Keeping Super Safe: A call for greater transparency from superannuation funds

EXECUTIVE SUMMARY

Disclosure levels by Australian superannuation funds are inadequate.  Disclosure levels should meet international benchmarks to adequately protect Australians' superannuation savings.

The role of some Australian superannuation industry funds as 'default' funds in Australia's industry relations system constitutes government-granted special financial privileges.  While customers can opt-out of industry funds defaulted by the industrial award system, few do so.

The poor disclosure means that Australians who have their retirement funds tied up in superannuation funds do not have access to information necessary to understand where their money is invested and what expenses are being paid from their superannuation savings.  This lessens competition in the sector.

There is strong international and domestic evidence to show that superannuation funds and/or trust arrangements can be subject to abuse.  There is nothing inherently 'safe' about the trust arrangements under which superannuation funds are managed.

Particular attention must be paid to situations where financial power is concentrated.  Safeguards must be inbuilt to minimise the ability of well-connected political players to manipulate the system to favour particular investment funds, managers or individuals.  A basic safeguard is enforced high-level disclosure of how Australians' superannuation moneys are used.

This report calls for new laws that will force Australian Prudential Regulation Authority (APRA) regulated superannuation funds to comply with extremely high standards of disclosure and transparency.

A fund member, investment advisor, or member of the public, should be able go into the website of any retail or industry superannuation fund and obtain enough information so they can understand where their money is invested, how it is performing relative to similar funds, who gets paid to manage and administer the fund, and how much is paid, and whether the fund's trustees have any cross-directorships.

INTRODUCTION

No Australian should automatically accept that their superannuation retirement nest-egg is safe.  As in all things financial, a healthy level of scepticism is warranted and needed when other people have control of money.  The greatest safeguard that individuals have over their money is that the people who control their money disclose precisely what they are doing with it.  There must also be full disclosure of fees and commissions that superannuation investment controllers receive.

This is a report into the disclosure and transparency levels of Australian superannuation funds.  We find that the disclosure levels are inadequate to allow members to understand where their money is invested and what expenses are being paid from their superannuation savings.  Superannuation fund transparency is not good enough.

This report does not allege that the financial results claimed and reported by Australian superannuation funds are false or in any way inaccurate.  Neither does this report allege any wrongdoing, malpractice or poor decisions of any sort, by any of the persons or organisations responsible for, or managing, superannuation fund money.  This report is entirely focused on disclosure and transparency.

This report calls for new laws that will force superannuation funds to comply with extremely high standards of disclosure and transparency.

This report is focused on the transparency and disclosure practices and outcomes of industry and retail superannuation funds only, with a heavier emphasis on industry funds.  For this research exercise we have not investigated non-industry public sector funds, corporate or SMSFs. ⁽¹⁾

The reasons for the focus on just these two types of funds are as follows:

• Industry and retail funds exercise control over half of all fund assets ($548 billion) and have by far the largest number of fund members (27 million accounts).
• Old style public service and corporate pension funds (defined benefit funds) are largely closed to new members.
• In most cases industry and retail fund members do not have any control over the people who manage their money.  Usually members do not elect managers/trustees and cannot dismiss them.  Their only power is to remove their money and place it in another (similar) fund structure.  This compares starkly with SMSFs where (mostly) the people who control the funds (trustees) are also the fund members.  That is, SMSF arrangements allow fund members to directly control their money through the trust arrangement.
• The retail and industry funds control the assets of some 27 million fund holders, which is by far the largest bulk of fund members.  Industry funds are the predominant default funds (see Table 5 and Table 6 below).  That is, if workers do not choose their own fund, the industrial relations system requires their money to go to specific funds.  This gives the default funds massive institutional market power and advantage over non-default funds.  In many respects the default-fund process creates and sanctifies anti-competitive, oligopoly-like market power in superannuation.

Each of these reasons—size of the funds, fund member power imbalance and government mandated anti-competitive arrangements—provides enough cause for high levels of disclosure and transparency.  This should be mandatory as a 'first base' protective mechanism for Australians' retirement savings.

THE AUSTRALIAN SUPERANNUATION SYSTEM

OVERVIEW

In 1992, the Keating Government introduced compulsory superannuation for all Australian employees.  Originally set at 3 per cent, since 2002 employers have been required to pay an additional 9 per cent of the wages they pay employees into superannuation funds.

The money is not the employers' money.  It is employees' money that would have been paid to workers as part of higher wages if compulsory superannuation did not exist.

Workers are banned from touching their superannuation money until they retire or part-retire (usually only after someone is 55 years or older).  There are laws about how and when workers can receive their superannuation money.

Superannuation funds are approved and regulated by the federal government.  Funds are set up under, and must comply with, the Superannuation Industry (Supervision) Act.  Superannuation funds must operate under 'trust' arrangements.

Trusts are legal 'business' structures commonly in use and subject to federal 'trust' laws.  Trusts are controlled by 'trustees' who have a legal duty to run the trust entirely for the benefit of the people who have their money in the trust.  An example would be where orphaned children may have money left to them from their deceased parents' estate which is held in a trust.  The trustee must manage the money for the benefit of the children, although the trustee is permitted to take a fee for doing this.

Superannuation funds operate in much the same way.  The fund trustees are appointed by the organisation/s that set up the trust.  The fund members are the beneficiaries of the trust.  A very small number of superannuation funds have elections for some trustees however most industry fund trustees are appointed by union and employer groups.

Since the Superannuation Guarantee Act (SGA) was introduced in 1992 (which made superannuation compulsory), superannuation funds have grown enormously.  As of June 2009, total assets were around $A1.1 trillion.⁽²⁾  This is close to the size of Australia's economy (in terms of annual GDP).  Contributions to the funds were $112.2 billion in the year to June 2009. ⁽³⁾  The size of super fund assets is expected to exceed the size of the Australian economy by 2015. ⁽⁴⁾

FUND TYPES

There are 5 major types of superannuation funds, with assets of $1.1 trillion and 32.7 million member accounts. ⁽⁵⁾

Retail Funds:

These were usually set up and run by major financial institutions such as AMP for example.  Many of these funds were operating well before compulsory superannuation was instituted in 1992.  At December 2009 there were 154 retail funds, with combined assets of $346 billion and 16.6 million members. ⁽⁶⁾

Table 1:  Top 5 Retail Fund Managers

Name	Funds Size	Members
AMP	$49.2bn	3,200,000
ASGARD	$20.0bn	376,000
MLC	$37.3bn	1,237,000
Colonial First State	$34.9bn	588,000
ING	$25.3bn	939,000

Source APRA Statistics Superannuation Fund-Level Rates of Return, issued 20 August 2009

Industry Funds:

These were set up jointly by unions and employer associations—usually after 1992.  Half of the trustees are appointed by unions and the other half by employer associations.  Some funds also have one or two "independent" trustees.  At December 2009 there were 65 industry funds with combined assets of $219 billion and 11.6 million members. ⁽⁷⁾

Table 2:  Top 10 Industry Funds by Size

Name	Funds Size ($m)	Members ('000)
Australian Super	29,623.9	1,427.9
Unisuper	24,448.6	419.6
REST	15,324.6	1,899.8
Sunsuper	13,559.3	1,167.3
HESTA	13,542.9	641.4
Cbus	12,920.2	561.9
Health Super	7,818.3	210.6
HOST Plus	6,986.2	884.2
MTAA	6,275.0	281.5
Vic Super	6,250.1	237.9

Source APRA Statistics Superannuation Fund-Level Rates of Return, issued 20 August 2009

Self Managed Super Funds (SMSFs):

These are small funds with four or fewer members.  Mostly the trustees are the fund members.  Almost 70% of SMSF have 2 members.  There are 420,000 SMSFs, with combined assets of $386 billion and 800,000 members. ⁽⁸⁾

Corporate Funds:

These are typically run by large businesses for their employees.  At December 2009 there were 171 corporate funds, with combined assets of $60 billion and 650,000 members. ⁽⁹⁾

Table 3:  Top 10 Corporate Funds by Size

Name	Funds Size ($m)	Members ('000)
Telstra	10,660.6	94.9
Commonwealth Bank	6,978.9	61.0
Qantas	5,873.5	32.3
NAB	3,102.6	30.5
Westpac	2,603.5	33.8
Rio Tinto	2,404.8	23.1
BHP Billiton	2,162.9	18.6
ANZ	1,771.8	29.9
Bluescope Steel	1,660.2	9.6
CSR	1,222.9	13.1

Source APRA Statistics Superannuation Fund-Level Rates of Return, issued 20 August 2009

Government funds:

Government funds are run for public servants.  At December 2009 there were 39 government funds with combined assets of $173 billion and 3.1 million members. ⁽¹⁰⁾

Table 4:  Top 6 Government Funds by Size

Name	Funds Size ($m)	Members ('000)
ARIA	18,491	471.5
First State	15,889	515.5
Local Gov Super	7,142	121.2
Australia Post	6,885	49.0
QLD Local Gov	4,041	72.7
Vision Super	4,000	102.8

Source APRA Statistics Superannuation Fund-Level Rates of Return, issued 20 August 2009

REGULATORY STRUCTURE

Three government bodies oversee and regulate the superannuation funds:

• The Australian Prudential Regulatory Authority (APRA)
• Australian Securities and Investment Commission (ASIC)
• Australian Taxation Office (ATO)

APRA approves the setup of superannuation funds.  Both APRA and ASIC have statutory responsibilities to oversee the operation of superannuation funds.  This is a part of their general oversight of the total financial system.  They do not oversee self-managed super funds (SMSFs).  This is undertaken by the ATO.

WHAT ARE 'DEFAULT' FUNDS?

Since 2006, the law has required employers to give employees the right to choose the superannuation fund into which their money will go.  However, under Australia's award and enterprise agreement system, if an employee does not make a choice, the contributions must be paid to the superannuation fund stipulated in the appropriate award or enterprise agreement.  The award/agreement funds are known as default funds.  The overwhelming majority of compulsory superannuation contributions are allocated to the default fund and within that to the default investment option.

Most of the so-called 'modern' awards include default superannuation fund clauses.  The number of default funds varies between 1 and about 5 in each award (although the Educational Services General Staff Award manages to mandate 18 default funds).  Each award superannuation clause also has a provision for existing employers to continue to pay into any fund they were already paying into as at September 2008.

An analysis of 166 'modern' awards highlights the dominance of Industry Superannuation as the default option.

