station prices are fixed for 24 hours.

In December 2007, the ACCC released its report into petrol pricing in Australia.  In that report the ACCC expressed some concern about transparency in petrol retail markets and also canvassed some policy solutions.  It is worth highlighting three statements the ACCC made in regard to retail petrol sales:

1. "There is a significant degree of price competition at the retail level." (ACCC 2007 pg. 15)
2. "There are a range of explanations for price cycles.  Many of these are consistent with competitive market behaviour and the existence of price cycles does not provide any evidence of a lack of retail competition.  It is clear, however, that compared to international experience, Australia's price cycles appear distinctive." (ACCC 2007 pg. 16)
3. "In the end, the ACCC decided that in the time available it was not possible to fully review all the options with regard to their administrative implications, effects on competition or their likelihood of delivering the objective of increased price transparency.  A detailed assessment addressing these issues would have to be made before government could confidently embark on any one of the suggested options." (ACCC 2007 pg. 18).

These three points cannot be over-emphasised.  First the ACCC believes that the retail petrol market is competitive despite price cycles (which may themselves be consistent with competitive market behaviour) and then the ACCC did not undertake an exhaustive analysis of all the options that may address issues related to price transparency.

The ACCC report included an Appendix (Appendix S) that contained an econometric analysis of the FuelWatch scheme.  Senator Barnaby Joyce made the point at Senate estimates that, "The whole premise of FuelWatch is based on this econometric analysis.  That is why it is the crux of our questioning."  In agreement, the ACCC's Brian Cassidy said "Yes" (Senate Estimates 5 June 2008 pg. E42).  That econometric analysis has been widely cited as demonstrating that the FuelWatch scheme has led to lower prices in Western Australia.  The ACCC itself said, "Analysis of pricing results in Perth indicates that there has been some reduction in average price margins relative to the eastern capitals in the time following the introduction of FuelWatch" (ACCC 2007 pg. 257).  Furthermore, the Minister for Competition Policy and Consumer Affairs, Chris Bowen, told the Parliament on 28 May 2008, "the government has had the benefit of working through the ACCC's report with them over several months and working through the implications.  The ACCC recommended that more work be done on FuelWatch.  I understand that the government had had the benefit of that analysis and that process and that the opposition has not. ... [T]he chairman of the ACCC is more than happy to work them through the analysis that the ACCC has done, work them through the econometric analysis and work them through the proposals.  If members seriously want to deal with petrol prices and they seriously want to hear about the rigorous analysis that the ACCC has done they will take up that offer..." (Hansard 28 May 2008 pg. 52).

It is quite clear from what the Minister is indicating that the econometric modelling was an important component of the analysis and that the ACCC had undertaken additional analysis of the national FuelWatch proposal.  Indeed, on 29 May 2008, the ACCC released a document that purported to provide details of "further FuelWatch econometric analysis".  That document is quite remarkable in that it purports to report the results of an econometric testing procedure, but does not name the actual procedure being performed, nor does it report any of the diagnostic statistics such as standard errors or p-values that one might expect in any econometric analysis.  The ACCC allegedly undertook an analysis "known as endogenous selection of structural break points" (ACCC 2008 pg. 3).  This analysis apparently identified a number of dates of interest (March 2000, May 2000, February 2004, and September 2005).  To place those dates in context, FuelWatch began in Western Australia in January 2001, and Coles entered into the Western Australian market in March 2004.  This later ACCC document also moved the policy goalposts by claiming that "there is no evidence that the introduction of Fuelwatch in Western Australia led to any increase in prices and it appears to have resulted in a small price decrease overall" (ACCC 2008 pg 4).  The claim being made about FuelWatch was that it would reduce petrol prices, not increase them.  When asked about this analysis at the Senate estimates committee one week later, the ACCC did not say which econometric test had actually been performed, but did reveal that all structural breaks were significant at the five percent level.