Table 5:  Default Funds by Type

Fund Type	Total Funds identified	Total times listed as default fund
Industry	66	477
Retail	16	38
Public	14	36
Corporate	2	3
Unidentified	9	12

Source Author's analysis of 166 'modern' awards

Table 6:  Major Default Super Funds

Fund Type	Fund	Times listed as default fund
Industry	Australian Super	68
Industry	Sun Super	56
Industry	Asset Super	47
Industry	Tas Plan	44
Industry	Westscheme	26
Industry	State Wide	24
Industry	LUCRF	16
Industry	HOST-PLUS	14
Industry	HESTA	13
Industry	AustSafe	13
Industry	First State	12
Industry	REST	10
Retail	AMP Super Savings	15
Public Sector	Australian Public	6
Corporate	BHP	1

Source:  Author's analysis of 166 'modern' awards

When the Senate Standing Committee on Education, Employment and Workplace Relations took testimony on the question of default funds strong concerns were expressed as to the lack of transparency in the process of choosing which funds gain the privileged positions as default funds.

For example, Mr Richard Gilbert, CEO of Investment and Financial Services Association (ISFA), put on record,

"IFSA's ... concern is the lack of fair and transparent process in the selection of default funds.  A range of super funds made submissions to the commission to be included as default funds in a particular industry.  This includes both industry and retail corporate master trust funds.  In many cases, the commission has not agreed to their inclusion.  This could have a substantial impact on the viability of these funds.  IFSA is not aware of any rationale for the decisions by the commission.  IFSA is not aware of any scope for excluded funds to appeal the decision of the commission.

The successor body to the commission, created by this bill, is Fair Work Australia.  Division 3E of part 5-1 of the bill appears to prohibit appeals of decisions by the full bench of Fair Work Australia.  The only review mechanism IFSA is aware of is the requirement that Fair Work Australia review the awards every four years." ⁽¹¹⁾

The Investment and Financial Services Association (IFSA) represents 145 financial organisations with more than $1 trillion under management.

DEFAULT FUNDS -- A CONCENTRATION OF FINANCIAL POWER

The number of industry and retail funds is expected to decline considerably in the medium term while the asset bases expand.

By 2025, total superannuation assets are expected to grow to $2.2 trillion.  The number of industry funds is expected to decline to 21, and the number of retail funds is expected to decline to 47. ⁽¹²⁾

This will result in a heavier concentration of workers' money being controlled by a smaller number of financial managers and fund trustees in the retail and industry funds sectors.

There are concerns about the concentration of Australians' superannuation fund assets in a small numbers of hands.  For example, Mr Gilbert, the CEO of IFSA argues:

... one of the strengths of the Paul Keating SG agenda was that diversification was critical to it.  If we narrow where the money is, yes, there are more risks of systemic failure. ⁽¹³⁾

IFSA expresses concern about "... concentrating monopolies in single-administrations systems."  It gives the example of Japan "...where recent record-keeping errors by the centralized administrator of the pension system have caused havoc, to the extent that they have lost 50 million records, going back 20 to 30 years." ⁽¹⁴⁾

These sorts of warnings strengthen the need for full disclosure systems by superannuation funds.  Disclosure diminishes the opportunity of monopolies to behave inappropriately and increases the capacity for administrative error to be found early.

THE INDUSTRY FUNDS INDUSTRY

A TANGLED WEB OF CONTROL

Industry funds are a special case.  They make up 84 per cent of award default funds putting them in a privileged and powerful financial position in the Australian finance sector.  It should be expected that their levels of disclosure is extremely high.

However the structure and interrelationships of the funds and their fund managers is little understood.  What is disclosed through their websites and free public publications is relatively superficial.  It required ASIC searches to reveal much of the following information.

As at 31 December 2009 the 65 industry superannuation funds controlled $219 billion in Australians' retirement savings.  The 10 largest industry super funds controlled over 70 per cent of that $219 billion.  The men and women who are the trustees and executives of these 10 largest funds are therefore in an extremely powerful position given they choose where over $155 billion of workers money is invested.

Industry funds have spun off a web of interlocking companies and trusts that undertake much of superannuation administration and management.

At the heart of this web is an entity called Industry Super Holdings Pty Ltd (ISH) which is owned by a clutch of industry funds.  In its last set of financial statements (available from ASIC) ISH declared it controlled over $37.7bn in assets.  Figure 2 below shows, who owns ISH and what ISH owns.  ISH owns 100% of:

• Industry Funds Management (funds under management $19.5bn)
• ME Bank (worth $1.4bn)
• ME Investments (funds under management $756m)
• IRIS (worth $643m)
• AusFund (funds under management $575m) and
• Industry Funds Services (a provider of membership management, financial planning and other services).

Each of these entities provides funds management and other services back to industry funds as 'outsourced' providers.  But each of these service providers are owned by a corporate structure (ISH) which is in turn owned by industry funds.  This makes for a highly complex and confusing disclosure regime.

A note on associated entities

All external investment types whether listed or unlisted, managed or direct, have two characteristics.  First, they are purchased in the expectation of a measurable investment return, either from income (dividends, interest, rental income) or capital growth.  Second, the assets are managed and controlled external to the fund on commercial terms.

Thirty-six industry funds are shareholders in ISH.  The group of investments associated with Industry Funds Holdings (ISH) as associated entities because of the overlapping webs of control and directors.  Industry funds also invest in administration companies, promotion companies, financial planners and training organisations controlled by industry funds or the ACTU.  Some retail managers may have similar investments in associated financial planning networks, foreign subsidiaries or other associated entities.  Many of these assets pay no dividends and their return potential is difficult to assess.

Figure 1:  Interlocking shareholdings & relationships

Sources:  ASIC filings, annual reports

Figure 2:  Who owns ISH

Sources:  ASIC current extract

Industry Super Holdings is owned by 36 super funds.  However, just as the ten largest super funds control over 70 per cent of industry fund assets, the top four funds in ISH control 73 per cent of ISH.  However it is not the largest of the industry funds which have the largest shareholdings in ISH.  Four industry funds have taken large shareholdings in ISH at levels way beyond their overall market share.

Table 7:  The largest Industry Funds and their investment in ISH

Fund Name	Funds Size December 2008($m)	Approximate Fund Size as % of Industry Funds	Investment in ISH February 2009 (%)
Australian Super	29,623.9	15%	33%
Unisuper	24,448.6	12%	2%
REST	15,324.6	8%	0%
Sunsuper	13,559.3	7%	2%
HESTA	13,542.9	7%	16%
Cbus	12,920.2	7%	16%
Health Super	7,818.3	4%	0%
HOST-Plus	6,986.2	4%	8%

Source:  ASIC & APRA, Author's calculations

In observing the web of cross shareholdings in ISH, its subsidiaries as well as the associated Industry Super Property Trust (ISPT,) issues arise about concentration of control and disclosure.  The corporate and personal interconnections suggest significant concentration of financial control.

Table 9 details the cross directorships and background of the twelve most powerful people controlling industry funds.

The power concentration necessitates high levels of disclosure to maintain confidence in the overall superannuation system.  Given the industry funds also receive financial privilege through default provisions the highest level of disclosure should be required of these funds as to their investments in such shareholdings and funds.

CROSS INVESTMENTS & SHAREHOLDINGS -- FIRST SUPER v UNISUPER First Super is a mid-tier industry fund with $1.26 billion in funds under management (30 June 2009) ranking it about 25th in industry fund size.  First Super was formed in July 2008 from the amalgamation of three smaller funds covering furniture workers, the timber industry and pulp and paper workers.  First Super has somewhat less than 1% market share of the industry funds. According to First Super they have outsourced and spread their members' monies as follows Table 8:  First Super assets Asset Value IFM Enhanced Index Fund $81,148,229 IFM Global Equities Trust $6,061,220 IFM Australian Infrastructure Fund $47,788,444 IFM International Infrastructure Fund $26,304,950 Super Loans Trust (Members Equity) $12,579,611 ISH/Members Equity (Direct Investment) $16,470,720 Super Benefits Administration Pty Ltd $755,909 ISPT Core Fund $83,274,086 Total Industry Fund Entities $274,383,169 All Other Assets $990,586,657 Total Fund $1,264,969,826 Source:  First Super Annual Report 2009 First Super's 2009 annual report shows that 20% of First Super funds are invested in funds run by Industry Funds Management, Industry Super Property Trust and Members Equity. A further $17.2 million is invested directly in ISH and Super Benefits Administration.  Analysis of the current ISH shareholders suggests First Super's shareholding in ISH had increased since its annual report.  In February 2010 First Super has a 4.8% shareholding in ISH at a cost of $32,986,060 (see note below).  This compares to First Super's market share of less than 1% of industry funds.  ISH has not paid a dividend in the past two years. By contrast, the same analysis for Unisuper shows a different picture.  Unisuper is the second largest industry fund with about a 12% market share and $21.77 billion in funds under management.  Unisuper is also a shareholder in ISH with a 1.9% shareholding, considerably below their overall market share of 12%.  Unisuper's investments in IFM, ISH and ISPT only total 1.2% of funds under management. [Nb:  The shareholding in ISH may have increased since June as the current ISH top-20 shareholding report shows Timber Industry Super Scheme with 14,305,806 fully paid shares and First Super Pty Ltd with a further 20,377,306 partly paid shares.]

INDUSTRY FUNDS DISCLOSE LESS THAN OTHER FUNDS

Information on the ownership structure and directors of the group of companies comprising the Industry Super Holdings Group and ISPT is not freely available.  The shareholdings and directors information presented in this report was purchased from an approved ASIC information broker.

Investing members of the ISH group such as IFM and also ISPT also disclosed significantly less information about the investments under their control than independent investment managers also used by industry superannuation funds.

For example, and by comparison, the screen shots below ⁽¹⁵⁾ are from the Stockland Group website and show information for the Stockland Direct Office Trust No.3.  Stockland is a high profile property investment fund that is directly comparable to ISPT.  The first shot details the purpose of the Stockland fund,

The second screen shot is a click through from the properties list in the first shot to 541 St Kilda Road Melbourne.  This has a picture of the building, its address, purchase date, valuation and key details about the property.  This shows a high level of disclosure by Stockland.

Below is the corresponding screen shot from ISPT, the Industry Funds property trust.

For the main fund, the IPST Core Fund, the only information available is the total value of the fund as at 30 June 2009.  No individual properties are listed, no property details are provided and none of the type or level of information available from the Stockland Property Trust is made available by ISPT.

Similar results occur with disclosure of private equity investments.  We compared a private fund, Starfish Ventures to the industry management fund IFM.  IFM provides no information as to the assets making up their private equity funds or their current valuations.

By contrast Starfish Ventures, a much smaller private equity firm, provides considerable detail on their website of the investments in their funds, including links to the websites of their investments.  Starfish is a small fund.  If Starfish can provide high level of disclosure surely superannuation funds can do the same.