It seems quite clear that the federal government relied on the ACCC when making the decision to implement a national FuelWatch scheme and, in particular, relied on the fact that the ACCC had undertaken a rigorous econometric analysis.  In fact, the ACCC has done no such thing.  The econometric analysis in Appendix S does not stand up to any scrutiny.  When this had become clear, the ACCC then shifted the policy goalposts to argue that saving a few cents per litre was not the objective of the policy at all.  Rather, the FuelWatch scheme would empower consumers.  When challenged on this point by Senator Helen Coonan as to whether any economic modelling had been done on the notion of consumer empowerment, Graeme Samuel answered "No" (Senate Estimates 5 June 2008 pg. E65).  In short, the only empirical evidence the ACCC have to support their recommendation to implement a national FuelWatch scheme is located in Appendix S.

Finally, it is clear that the ACCC recommended the implementation of FuelWatch.  At the Senate estimates, Graeme Samuel made the comment, "If the commissioners that sat on that inquiry had found through that econometric modelling that Perth motorists had suffered harm as a result of the introduction of FuelWatch, we would never have recommended it to the Australian government in our report" (Senate Estimates 5 June 2008 pg. E16 emphasis added).  The difficulty, of course, is that nowhere in the 2007 report did the ACCC recommend a national FuelWatch scheme.  Fortunately, Chris Bowen corroborates Graeme Samuel's testimony in a recent Sydney Morning Herald article, "the Australian Competition and Consumer Commission chairman, Graeme Samuel, told me that the consumer commission would recommend that serious consideration be given to a national roll-out of the West Australian Fuelwatch scheme" (SMH 4 June 2008).  What is not clear is when and why the ACCC recommended a national FuelWatch scheme.  As Senator Helen Coonan indicated, "That is a real issue here.  And what we are really troubled by as a committee, and no doubt we speak on behalf of a lot of people, is how this very expensive scheme -- the best that can be said about it is that it will do no harm, but probably it will not do much benefit -- is now foisted upon Australians against the advice of some very experienced departments and no doubt some very concerned ministers" (Senate Estimates 5 June 2008 pg. E22).

THE ORIGINAL ACCC ANALYSIS

The ACCC collected weekly, monthly and weekly minimum data for the period 1 August 1998 to 8 June 2007.  They then calculated the following Price Margin measure

Price Margin = (Retail price - lagged Mogas95 price - net taxes - fuel quality premium) _Perth

less

(Retail price - lagged Mogas95 price - net taxes - fuel quality premium) _{average of eastern capitals} (1)

The ACCC defend this measure on the basis that it removes factors that are beyond the control of FuelWatch.  The lagged Mogas95 price is the base supply price of petrol and is lagged one week.  It is difficult to understand why this figure has been subtracted from the retail price as it is likely to be constant across Australia.  Unfortunately, the ACCC analysis gives no indication as to whether this figure does vary across the various states.  Similarly, it is not clear whether the net taxes figure varies across states.  The mandated fuel quality does vary across states, but the ACCC analysis gives no indication as to what those figures or variations might be.  In other words, the measure of interest is not transparent.  The ACCC also does not provide any summary data.

The ACCC then undertakes a "unit-root test" to ensure the measure is stationary.  This is important for technical econometric reasons.  The ACCC analysis then investigates whether the data exhibit a structural change after the introduction of FuelWatch.  It appears that the ACCC estimated the following equation:

Price Margin_t = α+ βFW_t +ε_t (2)

Where α = constant representing the average Price Margin before the FuelWatch scheme was introduced, β = the average impact of the FuelWatch scheme, FW_t is a dummy variable = 1 after 2 January 2001 and = 0 before 2 January 2001 and ε_t = an error term.

The ACCC estimates three versions of the equation, one for each of the three time series versions of Price Margin.  They report the results in their Table S2 (reproduced below).

Table S2 Structured break test ³ for relative price margin, cpl,
August 1998 to June 2007

Series	Average (August 1998 to December 2000)		Average (January 2001 to June 2007)
Weekly average	0.83	(0.002)	-1.92	(0.000)
Monthly average	0.88	(0.001)	-1.86	(0.000)
Weekly minimum	0.30	(0.277)	-0.90	(0.003)

³ Coefficient given with p-value in brackets.
Diagnostic testing indicated serial correlation so Newey West standard errors used.
Source:  ACCC estimates