INDUSTRY FUNDS ARE CONTROLLED BY AN EXTREMELY SMALL NUMBER OF INDIVIDUALS.

Twelve people across the industry funds industry hold directorships or executive positions where they control $188 billion of financial assets.

As shown earlier, at the heart of the web of cross shareholdings and cross directorships is Industry Super Holdings (ISH) and the largest industry super fund Australian Super.

The largest shareholder in ISH is Australian Super (a $29 billion dollar fund).  Australian Super has 13 trustees of whom four hold cross directorships on other ISH related companies or are on ISPT the industry funds property trust that has $7 billion invested in it.

Table 9:  The twelve most powerful people in superannuation

	Superannuation Industry Positions Held	Background & Qualifications
Anna Booth	Director of IFM ($19.5bn), ME Bank, Industry Super Holdings ($37.7bn).  Total $58.5 bn.	Formerly National Secretary of the Textile, Clothing and Footwear Union of Australia and Junior Vice President of the ACTU.
Cath Bowtell	Director of Australian Super ($29bn) and AGEST ($3.5bn).  Total $32.5 bn.	ACTU Senior Industrial Officer (resigned 16 March 2010).
Brian Daley	Director of Australian Super ($29bn), ARIA ($11.5bn), HOST Plus ($7bn), and ISPT ($7bn +).  Total $54.5bn.	National President of the Liquor, Hospitality and Miscellaneous Union (LHMU).
Anne De Salis	Director of NSW State Super ($38bn), Industry Super Holdings ($37.7bn), ME Bank ($1.3bn) and Funds SA ($14bn).  Total $91bn.	Senior Advisor to Paul Keating then career financial services professional. Has held senior management positions with AMP and MBF.
Mark Delaney	Chief Investment Officer Australian Super ($29bn) and Director ISPT ($7bn).  Member Australian Council of Super Investors Committee of Management.  Total $36bn.	Career funds management professional.  Has held senior positions with AXA and Federal Treasury.
Angela Emslie	Chair HESTA ($13.5bn), Care Super ($3.6bn), Vision Super ($4bn) and Australian Institute of Superannuation Trustees.  Total $21.1bn.	Consultant in the health, community services and government sectors. VECCI background in OHS.
Bernie Fraser	Chairman of ME Bank and Industry Super Holdings ($37.7bn).  Director of Australian Super ($29bn) and Cbus ($13bn).  Total $81bn.	Governor of the Reserve Bank of Australia 1989 to 1996.  Secretary to the Treasury 1984 to 1989.
Sandy Grant	Director of Industry Super Holdings ($37.7bn), ME Bank, Super Members Investments Ltd ($0.8bn), IRIS, Superpartners ($75bn) and Care Super ($3.6bn).  Total $42.6bn.	Career superannuation management professional.  Has held senior positions with Colonial and been CEO of IFS and Cbus.
Brian Pollock	Director of IFM ($19.5bn), ME Bank and Industry Super Holdings ($37.7bn).  Total $58.5bn.	Career funds management professional.  Formerly Executive Director Property and Lending with AXA.
Elana Rubin	Chair of Australian Super ($29bn).  Director of ISPT ($7bn +) and Tower Australia.  Total $36bn.	ACTU background in OHS, industrial work, superannuation policy and advocacy.  Was CEO of ARF.
Ian Silk	CEO of Australian Super ($29bn) and alternate director of ISPT ($7bn).  Total $29bn.	Advisor to Cain/Kirner governments. Has held senior positions in the superannuation industry for 14 years.
Garry Weaven	Chair of IFM ($19.5bn).  Director of ME Bank and Industry Super Holdings ($37.7bn). Total $58.5bn.	Former Assistant Secretary of the ACTU.  Founded Industry Fund Services in 1994.

Source:  Directorships from ASIC extracts as at 12 Feb 2010 and, annual reports.
Biographies from annual reports & online searches.

INADEQUATE TRANSPARENCY CAUSES PROBLEMS

CONFIDENCE IN THE SYSTEM IS PUT AT RISK

Fortunately, the Australian financial system has proven stronger than most international systems in the global financial crisis.  Despite this, the Australian superannuation sector has concerning features:

1. There is a heavy concentration of control of other people's money in a comparatively small number of hands.
2. There is a reliance on process alone to ensure integrity.
3. Disclosure of transactions is low or masked.

LOW DISCLOSURE MEANS FUND MEMBERS ARE UNINTERESTED IN THE OPERATION OF THEIR FUNDS

It is recognised that many Australians are disengaged from, or uninterested in, the financial affairs of the super funds in which they have their money.

Australians have their income compulsorily taken from and placed in superannuation funds and are institutionally discouraged by the superannuation funds because of poor disclosure.  Effective comparisons between funds cannot be made because of poor disclosure.  Inadequate disclosure is the main reason that Australians are disengaged from the use of their compulsory superannuation contributions.

Australians must be given the opportunity to be engaged and interested in how their superannuation nest eggs are being used.  The basic step to achieving this is to require the superannuation funds to disclose the necessary information in full.

DISCLOSURE WORKS:  THE CalPERS CASE

The California Public Employee's Retirement System (CalPERS) is one of the largest superannuation funds in the world, with assets of some $US200 billion (2009) covering 1.6 million workers and retirees.  Its assets are larger than all of the Australian industry superannuation funds combined.  It is a government-sector fund and, as such, should have been expected to have the highest of governance standards.

CalPERS has been plagued by scandal over the scale of fees paid to outsourced investment managers and 'placement agencies' (intermediaries who pitch their products). ⁽¹⁶⁾  There is concern about 'political fixers' and 'peddlers masquerading as placement agents' resulting in calls for intermediaries to register as lobbyists.  The troubles were triggered by revelations of huge fees paid—in one instance $US70 million to a former CalPERS board member turned agent.  The former board member had used his political connections to help private fund managers gain billions in business.

CalPERS provides outstanding disclosure of assets, expenses, fees and commissions paid.  This level of disclosure is far beyond any Australian super fund yet CalPERS still fell afoul of good governance.  It was only through the level of disclosure of CalPERS that investigators were able to piece together the money trail to the 'political fixers' and 'peddlers masquerading as placement agents.' High levels of disclosure and transparency are not in themselves inoculation against malfeasance but they are a powerful shield.

CalPERS provides a powerful lesson for Australian superannuation funds.  Like any financial institution, superannuation funds can be subject to misuse of the members' funds.  Particular attention must be paid to situations where strong political connections exist.  Safeguards must be built to minimise the ability of well-connected political players to manipulate the system to favour particular investment funds, managers or individuals.

LESSONS FROM THE COLE ROYAL COMMISSION

There is strong evidence in Australia that fiduciary trust arrangements have been abused.  The 2003 Cole Royal Commission ⁽¹⁷⁾ into the building and construction industry provided damning evidence that workers' money held in trusts was being misused in the construction sector.

The Royal Commission into the Building and Construction Industry (the Cole Commission) was a highly controversial investigation.  Building unions claim that it was a political set-up intended to harm Australian unions.  Whether this is true or not is irrelevant to the issue of security of workers' money.

The Cole Commission found major misuse of member funds in trusts (redundancy, long service leave, and training) where the structure, control and governance arrangements were/are almost identical to those for the industry superannuation funds.  That is, the funds are controlled by a 'partnership' of unions and employer associations.

The operations and governance of the superannuation funds did not receive adverse findings.  This is welcome.  This should not, however, result in complacency.

Volume Ten of the Cole Commission Report presents the outcome of the Commission's investigations into trust funds operating within the construction sector.  There were four types of funds investigated.  In each instance the funds obtain their income and assets from compulsory employer contributions paid on behalf of employees.

The four trust fund types investigated were:

• Superannuation funds
• Redundancy funds:  Where money is held in trust for employees who suffer redundancy and is paid to them to compensate for redundancy.  In 2001 there are eight construction-sector redundancy funds with assets exceeding $500 million.
• Long Service Leave funds:  Where employees' money is held in trust and paid to them after long service in the industry.
• Training Funds

The funds are controlled by trustees appointed by unions and employer associations.

The significance of the Cole investigation was that the Commission was able to compulsorily acquire all the financial records of the trust funds and conduct an exhaustive forensic investigation of the accounts.  Probably never before have any superannuation funds in Australia been so thoroughly and publicly investigated as to their internal governance standards and practices.  The Commission was not interested in the funds' financial performance but whether funds were being used for the exclusive benefit of members.

The Commission investigated the following superannuation funds

• Allied Unions Superannuation Trust (Queensland) Building
• Unions Superannuation Scheme (Queensland)
• CONNECT Construction and Building Unions Superannuation Fund
• New South Wales Electrical Superannuation Scheme
• Superannuation Plan for Electrical Contractors (Qld)
• Westscheme Superannuation Scheme

There were no findings by the Cole Commission that any of the superannuation funds used members' money for any purpose other than the benefit of the members.  Findings were made about unions acting as 'enforcers' to require moneys to be paid to these superannuation funds.  However, that does not go to the question of the internal operation of the funds themselves.

The same cannot be said of the redundancy and long service leave funds.  The Commission found systemic misappropriation of member's funds including:

(a) the making of payments by industry redundancy funds to members in circumstances not authorized by the trust deed;

(b) the provision of welfare benefits by an industry fund exclusively for those of its members who were financial members of a union, thereby discriminating against members of the fund who were not union members; ...

(i) the receipt by a trust controlled by a branch of a union, of the proceeds of part of a commission paid on an annuity purchased by a trustee of an industry redundancy fund;

(j) the receipt by a trust controlled by a branch of a union, of distributions from a trustee of an industry redundancy fund, the source of such distributions being interest earned on payments made by employers for the benefit of employees; ...

(s) the distribution by an industry training fund of most of its general purpose funding to unions or union-controlled bodies rather than to 'bipartite' bodies as contemplated by the fund's objects; ...

(v) the approval by the board of an industry training fund of funding for a scheme to which discriminatory conditions of participation, favouring the sons and daughters of trade unionists, apply;

(w) the approval by the board of an industry training fund of a grant to a union for a 'safety and training officer' in circumstances where that officer in fact engaged in numerous tasks not related to training;  with the result that the funding was expended for purposes not authorised by the trust deed;

(x) the repeated renewal by the board of an industry training fund of a grant to a union for a 'safety and training officer' despite failing to receive acquittal of moneys provided ... ⁽¹⁸⁾

In other words, interest from trust funds was paid to unions, thereby breaching the purpose of the trust.  Union officials' children received privileged access to trust training moneys.  Training trust moneys were used by unions to fund their own activities.  Money was taken from trust funds for non-trust member uses.  Trust benefits were paid to union members and not to non-union members.

Examples of allegations of misuse of construction industry trust fund moneys have continued since the Cole Commission Report.  These include the use of funds to pay for international travel 'junkets'. ⁽¹⁹⁾

The Cole Royal Commission demonstrated that there is nothing inherently 'safe' about trust arrangements.  They do not guarantee that fund moneys are used entirely for the benefit of members and that funds are not misappropriated for other purposes.  Many other layers of oversight and protection are needed, including high-level disclosure of the details of how fund moneys are used.

CURRENT SUPERANNUATION FUND TRANSPARENCY

THE POLICY ENVIRONMENT

In mid-2009 the Federal government commissioned an inquiry, called the Review into the Governance, Efficiency, Structure and Operations of Australia's Superannuation System (the Cooper Review). ⁽²⁰⁾  The Cooper Review reports and submissions to it give a good insight into the thinking of the superannuation and financial industry on the governance levels required of superannuation.  The Review is being conducted by a panel with considerable experience in the financial and superannuation sectors.  Around 190 submissions were sent to the Review by organisations and individuals involved and/or interested in superannuation.  A Preliminary Report was released on 14 December 2009.

The 'government has articulated four principles that will guide its assessment':  'Simplicity', 'Efficiency', 'Equity', and 'Adequacy'. ⁽²¹⁾  Glaringly absent is the word 'transparency'.  This omission is, unfortunately, consistent with the style and approach of the governing Act, the Superannuation Industry (Supervision) Act.  It's also consistent with the regulatory oversight apparent from APRA and ASIC and with which those operating in the superannuation industry seem comfortable.

Neither APRA nor ASIC appear to undertake any form of direct auditing of the superannuation funds.

APRA publishes a summary of all superannuation fund performances online.  However, this summarises the returns supplied to APRA by the funds. ⁽²²⁾  It is not an independent assessment of the funds' performance.  That is, under current legislative requirements, APRA reports what the funds are reporting.

APRA appears to rely on governance processes stipulated under the superannuation Act to satisfy its integrity requirements.  That is, APRA assumes that the superannuation funds keep accurate financial records in line with standard accounting practices and have these accurately audited.  However, it is not possible to assess if the fund performance comparisons supplied to APRA enable accurate 'apples with apples' comparisons of performance to be made.  It is unknown if funds have differences in valuation methods.  For example, what is the timing of real estate valuations?  If some funds revalue their real estate holdings on a constantly rotating basis and others revalue property holdings on a set date in a year, performance results can be markedly different.

ASIC's available online information on superannuation funds is also scant, relating mostly to advice on process.  ASIC does provide general information on how to compare funds and funds' performance and supplies some general tables. ⁽²³⁾

However, ASIC makes it clear that it bears no responsibility for the accuracy of the data it supplies, stating 'ASIC acknowledges with thanks data supplied by the following agencies that rate super funds:  Morningstar, SelectingSuper and SuperRatings.  These agencies remain responsible for the data and we have not independently verified it.'

As ASIC makes clear, the real external performance oversight of superannuation funds' performance (other than their required audit processes) is done by three private ratings agencies.

• Morningstar is an international ratings agency.
• Selecting Super is a privately owned Australian entity.
• Super Ratings is a privately owned Australian entity.

What we conclude is that the official regulatory oversight of superannuation is focused on governance processes.  It is assumed that if the process of 'Trust' and statutory governance is adequate, that the superannuation system will have integrity, that transparency will occur and that potential for misappropriation or misuse of members' funds can be minimised.  This can be true to a point.  Proper governance process is essential to a superannuation system for it to have integrity.

But governance processes on their own do not give sufficient protection to fund members.  Instead the regulatory assumption ought to be that when the control of large sums of other people's money is put in the hands of comparatively small numbers of people that the capacity for maladministration, diversion of funds to other (non-member purposes) and fraud is ever-present.  This is not to suggest that this is happening in the superannuation sector at the moment.  However, it is irresponsible of the regulatory framework to operate on any assumption other than that risk is ever-present.  Operating on the regulatory assumption that governance processes themselves will guarantee transparency and protection equates to low-level regulatory oversight.

What would put an additional brake on the potential for misuse of superannuation member funds is the enforced disclosure of all asset listings, movements in values and fees and commissions.  That is, to require not only disclosure through governance process, but also disclosure of detailed, tangible facts and financial outcomes.

A MODEL FOR TRANSPARENCY:  BEST PRACTICE DISCLOSURE

The Panel views disclosure as one important way in which trustees can be made accountable to members:  that is, specific information must be given to members. ⁽²⁴⁾

APRA regulated superannuation funds should be required to conform to high mandated disclosure standards.

A fund member, investment advisor, or member of the public, should be able go into the website of any retail or industry superannuation fund and obtain enough information so they can understand where their money is invested, how it is performing relative to similar funds, who gets paid to manage and administer the fund, and how much is paid, and whether the fund's trustees have any cross-directorships.

These full disclosure and transparency declarations should be posted on superannuation websites every quarter.  By posting declarations quarterly, reflecting the previous quarter's activity and position, this would protect the confidentiality required in relation to funds' forward investment strategies.

This disclosure should be mandatory.  The law should require all superannuation funds to report these financial facts in a standard format.  Similar information should be supplied by outsourced fund managers and made available on the superannuation fund websites.

Full disclosure will not provide a guarantee against poor fund performance, misappropriation of funds, or fraud, but it is a basic essential step needed to manage and minimise the risks.

Default award funds, whether industry, corporate, retail or government must be held to a higher standard than those actively chosen.  As the Cooper Review notes, these are the funds the least sophisticated investors belong to and they are there under legislated mandate.  AMP also makes this point in their submission to the Cooper Review.

Increasingly, the ownership or legal structure of a fund is less relevant to the product design, pricing and other features offered to consumers.  The governance of the superannuation industry needs to reflect these developments, and while high regulatory standards should apply to protect all members of superannuation funds, arguably higher standards should apply to the "default" market where members do not make an active choice. ⁽²⁵⁾

It is an important operational principle to accept that default funds are a special superannuation case requiring the highest levels of disclosure.

STANDARD REPORTING FORMAT

Morningstar is a large international ratings agency providing independent assessments on the performance of Australian superannuation funds.  We believe it is worth citing in detail aspects of Morningstar's submission to the Cooper Review of Superannuation.

They paint a damning picture of poor disclosure in the Australian superannuation industry and are specific about what should be required to fix the situation.

The requirement should be for investment managers to publish quarterly asset allocations at a minimum.  Many investment managers currently disclose this information to Morningstar voluntarily on a monthly basis, and we advocate regular, comprehensive disclosure of portfolio holdings more generally (refer section 8.2.6 below).

8.2.6 Measures such as publishing trust deeds, offer documents, and related materials on websites are effective and economical ways of increasing transparency and member engagement. ...

It is, however, our view that the key disclosure issue for superannuation and funds management is the comprehensive, periodic disclosure of portfolio holdings (the stocks, bonds, and other securities which constitute the portfolios of superannuation funds and other pooled investment vehicles).

Australia lags global best practice in this area.  In a Morningstar study of global fund investor experiences published earlier this year, Australia and New Zealand were the only countries among the 16 assessed which do not require regular, full portfolio holdings disclosure.

Australian superannuation scheme providers and fund managers currently have a mish-mash of approaches to holdings disclosure.  Some disclose information on a monthly basis, some quarterly, and some not at all.  Some disclose their top 10 holdings only, and some nothing.

Superannuation and managed funds disclosure in Australia is also poor when compared with the extensive mandatory disclosure requirements for listed securities.

Regular, comprehensive holdings disclosure would also provide greater opportunity for detection of undesirable behaviours such as excessive turnover and 'window-dressing' (the practice of turning over a fund's portfolio holdings close to a reporting period, selling poorly-performing companies and buying strongly-performing ones, to make the fund's performance look better).

Additionally, there is little uniformity or consistency in other key information such as the identity of the people managing the money.  Product disclosure statements for superannuation funds and other pooled investment vehicles should disclose information such as the key individuals responsible for investment management. ⁽²⁶⁾

The law should require all superannuation funds to disclose financial facts in a standard format.  We agree with the position of Morningstar.

The following is the minimum we advocate should be disclosed and updated quarterly.  See Appendix A for definitions and characteristics of each asset class described in this section.

FUND ASSETS

Best Practice Reporting:  Traditional Exchange-Traded Asset Classes Top 20 Australian shareholdings by name, number and value. Top 20 International shareholdings by name, number and value. Country allocation for international shares Any substantial shareholdings notified to the exchange Fixed interest by portfolio maturity length and yield. Cash deposits held and with whom. External managers by asset class, name and value of funds managed with links to fund descriptions on the managers' websites.

These assets are generally re-valued at least daily by fund managers as standard operating procedure.  If the fund manager utilises daily unit pricing then the value of these assets is transmitted from the fund manager to the overall fund daily.

Industry superannuation funds make heavy use of fund managers. ⁽²⁷⁾  That is, industry funds decide on the asset allocation of the funds, into for example shares, property, fixed interest and cash then contract out significant portions of funds management to specialist organisations (fund managers) who have expertise.  This is sound, sensible practice.

As standard procedure external fund managers provide fully detailed reports to superannuation fund trustees, usually on a monthly basis.  However, the use of external fund managers is often used as the excuse for lower levels of disclosure because multi-manager funds (such as Industry super funds and retail master trusts) collate and consolidate their holdings data from a number of sources.

Perhaps surprisingly, the Australian Superannuation Funds Association argues against individual reporting of stocks and even pooled funds.

Reporting from super funds on the individual holdings of stocks, pooled funds, etc. can be very burdensome for super funds and investment managers and in many cases is already provided to individual members if they request it, and also to fund analysts and researchers for analysis of style and other portfolio return factors. ⁽²⁸⁾

This almost amounts to a plea for secrecy and must be rejected as a flawed policy and wrongly described as burdensome.  There is an abundance of software available that can bring together required information.  At minimum, it should be a straightforward procedure to report quarterly, in arrears, on a website, the overall holdings of the top 20 domestic and international shares, cash holdings and bonds.  Any claimed inability to do this must raise questions about the record keeping capacity and reliability of funds performance.