To understand this table, look at the "Weekly average" row.  The number 0.83 indicates that there was, on average, a 0.83 cent per litre (cpl) difference between the Perth net price and the average of the eastern capitals' net price before FuelWatch was introduced.  This figure corresponds to the α-term in the equation (2).  The number in parenthesis (0.002) indicates that the 0.83cpl difference is statistically significantly different from zero (the way to think about the p-value is that it indicates the probability that the coefficient is zero.  In other words, there is a 0.2 percent chance that the number 0.83 is really zero).  The figure -1.92 represents the impact FuelWatch had on the Price Margin;  this is the β-term in equation (2).  This implies that the Perth net price fell, on average, by 1.92cpl relative to the average of the eastern capitals following the introduction of FuelWatch.  The number in parenthesis (0.000) indicates that the -1.92cpl difference is statistically significantly different from zero.  (In other words there is a less than 0.0 percent chance that the number -1.92 is really zero).

This analysis is consistent with the argument that the FuelWatch scheme lead to lower prices following its introduction in 2001.  The ACCC does, however, discuss some important caveats to the analysis.  More importantly the ACCC do not report whether they considered any other factors that could have resulted in a change in relative prices between Perth and the eastern capitals.  This is a remarkable oversight.  Brian Cassidy of the ACCC indicated that the ACCC had previously believed that the entry of Coles into the WA market had had an effect, whereas FuelWatch did not (Senate Estimates 5 June 2008 pg. E6).  Mr Cassidy told Senate estimates, "It is interesting that in the econometric work that was done for our report last year we did find a price effect as a result of the Coles entry, but (a) it was relatively small, and (b) it was less than the price effect of FuelWatch" (Senate Estimates 5 June 2008 pg. E7).  What is especially difficult to understand is why this particular analysis was not included in Appendix S -- this is the most obvious alternative explanation for what had happened in WA and was also what the ACCC had thought had happened in WA, yet they clearly did not see the need to report this analysis in Appendix S.

Informed Sources have provided me with their petrol price dataset including daily, weekly and monthly average prices for Perth, Adelaide, Melbourne, Sydney and Brisbane.  This is the same data that Informed Sources had provided to the ACCC.  That dataset does not include the Fuel Premia, Mogas95 prices or the net taxes used by the ACCC in their analysis.  I was able to calculate a similar measure to the ACCC measure but I was not able to replicate the ACCC measure.  In this sense the evidence provided to the Senate by the ACCC, and in particular Graeme Samuel, was misleading, if not false.  There are two points worth making;  first Graeme Samuel keeps suggesting that the data belongs solely to Informed Sources and that independent analysts could replicate the ACCC analysis if Informed Sources chose to release the data.  Those suggestions are wrong.  The second point relates to the misleading statements the ACCC made regarding peer review.  The ACCC had no intention of allowing their analysis to be peer reviewed.

(1) Graeme Samuel;  "We were asked by Informed Sources the other day whether the data we had could be made available.  We advised Informed Sources that, of course, it is their proprietary data, they can make it available to whoever they want, whenever they want, in whatever form they want and the parties to whom they make that data available can then do whatever they like with it.  That is not under our control.  That is a matter for Informed Sources.  It is their data."  This statement is at page E32 of the Senate Estimates transcript (emphasis is added).  Informed Sources do not own the entire dataset that the ACCC use.  Informed Sources only own the price series.  In other words, it is not possible for Informed Sources to make the ACCC data set available to the public.  This was acknowledged by Joe Dimasi (at E34);  "The other adjustment we made was for fuel premiums.  That is not available to people.  That is also confidential data so people would need to go [to] the refineries to get that.  We could not release that without the refineries' agreement.  That is their data."  In other words, Joe Dimasi indicates that the data do not all belong to Informed Sources.  Yet later at page E42 of the Senate Estimates, Graeme Samuel again indicates that releasing the data set used by the ACCC is within Informed Sources power.