Best Practice Reporting:  Unlisted Trusts The following also should be reported including infrastructure investments, private equity holdings, total return portfolios and property trusts showing. Value of funds managed aggregated by fund manager External managers by asset class, name and value of funds managed Links to websites of individual funds.  E.g. The Stockland Direct Office Trust No. 3 website shows fund size, performance, names of properties with further links for more information (29) Links to the underlying investments in associated entity trusts, e.g. Industry Funds Management funds and ISPT for industry funds and other members of the overall group for retail funds

The overall principal for these types of assets is that a super fund member should be able to go directly to a listing of the underlying assets and see the values for any trust from links on the super fund website.  As investments in these assets tend to be long-term as do the underlying investments in the trusts, once implemented, maintaining this information should be straightforward and inexpensive.

Best Practice Reporting:  Direct Property, Property Development & Other Direct Investment All properties owned, the address, purchase date, purchase price, most recent valuation and yield. Properties leased to associated entities, (defined in the broadest sense) to whom the properties are leased and the rental amounts.

Investments in property developments should have special treatment.  This should happen particularly where the workers constructing the properties are also members of the superannuation fund.  Additional disclosure in construction was recommended by the Cole Commission.  This should include;

• financial or other interests, directly or indirectly, in any of the projects in which the super fund is an investor
• Interests of controllers or managers of outsourced fund managers in any of the projects in which the super fund is an investor
• Interests (including leases) of unions or industry associations who appoint the trustees to the super fund
• Any lobbyists associated with or acting for the super fund or the unions or industry associations who appointed the trustees to the super fund involved in seeking government approvals for projects in which the super fund is an investor?
• Any unions or industry associations who have appointed trustees to the super fund arranged or caused to arrange any arrangements, either commercial or industrial relations arrangements, that give special advantage to projects in which the super fund is an investor?

Best Practice Reporting:  Other Direct Investments Disclosure should list infrastructure, private equity and art investments providing; Name, value and size of shareholding for all assets Valuer, valuation date, most recent movements in valuation for all assets

Best Practice Reporting:  Associated entities & Any Other Assets Not Already Mentioned Related party direct investments, such as shareholdings, (as opposed to deposits or investments with) in industry superannuation vehicles such as ME Bank, ISH, ISPT and any other assets or investments not already listed and showing; Full list with shares held, amount paid (and any outstanding amounts if partly paid shares), value, valuation date. Dividends received

These shareholdings are generally long term in nature.  Once posted to the web this should not generally be expected to change much.

CONTROL & TRUSTEES

Control of super funds is formally vested in the trustees.  For industry funds, the majority (often all) trustees are appointed by employer groups and unions.  Retail fund trustees are often executives of the firm running the fund although independent directors are becoming more common in these funds.  Trust law is very clear as to the duties of trustees to act solely in the interests of the trust beneficiaries.

Because trustees are in such a powerful and responsible position, information about trustees and their capacity to undertake the duties of a superannuation trustee is of direct relevance to super fund members.

There is a complete divergence of views within the industry as to the adequacy of current appointment and suitability requirements for trustees.  In summary;

• Industry funds think equal representation of employers and unions is not only a suitable governance model of itself, they argue other models, especially executive or finance industry professionals dominated models are inferior.
• By contrast, retail funds think the qualifications and skills of trustees to discharge their duties are the important criteria.
• One group focuses on who appoints the other group on who is appointed. ⁽³⁰⁾

The Cooper Review recognizes that competence, rather than provenance, is of utmost importance in the effective supervision of superannuation funds.

Specifically, it believes that while individual trustee directors do not have to be technical experts across all aspects of superannuation, they must be able to understand and address effectively the issues they encounter as trustee directors.  They must be capable of setting the business, investment and operational strategies of the fund and overseeing its operation. ⁽³¹⁾

Unisuper raised an important and, it appears, untested and evolving area of law in relation to trustee capacity:

UniSuper would also like to see equal representation rules and the 'fit and proper' requirements for directors harmonised to avoid impasses where members elect directors who may not individually have the qualifications that APRA might expect.  In the past, it was sufficient if the board, assessed as a whole, met the requirement, whereas now there is a trend towards requiring every director to possess the requisite skills and expertise across all disciplines. ⁽³²⁾

Irrespective of one's view as to whether it is the appointment process or the attributes of the appointees which is important, the appropriate disclosure for all trustees should be:

Best Practice Reporting:  Disclosure of Appointment, Skills and Conflicts Who appointed trustees and when Formal qualifications relevant to their role Other relevant training completed and when All other positions they hold showing by name, other superannuation trusteeships and industry directorships Any links to fund managers the trustees may have, especially links to funds in which the superannuation fund has investments Any directorships of entities in which the superannuation fund has investments Any conflicts of interest

Of great interest in terms of transparency are all fees and other payments to trustees.  In general, these are not separately disclosed and the industry appears to have little appetite for full disclosure in the future.  The industry superannuation lobby association ASFA argue that only policies for remuneration should be disclosed and not the actual amounts paid be disclosed.

ASFA contends that there should not be a requirement to disclose to members the level of remuneration paid to directors and executives of super funds or remuneration arrangements of service providers. ... in the interest of transparency trustees should be required to disclose to members their policies around key governance areas, including remuneration. ⁽³³⁾

Remuneration policies are insufficient for adequate disclosure especially when this often means a statement to the effect that trustees also act as directors of the holding company of the trust and of this they receive no payment.  Such slippery statements hiding the fact the trustees are in fact paid to act as trustees.

A few superannuation funds do disclose actual trustees and executive remuneration, usually in the same way large public companies do i.e. in a table with remuneration bands.  Unisuper is a leader in this regard

[Unisuper] believes the industry should not ignore the basic tenet that remuneration is an important element in attracting and retaining talent.  Remuneration also sets an expectation that a Board appointment comes with the obligation to make a contribution worthy of payment. ⁽³⁴⁾

Best Practice Reporting:  Disclosure of Remuneration of Trustees and Senior Management Trustee payments, including all expenses should be disclosed in the same manner as listed public companies are required to disclose their payments to directors The same disclosure standards for executive remuneration applying to listed public companies should apply to superannuation fund managers. Information for the preceding financial year should be posted in html format on the superannuation fund's website.

FEES & COMMISSIONS

1. Fees & Commissions to External Service Providers

   The level of fees and commissions paid by super fund members has been the focus of a major marketing campaign by industry super funds for some years.  Distrust of commission based remuneration has become so strident within sections of the industry funds segment that the Industry Funds Forum seriously argued commissions should be banned altogether rather than just disclosed and 'representative trustees' i.e. the industry funds model be mandated.

   If commissions were banned, the governance arrangements of promoters could more easily be structured to reflect the success and need for a representative Trustee system to protect and grow Australia's retirement and national savings pool. ⁽³⁵⁾

   This is an extraordinary attack on a rival business model.  It smacks of self-interest promotion particularly as IFF says all funds should have a "representative Trustee system" as industry funds do.

   Industry funds claim that they charge members lower fees than retail funds.  This claim has been disputed on the public record by IFSA to the Senate EEWR. ⁽³⁶⁾  At least one industry fund, Cbus, recognises the current reporting of fees does not adequately capture wholesale investment management fees paid by both industry and retail funds.

   Cbus has some concern that most superannuation funds are not currently adequately reporting on the underlying investment fees incurred within fund of fund investments.  For a typical default fund investment structure, this can add up to 20 to 30 basis points to the total disclosed fee.  Cbus has spent significant effort on ensuring that all such fees are disclosed as part of our fee reporting to members, but we believe that few other superannuation funds are doing so.  Cbus would be happy to discuss this in more detail with the Review Panel. ⁽³⁷⁾

   It may be that retail funds' fees are more clearly declared because retail funds tend to manage their investments directly whereas industry funds make heavier use of outsourced fund managers.  It may be that the fund managers charge steep fees that do not show up in the industry funds' balance sheets.  For example one scenario could be if 'fees' were left undisclosed by offsetting against lower declared investment returns than would otherwise be the case.  There is not enough information disclosed by the superannuation funds to make any assessment.

   The Association of Superannuation Funds of Australia details a long list of ways expenses can be hidden from members.

   Examples of invisible costs are many and varied -- including fees in asset swaps, using intermediate company structures, different treatment for different elements of custody costs, soft dollar brokerage, custodians carving out margins for currency transactions etc.

   The list is long and can often involve addition of an extra layer of cost in order to make fees appear lower, which is clearly not in the best interests of members.

   Both corporate and public sector funds often incur expenses that are not recovered by fees, e.g. the employer (or government in the case of public sector) subsidises some of the costs of administration (e.g. in staff time spent on fund issues).  Some investment fees are not currently captured.  Some investment products involving multiple layers of fees (that may not be publicly disclosed by the superannuation funds that invest in the products) and performance fees are not consistently disclosed.

   Under the current rules investments could be arranged in such a way that the Indirect Cost Ratio (ICR) for many superannuation funds could be legitimately disclosed as zero. ⁽³⁸⁾

   One thing is known:  no-one manages money for nothing.  Everyone who manages money must gain income from the exercise to continue in the money management business.  What is needed is full transparency by superannuation funds so that assessments can be made of fees, commissions and other costs.  Then the accuracy of funds claiming to have lower fees can be put to the test.

2. Internal Fees & Expenses

   In addition to fees paid to external parties, whether they be commissions to financial planners from retail funds, investment management fees to fund managers or fees to outsourced fund administrators there are also internal fees and costs.

   Payments to trustees and senior executives are not the only internal expenses.  All expenses to related parties, other administrative costs and profit margin in the case of retail funds should be disclosed in actual dollar amounts and as a percentage of fund assets.

PERFORMANCE

There are a number of issues relating to superannuation performance that arise due to changing policy positions of successive governments and from the differing returns from the various asset classes and investment managers.  These issues relate to comparability, timeliness, value added, relevance and actual return.  We recognise that investment performance measurement is an area where policy requires trade-offs and that no one model will suit all investors.

Because this is a report about transparency through disclosure, we will highlight only three aspects of performance measurement:  timeliness, consistency and investabilty.

1. Timeliness

   Daily unit pricing should be mandated within the industry as the only appropriate standard to ensure fair treatment of all super fund members.  While mandating daily unit pricing for multi-manager funds may seem to be costly and difficult, in most cases those managers will either have end of day asset pricing for their listed investment portfolios or will be managers of slow changing unlisted assets.  In either case the information is available.  ING Australia sums up why daily unit pricing is the only fair investment performance measurement.