(2) The ACCC have worked very hard to avoid any peer review especially relating to any data release.  Graeme Samuel at page E42 (emphasis added), "... I am not in a position to be able to say that we would make our data and our methodology available to anyone out in the public arena.  We are not prepared to make all this available for any economic modeller or any economic student to simply go through and then to engage the already heavily worked staff of the ACCC in debate on these issues."  Notice that what was Informed Sources' data is now the ACCC data.  Further Joe Dimasi had said at page E 33 (emphasis added), "I might add that a peer review would normally involve the peer getting access to the original data and running their own tests on it.  That is what a peer review would normally involve.  We have provided the results for people to do that.  The tests that we ran are known to other econometricians.  As Treasury has also verified, they are standard.  As long as the owners of the data are prepared to release it, people can go in and apply the standard tests."  The very next speaker in Hansard is Graeme Samuel saying, "If Informed Sources wants to release the data that they gave to us to anyone else -- they gave it to us under subpoena -- they are entirely free to do so."  Yet again Graeme Samuel suggests that the data set is Informed Sources' data.  The exchange between Senator Barnaby Joyce and Graeme Samuel is worth quoting in full (at page E42).

Senator Joyce -- Let us cut to the chase:  what you are saying is that you will not allow independent reviewing of that modelling work?

Mr Samuel -- I would have thought that I did not say that.  I said that Treasury had undertaken its own robust analysis.  But if there is an economic consulting firm that wants to do its own analysis of the impact of FuelWatch in Perth then they can approach Informed Sources.  Not that it is our right to do so anyhow, but we have said to Informed Sources, You are absolutely free to make whatever data you want available to whomever you want on whatever terms and conditions you want to make it, so they are entitled to do their own research and use whatever test they want to use and whatever methodology they want to use.  I am sure that there are some economic consulting firms that will find someone prepared to give them a brief to do that.

I calculate a Relative Price measure where the Average of the eastern state capital average prices is subtracted from the Perth average price.  In order to confirm the ACCC analysis I estimate the following equation:

Relative Price_t = α + β₁FW_t + ε_t (3)

Where Relative Price_t = Average Price _Perth - Average Price _{Eastern Capitals} at time t, α = a constant representing the average Relative Price before the FuelWatch scheme was introduced, β₁ = the average impact of the FuelWatch scheme, FW_t is a dummy variable = 1 after 2 January 2001 and = 0 before 2 January 2001, and ε_t = an error term.

The table below shows the result of this exercise.

Table One:  FuelWatch structural break test for relative prices
(August 1998 - June 2007).

	Constant		FuelWatch		Adj-R2
Weekly Average	3.0246	(0.0000)	-0.8529	(0.0002)	0.0430
Monthly Average	3.0207	(0.0000)	-0.8515	(0.0077)	0.0763

Numbers in parenthesis are p-values.
Standard errors are Newey-West corrected.

The results are consistent with the original ACCC analysis, but note that the estimated coefficients are very different.  Before the introduction of Fuelwatch, it appears that the petrol price in Perth was about 3cpl higher than in the eastern capitals.  After the introduction of Fuelwatch, it appears that petrol prices in Perth fell by 0.85 cpl relative to the eastern capitals.  The point to note is that the benefit of FuelWatch is much smaller than the ACCC originally reported -- instead of FuelWatch lowering prices by almost 2cpl, the reduction is less than 1cpl.

The ACCC argue that, "Of potentially greater concern is the possibility that something else entirely has driven the improvement in the relative price margin."  That is always a possibility.  The ACCC, however, do not investigate the most obvious other factor -- the entry of Coles into the WA market in March 2004.  Using the Informed Sources dataset I investigate that possibility.

I calculate the following equation:

Relative Price_t = α + β₁FW_t + β₂Coles_t + ε_t (4)

Where Relative Price_t = Average Price _Perth - Average Price _{Eastern Capitals} at time t, α = a constant representing the average Relative Price before the FuelWatch scheme was introduced, β₁ = the average impact of the FuelWatch scheme, FW_t is a dummy variable = 1 after 2 January 2001 and = 0 before 2 January 2001, β₂ = the average impact of the entry of Coles, Coles_t is a dummy variable = 1 after March 2004 and = 0 before March 2004 and ε_t = an error term.  Consistent with the ACCC analysis, I use the time period August 1998 to June 2007 for the empirical analysis.

Table Two:  FuelWatch and Coles structural break test for relative prices
(August 1998 - June 2007).