   INGA is a strong supporter of unit pricing and proposes that it should be the pricing methodology used for ensuring member equity in a superannuation choice environment.  The ongoing cost of daily unit pricing is minimal once it has been established.  The benefit of member equity outweighs the cost of implementation and administration.  The principle of 'member equity' is essential for any pricing methodology and is endorsed under the ASIC and APRA Good Practice Guide to Unit Pricing.  In most cases, superannuation investment options that allow members to transact daily should also be required to price daily.  In the case of members buying into an investment option, methodologies other than daily unit pricing, for example crediting rates, may give an advantage to some members and a disadvantage to others depending on their point of buy-in since the real price is not known and members may pay a value for the assets substantially more or substantially less than what they are worth.  Daily unit prices are designed to ensure that this inequity may be avoided since the unit price of the investment option will reflect its value. ⁽³⁹⁾

2. Consistency

   Consistency should allow meaningful comparisons of all funds and all similar types of funds.  As ASFA advocates below, it is imperative that performance data compares like for like, both in terms of fees and taxes but also risk profiles.

   Investment returns should be measured on a consistent post tax and post fee basis.  There should be standard rules around which fees should be deducted from the investment return (eg. only investment fees as defined on a consistent, mandatory basis).

   In order that fund members can be clear about what they are choosing, and so that investments can be fairly compared, investment options within superannuation funds must be measured and disclosed on a compulsory standardised basis in terms of their risk/return profile.

   If investment options continue to be categorised in the current way, there needs to be a compulsory standardised way of categorising assets into "growth" and "defensive".  There is also a need for compulsory rules for placing investment options into the categories of "growth", "balanced" etc. ⁽⁴⁰⁾

3. Investability

   A final aspect of performance is mandating what super funds can compare themselves to and related to that, their own benchmarks.  At a bare minimum, whatever the fund compares itself to should be something a member could have invested in.  Many superannuation funds compare themselves to the CPI which it is impossible to actually invest in.  If a fund is not comparing itself to some sort of risk adjusted benchmark based on its own default asset allocation or the industry average asset allocation then an appropriate comparison to use is the cash rate return for the period.

CalPERS:  AN EXAMPLE OF TRANSPARENCY

The California Public Employee's Retirement System (CalPERS) meets or exceeds the model transparency we advocate.  CalPERS lists all shares, both domestic (US) and international, their book value and market value.

All unlisted trusts are listed by name, book value and market value.  In the example below venture capital funds are presented.  It can be clearly seen than all of these investments are valued at below book value, allowing an investor in CalPERS to ask informed questions if that concerns them.

In addition to listing all payments of commissions and fees paid to investment managers and stockbrokers CalPERS lists every payment to consultants and professional service firms and also details what the payment was for (see below).  These payments range from temporary help for accounts payable through to membership for the Chief Investment Officer at a leadership council.

There is no transaction or asset of CalPERS which they do not fully disclose.  The reports are written in such a way that they can easily be understood by anyone with a basic grasp of financial reporting.  For people with high-level financial and analytical skills we believe that the CalPERS information would enable extremely high quality analysis to be carried out.

However, as the CalPERS fraud story related earlier shows, disclosure does not prevent fraud.  But it does make fraud and misappropriation of funds much more difficult and, if they do occur, more likely that they will be discovered.

CalPERS provides an example of the minimum disclosure standards that should be applied to Australian APRA-regulated superannuation funds.

OUR OWN INVESTIGATIONS INTO
AUSTRALIAN SUPERANNUATION DISCLOSURE

To test disclosure in the Australian superannuation sector, we undertook our own investigations.  The results further heighten our concerns.

We selected a list of major Australian superannuation funds and did two things:

• Searched their websites for disclosure information and followed up each fund with phone calls to see if additional information would be supplied on request.
• Undertook an Internet search of all publicly available information on the trustees and managers of the superannuation funds and their outsourced fund managers.

We selected 24 industry funds and 12 retail funds.  The industry funds are a mix in size ($1bn to $30bn), industry (blue collar, professional, white collar) and geographic spread.  The retail funds vary in terms of distribution networks, size, internal management and style.

The list is a selection of funds to give an indication of what an ordinary person doing a search could find.

OUR FINDINGS:  SUPERANNUATION DISCLOSURE OF INVESTMENTS

We ranked industry and retail funds on the asset disclosure model we advocated earlier.  For each type of disclosure we allocated a point, so if for example a fund disclosed its top 20 shareholdings in Australian equities it received a point and if it disclosed both the name of its fund managers and how much money it had with each it received another two points.  Not all funds invest in all the asset classes available and it is recognised that this methodology will favour a complex fund with good disclosure over a very simple fund with excellent disclosure.  As a result we have not included the actual names and points received of the funds we ranked.

No fund fully met the standard of disclosure advocated in this report however some funds do provide substantial amounts of relatively timely information to members and prospective members.

Below we provide a rating of funds disclosure based on our criteria

5 Stars *****
Fully meets needed disclosure standard

4 Stars ****
Approaches needed disclosure standard -- typically discloses some individual investments e.g. top 20 Australian shares, has good disclosure of external fund managers used, may disclose names of direct property or infrastructure holdings.

3 Stars ***
Average for Australia but insufficient disclosure -- typically has no details of individual investments and no disclosure of direct shareholdings in associated entities but has relatively good disclosure of external fund managers used.

2 Stars **
Inadequate disclosure -- this is a diverse group containing funds that are poor on external funds managers (often failing to list amounts held with each) but then manage to disclose one other investment type, i.e. direct investment names or associated entity investments.

1 Star *
Poor disclosure -- this group provides very little information with usually their only disclosure (out of greater than 20 possible disclosure points) being the names of some of the external fund managers used but with no listing of amounts held with each.

Table 10:  Industry and Retail funds ranked by level of disclosure

Disclosure Rating	Percentage & (Number)
	Industry Funds	Retail Funds
***** Fully meets needed disclosure standard	0	0
**** Approaches needed disclosure standard	21% (5)	42% (5)
*** Average for Australia but insufficient disclosure	46% (11)	33% (4)
** Inadequate disclosure	17% (4)	17% (2)
* Poor disclosure	17% (4)	8% (1)

Source annual reports, web pages, Author's analysis

Industry Funds

Most Industry funds disclosure was at 30 June 2009.  Typical disclosure included a list of investment managers by asset class and how much money is managed by each external fund manager.  On contacting the funds there is no more recent information available.  There is a legal obligation to disclose assets over 5% of the portfolio and most Industry managers interpreted this to mean by fund manager rather than individual assets.

The best disclosing funds reviewed provided substantially more information than the average.  One fund provided the top 20 ASX and international share holdings as at 31 December 2009.  Current asset allocation was disclosed and a quarterly stock voting report was posted to the website.

Two other funds invest large amounts of their default portfolio in a type of portfolio which invests in infrastructure, private equity, high yield bonds, property and other assets not traded on exchanges.  Both of these funds disclose major investments in actual properties and infrastructure investments.

Other funds were judged as above average.  One lists individual properties owned by the fund and provides additional information about its properties.  Another has the most detailed information on trustee cross-directorships and trustee remuneration.  One fund also discloses large infrastructure investments and individual properties.

The Industry Funds classified as below average in disclosure listed their external managers without disclosing how much was allocated to each manager.  With a few exceptions there was no listing of direct investments.

Retail Funds

As a group, the Retail Funds offer more disclosure than the Industry Funds.  This is particularly true of funds managed by a single manager although even multi-manager funds -- the equivalent of most Industry Funds -- disclose allocation by manager as at 30 September 2009.  In general the retail funds offer more timely information on their websites.

It is necessary to note that most retail funds are owned and operated by wholesale funds managers -- the same managers who manage portfolios for the industry funds.  If retail funds are capable of publishing their own asset and performance data it must also be available for the wholesale portfolios they manage for Industry Funds.

The best of the Retail Funds were on a par with the best of the Industry Funds in terms of disclosure.  For example one retail fund provides the top 10 stocks for single manager funds as at October 2009 and for multi-manager funds twice a year.  Another discloses actual asset allocations to 31 December 2009.  And another lists every share held in the fund (although without weights) and asset allocation by sector as at 31 July 2009.

The worst disclosure from Retail Funds mirrored poor disclosure from industry funds.  One retail fund for example offers relatively good disclosure of single asset class funds they manage but is entirely lacking on information for multi-manager, multi-asset class funds.  Another appears to offer no asset allocation information at all for the general public.

General Comment

This rating of 36 funds represents 35 per cent of industry funds and 7 per cent of retail funds and is a sample only.  There may be funds not included in this list that may have disclosure levels that we would consider as meeting the necessary disclosure requirements.  However our assessment is consistent with comments made by Morningstar and others referred to previously.  The standard should be that 100 per cent of funds meet the disclosure standards necessary for an ordinary person to gain a good understanding of what is happening with their superannuation retirement money.  This is clearly not occurring.

CONCLUSIONS

Australia leads the world in the non-government management of retirement savings.  On the evidence from this report, the level of disclosure from the superannuation funds accorded default (monopoly) status is insufficient.

There is insufficient information available from the superannuation funds to be able to make a full assessment about what is occurring with Australians' retirement nest eggs.

Further, the low levels of disclosure mean that the accuracy or otherwise of superannuation funds performance cannot be tested or verified by fund members themselves or anyone with an interest.  The compulsorily nature of superannuation, in particular makes the poor disclosure highly unacceptable.

Fixing this problem will require the imposition of the highest levels of disclosure on to the APRA-regulated superannuation sector.

APPENDIX A:  DEFINITIONS TO
UNDERSTAND SUPER FUND ASSETS

Assets are what the fund invests in.  Superannuation funds may package these varying asset classes into investment options, known as balanced funds, or they may allow members to invest in single asset classes such as Australian Shares.

Traditional exchange-traded asset classes

These are listed assets.  That means they are traded on stock exchanges or other markets and are highly liquid (i.e. easy and quick to buy and sell).  These are the asset classes traditionally invested in by superannuation funds.  The asset classes are Australian and international equities, listed property trusts, cash, fixed interest.  Equities (shares) and property are regarded as growth assets, while cash and fixed interest are defensive assets.  This means equities and property have a higher risk and a higher return profile compared to cash and fixed interest.

Listed equities can be single companies such as BHP Billiton or Woolworths but they can also be listed investment trusts.  Listed property trusts are one example but others include listed infrastructure funds such as Challenger Infrastructure Fund or private equity funds such as ING Private Equity Access.

The value of these asset classes fluctuates as much as second by second while the exchange is open.  And because they are so easily traded the makeup of a portfolio of these types of assets can vary day by day, or even more.  A portfolio of traded assets can be valued in real time with end of day reporting standard.

Most superannuation funds invest in these assets via external managers although occasionally a super fund will make a direct investment in a single company or listed trust.

Unlisted trusts

Popular unlisted investment categories include property, infrastructure and private equity trusts.  Unlisted property trusts and infrastructure trusts invest in property and infrastructure respectively in the same way as those listed on stock exchanges but entry and exit from these funds is via application and redemption rather than buying and selling units on the exchange.  As a result unlisted property and infrastructure trusts are less liquid (harder to turn into cash) than listed trusts.  For example, investors in The Stockland Direct Office Trust No. 3 can apply to sell their units based on the net tangible asset backing for the last quarter, (less a discount).  There is a queuing system and limits on how many can be processed in a quarter. ⁽⁴¹⁾

Private equity funds can be venture capital providers to start-up ventures, concentrated in a single industry e.g. biotechnology, or focussed on companies with distressed assets.  The scope is very broad and as a result the risk profile of private equity funds varies.

Unlisted funds are a growing asset class for many superannuation funds.  Specialist firms create portfolios of assets in many categories.  These funds can be either open or closed.  Open funds allow new money to be invested which the managers then use to invest in further assets.  Closed funds do not permit new investment and hold a fixed portfolio of assets to maturity.

The valuation of these assets changes less often than that of listed assets.  However, the makeup of the underlying assets also changes less often than for listed assets.  While individual shares can be bought and sold within a day, properties and start-up businesses are often held for years.

Superannuation funds can either invest in these trusts directly or engage an external manager who invests in these funds for a number of clients.

Direct investment (including property)

Some superannuation funds invest directly in certain assets.  As was noted above occasionally a fund will buy and sell its own shares or other listed assets.  However, by far the largest category of direct investment is property, with some funds such as Cbus having significant proportions of their funds directly owning entire commercial properties.

Increasingly infrastructure is also seeing direct investment by superannuation funds.

The value of direct investments depends on the valuation policies of the fund and typically changes infrequently, perhaps as little as once a year for property and infrastructure but daily for listed shares.  And similar to unlisted trusts referred to above, the assets are often held for long periods of time.

Associated entities

All of the above investment types whether listed or unlisted, managed or direct, have two characteristics.  First, they are purchased in the expectation of a measurable investment return, either from income (dividends, interest, rental income) or capital growth.  Second, the assets are managed and controlled external to the fund on commercial terms.

As was detailed in the main body of the report, there is also a large, and growing, group of investments associated with Industry Funds Holdings (ISH) and ISPT.  Thirty-six industry funds are shareholders in ISH and 24 are shareholders of ISPT.  Industry funds also invest in administration companies, promotion companies, financial planners and training organisations controlled by industry funds or the ACTU.  Some retail managers may have similar investments in associated financial planning networks, foreign subsidiaries or other associated entities.  Many of these assets pay no dividends and their return potential is difficult to assess.

---

ENDNOTES

1.  Public sector funds are often now closed to new members and are sometimes 'unfunded', i.e. the governments pay benefits from consolidated revenue as they arise rather than accumulating investment funds that then pay out benefits.

2.  Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System (Cooper Review).  "Clearer Super Choices:  Matching Governance Solutions." 2009, p. 4.

3.  Australian Prudential Regulation Authority (APRA).  "Annual Superannuation Bulletin "as at June 2009, 2010, p. 6.

4.  Association of Superannuation Funds of Australia (ASFA).  "Superannuation Statistics - March 2010." 2010.

5.  Note:  the number of fund members significantly exceeds the size of the Australian workforce (about 10.5 million) and the Australian population (21.8 million).  The disparity simply reflects the fact that many Australians have money in several superannuation funds.

6.  ASFA.  "Superannuation Statistics - March 2010." 2010.

7.  Ibid.

8.  Ibid.

9.  Ibid.

10.  Ibid.

11.  Senate Standing Committee on Education, Employment and Workplace Relations (EEWR).  Fair Work Bill 2008 Hearings.  Sydney, 18 February 2009, p. 50.

12.  Cooper Review.  "Clearer Super Choices:  Matching Governance Solutions." 2009, Appendix 1, p. 19.

13.  Senate EEWR.  Fair Work Bill 2008 Hearings.  Sydney, 18 February 2009, p. 52.

14.  Ibid, p. 50.

15.  All screen shots taken 22 February 2010.  Media coverage calling for additional disclosure in the Age and Sydney Morning Herald appeared on March 20, 2010.  As at 2 April 2010, a link to the ISPT 2009 Annual report was included.

16.  Lifsher, Marc.  "CalPERS, CalSTRS See Long-Term Credit Ratings Lowered."  Los Angeles Times, 11 December 2009. (and) "CalPERS to consider stiffer rules."  Los Angeles Times, 16 November 2009.

17.  www.royalcombci.gov.au

18.  Cole Commission Report, Volume 10, pages 8–10.

19.  Masanauskas, John.  "Revealed:  Union Boss's $80,000 Luxury Junket."  Herald Sun, 13 November 2008, p. 1.

20.  http://www.supersystemreview.gov.au

21.  Cooper Review.  "Clearer Super Choices:  Matching Governance Solutions." 2009, p. 3.

22.  See http://www.apra.gov.au/Statistics/Superannuation-Fund-level-Publications.cfm "Data in this publication has been prepared from the superannuation returns submitted to APRA under the Financial Sector (Collection of Data) Act 2001.

23.  See http://www.fido.gov.au/fido/fido.nsf/byheadline/Long-term+performance+figures+for+typical+super+fund+investment+options?openDocument

24.  Cooper Review.  "Clearer Super Choices:  Matching Governance Solutions," 2009, p. 14.

25.  AMP.  "Response to the Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System, Phase 1 - Governance." 2009, p. 6.

26.  Morningstar.  "Submission to Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System, Phase Two:  Operation and Efficiency." 2009, p. 4, 5-6.

27.  Note:  Retail funds tend not make heavy use of fund managers, as they generally have investment expertise in-house.  In fact, the parent organisations of retail funds are often outsourced fund managers used by industry funds.  Hence fund manager disclosure requirements are likely to have a higher impact on industry funds than on retail funds.

28.  ASFA.  "Submission - Super System Review -- Phase Two:  Operation and Efficiency," 2009, p. 40.

29.  http://www.stockland.com.au/investor-centre/unlisted-property-funds2_stockland-direct-office-trust-no-3.htm

30.  See submissions to the Cooper Review by Industry Funds Forum, Cbus, AMP, AXA, Industry Super Network and Tower for examples of the divergence in views.

31.  Cooper Review.  "Clearer Super Choices:  Matching Governance Solutions," 2009, p. 12.

32.  Unisuper.  "Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation Industry, Phase 2:  Operation and Efficiency.  Unisuper Submission." 2009, p.9.

33.  ASFA.  "Submission - Super System Review -- Phase Two:  Operation and Efficiency," 2009, p. 46.

34.  Unisuper.  "Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation Industry, Phase 2:  Operation and Efficiency.  Unisuper Submission." 2009, p.9.

35.  Industry Funds Forum (IFF).  "Submission to the Australian Government in Response to the Issues Paper "Phase One Governance"." 2009, p. .

36.  Senate Standing Committee on Education, Employment and Workplace Relations (EEWR).  Fair Work Bill 2008 Hearings.  Sydney, 18 February 2009, p. 50, 53.

37.  cbus.  "Superannuation System Review, Phase One:  Governance - Submission." 2009, p. 5.

38.  ASFA.  "Submission - Super System Review -- Phase Two:  Operation and Efficiency," 2009, p. 37.

39.  ING Australia.  "Submission to the Review into the Governance, Efficiency, Structure and Operation of Australia's Superannuation System (the Cooper Review)." 2009, p. 12.

40.  ASFA.  "Submission - Super System Review -- Phase Two:  Operation and Efficiency," 2009, p. 5.

41.  http://www.stockland.com.au/investor-centre/unlisted-property-funds2_stockland-direct-office-trust-no-3.htm

Better use of tax take needed

There are more myths surrounding corporate taxation than personal taxation.  In years gone by many used to argue that the "rich" didn't pay their fair share of taxation.  In a series of articles published in 2004, I demonstrated that argument was false.

In those days the top 25 per cent of taxpayers paid 64 per cent of personal net income tax -- that figure has since increased to 67.4 per cent.

Corporate tax is in a similar position.  A very small number of very large companies bear the Australian corporate tax burden.  Tax Office data reveals that a mere 4105 companies, about 0.5 per cent of the total number eligible to pay corporate tax, paid 76.3 per cent of that tax in 2007-08 -- up from 74 per cent the previous year.  At 25.8 per cent, the effective corporate tax rate for these large taxpayers is close to the statutory rate of 30 per cent.  In other words, the corporate tax burden is very real.  It is commonplace to argue that big companies pay no tax, but the fact is most companies pay no tax.  Those that do tend to be big and tend to pay the lion's share.  The corporate tax is a tax on profit;  the 0.5 per cent that paid 76.3 per cent of the corporate tax earned 72.5 per cent of the taxable income.  The corporate tax system works well and works as it is designed to work.

The notion that companies should pay more tax is just nonsense.  The corporate tax take as a percentage of gross domestic product is already very high, by the Organisation for Economic Co-operation and Development's standards.

Furthermore, government revenue as a percentage of GDP is close to the long -term average revenue.  Budget deficits are due to increased government spending.  Rather than companies and individuals paying more tax, the government should cut spending.  As the latest Intergeneralional Report made clear, Australian public finance is on an unsustainable path.  Government is spending beyond our means to pay.  Every dollar that is taxed reduces the productive capacity of the economy to provide goods and services.

Rather than demonising those sections of civil society who already pay tax, the revenue lobby should consider better use of the existing tax take.  The government needs to live within the constraints of a productive and growing economy.  Bumps in the road, such as the recent financial crisis, might lead to temporary and small declines in revenue, but they should not be excuses to permanently increase the size and scope of public spending.

The challenge facing the government is to restrain spending and cut taxation so the economy can provide the lifestyles we aspire to through enhanced growth and opportunity, not through government expansion and redistribution of existing wealth.

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Green Tea party

Call it Tea Party derangement syndrome.

For the ABC's Kim Landers, writing on The Drum a fortnight ago, the Tea Party Movement inspired thoughts "about the rise of One Nation and Pauline Hanson in Australia."

And in the National Times in February, Bella Counihan speculated about the possibility of Hanson running as a Tea Party sponsored candidate.

The Tea Party Movement has been a force in US politics for more than a year now, arising in February 2009 to oppose George Bush's extraordinary bailouts of the banking system.

But what seems to really perplex Australian commentators is the idea that an American grassroots movement could be against Barack Obama's health care reform.  Many Australians seem to imagine that being anti-Obama's plan is same as being pro-death -- how could people be protesting it?

But the Obama plan is less about ensuring free health care than making it illegal for individuals not to buy health insurance.  And the plan eliminates many low-cost insurance options, compelling nearly a third of the country to switch to more expensive insurance.