	Constant		FuelWatch		Coles		Adj-R2
Weekly Average	3.0246	(0.0000)	0.0121	(0.9562)	-1.7403	(0.0000)	0.2137
Monthly Average	3.0207	(0.0000)	0.0024	(0.9931)	-1.7077	(0.0000)	0.3890

Numbers in parenthesis are p-values.
Standard errors are Newey-West corrected.

The results are now very different from the ACCC analysis.  The dummy variable associated with FuelWatch is now not statistically significant.  The Coles variable is highly statistically significant and indicates that greater competition in the form of Coles entering the market caused the relative price of fuel to fall by about 1.7cpl.  In addition, the adjusted R² are now much higher than before.  This result is consistent with the ACCC initial expectation regarding the WA petrol market.  As Brian Cassidy told the Senate estimates committee on 5 June 2008, "At the time, I readily agree with you -- I did not actually say it in evidence -- my feelings were that it was probably the entry of Coles that had the major impact on prices in WA, but I have been subsequently proven wrong" (Senate Estimates 5 June 2008, pg. E7).  The irony, of course, is that Brian Cassidy was not "proven wrong";  the ACCC did not report any analysis comparing FuelWatch and the entry of Coles into the WA market in its 2007 report.  Brian Cassidy was not proven wrong, the analysis here supports his initial views, and he was probably told that his initial view was wrong.

THE HARDING CRITIQUE

Professor Don Harding of LaTrobe University has released a comprehensive econometric critique of the ACCC Appendix S analysis.  His critique is very damning.  In particular he argues that the ACCC relied on a nominal price margin when it should have used a real price margin.  Specifically, Professor Harding is able to show that once the data are corrected for inflation, "it is not possible, based on this data, to say as the ACCC did that the WA FuelWatch scheme did not act to increase the real retail margin for petrol in Perth."

In the analysis above, I too have relied on nominal relative prices.  In order to check the robustness of my results I calculate the inflation adjusted average petrol prices in each of the capital cities in constant May 2008 dollars, then recalculate the relative price margin and then re-estimate equations (3) and (4).  Consumer Price Index data are published by the Australian Bureau of Statistics on a quarterly basis.  I use the quarterly figure for each month within the quarter, but also use the average quarterly petrol price reported by the Australian Automobile Association to provide a further check to the analysis.  Results are shown in Table Three.

Table Three:  FuelWatch and Coles structural break test for relative prices.

	Constant		FuelWatch		Coles		Adj-R2
Monthly Average	5.4407	(0.0000)	-0.8041	(0.0869)			0.0268
Monthly Average	5.4407	(0.0000)	0.6184	(0.0967)	-2.8451	(0.0000)	0.4641
Quarterly Average	4.8883	(0.0000)	-0.7123	(0.5388)			0.0003
Quarterly Average	4.8883	(0.0000)	1.2154	(0.1829)	-3.7072	(0.0000)	0.0801

Monthly average for the period August 1998 - June 2007.
Quarterly average for the period Q4 1980 - Q1 2007.
Numbers in parenthesis are p-values.
Standard errors are Newey-West corrected.

Overall the results are consistent with my previous analysis.  The introduction of the FuelWatch scheme into WA had a small effect, if any, while the arrival of Coles had a large effect on petrol prices in Perth relative to the eastern states.  It is worth noting that in two of the equations that the FuelWatch coefficient is positive (although only statistically significant in one instance), which indicates, that everything else being equal, FuelWatch actually caused prices to rise in Perth relative to the eastern capitals.  Not too much should be made of that result, however, as the significance level (p = 0.0967) is very poor.

The net result of the empirical analysis I have conducted is that the ACCC has under-estimated the impact of the Coles entry into the WA market.  What is particularly troubling is that the ACCC did not report any analysis along these lines in their 2007 report, while telling the Senate Estimates committee that (a) they had undertaken that analysis and (b) that the Coles effect was small.  The Coles effect is not small and it dominates the FuelWatch effect.  Indeed, there is weak evidence that the FuelWatch scheme increased prices in WA once the Coles effect is controlled for.

The Harding critique suggests that the ACCC analysis is not robust.  Here I demonstrate another instance where the ACCC analysis is faulty.

The ACCC investigated the differential between Perth and eastern capital cities and found that FuelWatch had reduced the price differential.  Here I calculate, using the weekly Informed Sources price data, the differential between Sydney and Melbourne and subject that price differential to the ACCC test i.e. the introduction of FuelWatch to WA, and also the introduction of Coles into WA.  Results are shown in the table below.

Table Four:  FuelWatch and Coles structural break test for relative prices
(August 1998 - June 2007).

	Constant		FuelWatch		Coles		Adj-R2
Weekly Average	1.6786	(0.0000)	-1.0446	(0.0002)			0.0579
Weekly Average	1.6786	(0.0000)	-1.1809	(0.0003)	0.2742	(0.4521)	0.0567

Dependent variable is (Price _Sydney - Price _Melbourne).
Numbers in parenthesis are p-values.
Standard errors are Newey-West corrected.

The ACCC-type test tells us that the introduction of FuelWatch into the WA market had the effect of reducing the petrol price differential between Sydney and Melbourne.  That result is clearly absurd.  It is pleasing, however, that the entry by Coles into the WA market had no effect on the Sydney - Melbourne price differential.  That, of course, is the result that we would expect.

CONCLUSION

The ACCC have not produced a rigorous assessment of FuelWatch.  Their analysis is poor.  Furthermore, the ACCC have gone to great lengths to prevent any external assessment of their analysis.  They have made use of secret data, secret econometric tests, secret analysis, and secret recommendations to government to propose a national FuelWatch scheme.  Ultimately, the Australian population are being invited to believe that the national adoption of FuelWatch is good public policy simply because the ACCC asserts it to be good policy.  Yet there is no corroborating evidence to support the ACCCs assertion.  Indeed, all the empirical evidence in the public domain rejects the ACCC's position.

Graeme Samuel has described FuelWatch as "a consumer empowerment exercise.  It is designed to empower consumers to take advantage of a competitive marketplace" (Senate Estimates 5 June 2008 pg. E16).  We are invited to believe that fixing prices constitutes a "competitive marketplace".  This is, of course, entirely counter-intuitive.  As Chris Bowen wrote in the Sydney Morning Herald (emphasis added), "I was intrigued that the body whose charter is to promote competition in Australia was telling Australia's first Competition Minister that a scheme to limit changes in petrol prices should now be considered to promote competition in the fuel market" (SMH 4 June 2008).  Chris Bowen's scepticism was well-placed and we know that he was convinced by the ACCCs econometric analysis that has been critiqued above.  In essence, the ACCC are trading off fixed prices against asymmetric information.  The difficulty they have is that they do not say how big the asymmetric information problem is in the petrol market, nor do they provide any argument or evidence to suggest that the economic gains from reducing asymmetric information are greater than the economic costs of price fixing.  Asymmetric information is a theoretical problem -- in the real world markets evolve solutions to deal with that problem (albeit imperfectly).  By contrast, price fixing is a real-world problem.  So much so that price fixing is illegal under the Trade Practices Act.  After much prompting by Senator Helen Coonan, Brian Cassidy admitted that if petrol retailers colluded to create their own FuelWatch type scheme whereby prices were fixed for 24 hours "then that is rather more likely to be a breach of the Trade Practices Act" (Senate Estimates 5 June 2008 pg. E81).

Friedrich von Hayek, the 1973 economics laureate, has described competition to be "like experimentation in science, first and foremost a discovery procedure" (Law, Legislation, and Liberty vol 3. pg. 68).  If petrol prices are fixed, the level of price competition in the petrol market will fall.  Recall that the ACCC believes that there is already a significant degree of price competition in the retail petrol market.  That competition is likely to be translated into non-price competition.  Non-price competition is likely to make petrol pricing less transparent rather than more transparent.  The FuelWatch scheme is likely to transfer competition from price to non-price considerations.  That reduces the transparency of the market and disadvantages those consumers who would prefer a lower price to an enhanced loyalty scheme.  The unintended consequences of the FuelWatch scheme will be to increase existing barriers to entry, increase market power of existing retailers and disadvantage those consumers who buy their petrol at the bottom of the pricing cycle.  In order to protect the "integrity" of the FuelWatch system, the ACCC would have to prohibit competition for petrol in both pricing and promotional terms.  This highlights the fundamental problem with FuelWatch.  In order to prevent petrol retailers from raising their prices, the ACCC need to prevent retailers selling cheap petrol.

The national FuelWatch scheme should be rejected by the Senate.  The government has suggested that the scheme be introduced and then evaluated after one year.  The problem with this particular approach is that it is not clear how the scheme would be evaluated.  It would be impossible to replicate the existing flawed ACCC analysis.  That is because it would not be possible to compare the before and after FuelWatch prices to an external standard.  The ACCC have been unable to produce any other empirical analysis showing that FuelWatch has benefited WA motorists despite that scheme being in operation since 2001.  There is no reason to believe that the ACCC will be able to produce any definite analysis (or indeed any other analysis) after the scheme is introduced nationally.  The only evidence the ACCC will be able to point to is that different petrol retailers sell their petrol at different prices.  This is hardly news, nor is it evidence of policy success or failure.

The most damning consideration of a national FuelWatch scheme is that the ACCC claim that Treasury evaluated their analysis and "they established the methodology was sound, the approach was robust and the outcomes were solid" (Senate Estimates 5 June 2008 pg. E21), yet we know that Treasury recommended that a national FuelWatch scheme not be adopted.

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BIBLIOGRAPHY

Australian Competition & Consumer Commission, 2007, Petrol Prices and Australian Consumers:  Report of the ACCC into unleaded petrol, December 2007.

Australian Competition & Consumer Commission, 2008, Press Release:  ACCC Issues Details Of Further Fuelwatch Econometric Analysis, May 2008.

Don Harding, 2008, FoolWatch:  A case study of econometric analysis and "evidence-based-policy making" in the Australian government, July 2008.

Regulations retard home ownership

Housing issues are always news in Victoria.  Now we have resident action groups opposing new apartment building in inner suburbs.

Moonee Valley was the latest suburb to feature Geoffrey Rush protesting against such redevelopment.

Stopping such in-fill development means less land available for home sites.  This aggravates the shortages created on city outskirts, due to planning schemes like Melbourne 2030.

In both inner urban areas and the city fringe, bureaucracy and multitudes of costly requirements magnify the price increases caused by issuing inadequate numbers of development permits.  The planning bureaucracy also requires additional outlays by forcing set-asides of land for communal and other purposes.

All these costs are passed on to the new homebuyer.

Every so often, the Premier, in a photo opportunity, announces a reform of the permit approvals system and foreshadows increases in new home building.  But once the cameras have departed we see little change.

There is excess demand for housing.  The Housing Industry Association has quantified Victoria's shortfall of supply compared with underlying demand this year at 12 percent.

In spite of this shortfall, new housing approvals in Victoria have been trending down for the past five months.  In the case of apartments, new approvals are in headlong retreat, down almost 40 per cent on a year ago.

And yet, the industry is far from overheated -- Victoria was building far more homes in 2002 than today.  Clearly, we are not hitting a ceiling beyond which the industry can't increase supply.

Some people say the decline in new home building is to be expected as a result of interest rate increases reducing affordability.  Fears of an economic downturn would reinforce a resulting reduction in demand.

However, one vital corollary of weaker housing demand is missing.  A softer housing market would be expected to bring declining prices.  But average prices last year in Melbourne increased by more than 10 per cent.

Clearly, any softness in demand is being matched by even greater restraints on supply.  Part of this may be due to reduced credit available to builders, something surveys by the Master Builders have indicated.

But the main reason why prices are rising in spite of higher mortgage costs comes back to government regulations that restrain the number of permits and raise building costs.

The new homebuyer pays for the political and bureaucratic measures that impede housing land development.  And these measures create scope for enormous profits.  In forcing shortages of developable land, the political permit system means a stroke of the pen can increase the value of a block of land from a few hundred dollars to tens of thousands of dollars.

Lobbying to get a favoured project through the planning system can therefore bring rich rewards to land developers.  Not surprisingly, they make handsome contributions to Labor Party funding.

It is commendable when businesses support political parties to promote a vigorous democracy.  However, when the support comes from firms in areas where politicians have the keys to unlocking considerable profits, it starts to look like corruption.

Meanwhile supply restraint destroys the dream of home ownership.

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