So putting aside the occasional Tea Party hyperbole -- Barack Obama is not literally a member of the Communist Party -- being opposed to the health care legislation isn't a priori evidence of craziness.

Pauline Hanson's supporters had a scattershot animosity towards immigrants, aborigines, and greenies.  The Tea Party Movement is concerned about a much more prosaic thing:  the reckless spending of the federal government.

Certainly, George Bush was a massive spender.  Of all the presidents since the Second World War, only Lyndon Johnson increased federal spending more than Bush did.

But Barack Obama makes Bush administration look cheap.  His proposed budget for this year increases taxes by $3 trillion over the next decade.  And his policies will increase the national debt will by $9.7 trillion.

Few areas of the federal spending are as out of control as health care.  Obama's plan will do nothing to keep down costs.

And the US government now pretty much owns General Motors.

Is being opposed to a massive transfer of wealth from taxpayers to bailout private banks and car companies, or being opposed to massive tax hikes and huge budget deficits, really the same as claiming that we're being swamped by Asians?

The Tea Party was sparked by the extraordinary bailouts at the start of the financial crisis, but there has been distress within American conservative circles about uncontrolled government spending for some time.

Porkbusters was a campaign started in 2005, dedicated to exposing examples of government waste.  Things like $1.8 million for swine odor and manure management research, and $50 million for an indoor rain forest for Iowa, slipped innocuously into an unrelated energy bill.

It was Porkbusters which exposed plans for the infamous "bridge to nowhere" -- a federally funded, $398 million bridge to an island in Alaska that has fifty inhabitants and an airport.  The island was already serviced by a ferry every half an hour.  Sarah Palin campaigned on a "build the bridge" platform when she was running for Alaskan governor in 2006.

The bridge was cancelled.  Palin now claims to be a born-again Tea Partier, dedicated to opposing pork in all its forms.

Clearly the movement has a quality control problem.

There is a belief that if Obama tackles immigration reform, the Tea Party movement will reveal itself as nativist and anti-immigration.  But a recent survey of Tea Party members found their views on immigration roughly corresponded with those of the general US population.

That's not to say there aren't members who want to crack down on illegal immigrants.  Tom Tancredo, a prominent anti-immigration Republican, addressed the Tea Party national convention in February this year.

Dick Armey (chair of the conservative group FreedomWorks and as close to a "leader" as the Tea Party movement has) is trying to keep voices like Tancredo out.

But worse again:  the convention also controversially invited a "birther" to speak, who wanted to ensure "signs saying 'Where's the Birth Certificate'" followed Obama everywhere in the 2012 campaign.

These distasteful elements are a direct result of the Tea Party's lack of structure and leadership.  On the one hand, the Tea Party is being courted by mainstream Republicans looking for endorsement.  But on the other hand, fringe groups like the Larouchites, birthers, 9/11 truthers, and the John Birch crowd see the Tea Party Movement as a possible vehicle for their own message.

It's messy.  But it's no more messy than the writhing mass of ideologies and agitators who comprised the Vietnam-era New Left.

There is one parallel between One Nation and the Tea Party Movement.  Their members feel ignored and disenfranchised by politicians and political elites.

Both want governments to justify their decisions to the people.

That's not necessarily a bad thing.

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Climate law: what's in it for the US?

After the passage of his sweeping healthcare reforms, Barack Obama is turning his sights to combating global warming.  This month, the US Senate is expected to take up a comprehensive environmental bill, albeit one heavily laden with subsidies and concessions to industry and offshore drillers, and the President is encouraging several Republicans and centrist Democrats to support it.

All the signs, however, indicate that the new climate and energy legislation from senators John Kerry, Lindsey Graham and Joe Lieberman won't pass before November's congressional elections.

Failure would not only hurt the Democrats' legislative agenda.  It would also have global ramifications, dramatically diminishing the prospects for Prime Minister Kevin Rudd's emissions trading scheme as well as a post Kyoto international agreement in Mexico City later this year.  It was not supposed to be this way.

When he campaigned for the White House, Obama pledged to introduce a comprehensive cap-and trade system -- another term for what we call an ETS -- that would slash US greenhouse gas emissions by 80 per cent of 2005 levels by 2050.  The signs looked encouraging for the new President last June when the House of Representatives narrowly passed a bill, named for its co-sponsors Henry Waxman and Ed Markey.

To be sure, the pork-plagued bill capped greenhouse gases at only 17 per cent from 2005 levels (or 4 per cent from 1990 levels) by 2020.  But the legislation was nonetheless seen as an important step in reducing America's carbon footprint.  A new era had dawned, Obama declared.  "We understand the gravity of the climate threat.  We are determined to act."

That was then.  The recession, record snowstorms, massive Tea Party rallies, mounting industry opposition, climate-gate and glacier-gate scandals, and failure to reach a legally binding global deal at Copenhagen, have all dampened the political climate for a new climate law.  AI Gore's moment has come and gone.

Without a filibuster-proof majority in the Senate, 60 votes are effectively required to pass legislation.  The President needs to win over not only a few Republicans but also several Democrats from plains, mid-west and southern states that are heavily dependent on coal and manufacturing.  In Washington, climate politics is just as much about geography as partisanship.

In recent weeks, Obama has championed the new bill's plans to expand offshore drilling and nuclear power generation.  But however much the White House and the architects of Senate legislation try to court sceptics, the chances of a climate law remain small.

For one thing, environmental groups and liberal Democrat senators, especially from oceanside states, are strongly opposed to offshore drilling.

And although conservatives are largely in favour of ending the ban -- remember Sarah Palin's "drill, baby, drill" catch phrase during the 2008 election -- many Republicans warn that Obama's proposal is too modest.

Polls, moreover, show rising scepticism of the science of man-made climate change.  A December 2009 Harris poll found that only 51 per cent of Americans think there is solid evidence that the Earth is getting warmer, down from 71 per cent two years ago.

The number of Americans rating climate change as a major policy priority at a time of 9.7 per cent unemployment and when China and India are chugging along the smoky path to prosperity is also dropping dramatically.

So much so that emissions trading has fallen out of favour in Washington.  Obama's Secretary of the Interior, Ken Salazar, recently said:  "I think the term 'cap and trade' is not in the lexicon anymore."

Meanwhile, climate change fatigue is setting in all over the globe.  The governments of China and India insist they won't join the West in what they see as an economic suicide pact.  In France, the Sarkozy government recently shelved plans to introduce a carbon tax.  In Germany, polls show only 42 per cent of Germans worry about global warming.

In the European Union, the ETS has been a victim of fraudulent traders and done little to curb emissions.  In Canada, the ETS is stalled in legislative limbo.  And in Australia, Opposition Leader Tony Abbott's "direct action" plans are more popular than Labor's tax that dare not speak its name.  In this changing climate, why on earth should the US unilaterally make carbon cuts that would cause economic pain for no environmental gain?  It's a question that Obama and his Senate allies will struggle to answer this election year.

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Climate change requiem

Under pressure from local election defeats, the French Government has abandoned its plans to introduce a carbon tax, having suddenly discovered it would, "damage the competitiveness of French companies".

Kevin Rudd once described reducing carbon dioxide emissions as the great moral dilemma of our time.  Like Barack Obama, he has now switched off this agenda and turned to health.

This reflects a global declining interest in the matter perhaps as a result of scientific advisers having been discredited following demonstrable evidence that they had, at the very least, over-egged the cake.

The battle against measures to reduce carbon emissions is however hardly over.  The issue has fuelled too many careers in politics, science, public service and the media for its beneficiaries to quietly move on.  Recent public relations barrages by the CSIRO and gatherings in Canberra and Melbourne of the many beneficiaries of the scare is being repeated around the world.

And the policy momentum is on-going.  We are still incurring wasteful expenditures, including on intrinsically uneconomic renewables, the will-of-the-wisp of carbon capture and storage, and draconian energy saving regulations.

But any new proposals for suppressing carbon emissions will simply be the wrapping paper for new taxes.  And France's experience shows that even this is a risky policy approach.

So what was it all about?  What was on the alarmists' minds behind the spurious rhetoric about a re-emergence of long-suppressed diseases, increasing numbers of cyclones, disappearance of Arctic ice and the extinction of local colonies of butterflies?

It was certainly not the cost to humanity of a warmer climate.  Even pessimistic assumptions used by the official estimates put the costs as low.  And those estimates were invariably carefully buried in hundreds of pages of diagrams, tables and trivia.

The IPCC assessment was for little economic change with temperature rises of 1 to 3°C, adding, "(By 2050) global mean losses could be 1 to 5% of GDP for 4°C of warming." This was in the context of GDP that is estimated to more than double.

For Australia, the costs of doing nothing by the end of the century were estimated by Treasury at 5 per cent of GDP.  Significant though this may be, it is dwarfed by the increase in GDP -- sixfold -- that is estimated to take place under business-as-usual.

Treasury also estimated the costs of taking action to reduce our per capita emissions to 12 per cent of those presently prevailing would be just a few percentage points of national income.  This rested on Pollyanna modelling assumptions about new technologies that would burst upon us and compensate for the forced total restructuring of the nation's industrial structure and the progressive elimination of coal, our greatest export industry.

The centralised control that climate restraint would entail led people like Lord Monckton and Czech President Vaclav Klaus to see the whole climate debate as a replay of long standing conflicts between those who want to direct our lives and those who are especially attached to individual liberty.

There are, indeed, many public officials who stood to gain from stoking the global warming flames.  Global warming was also an outlet for people concerned about the inequities and injustices of the modern world.  Many of these aspire to a simpler pre-industrial arcadia, though their main spokesmen, the Gore's, Pachauri's, and Prince Charles's would want to exempt themselves from the privations involved.

Even though the alarmists claim their opponents received massive financial support, they could never identify this.  That's because there was none -- support for the sceptical view would have amounted to less than one per cent of that accruing to the alarmists.

This lack of support for skeptics may be due to individual liberty being nowadays so readily taken for granted.  The enlargement of the state both within the economy and within our lives has not been seen, by-and-large, as excessively intrusive.

Nonetheless, as well as begetting a new class of drones, the greenhouse scare has created a serious diversion of resources.  This includes all the entrepreneurs who have seen better opportunities in lobbying for assistance for everything from pink batts to carbon storage schemes.

Potential greenhouse taxes also mean additional energy costs and risks to energy intensive developments that lie at the heart of Australia's comparative advantage.

The threat of such taxes makes it impossible for any private sector business in Australia to contemplate building a new coal fired power station.  Yet, if we are to avoid economic stagnation we will need additional conventional power supplies.  This is because we are unlikely to see the need for these becoming redundant.  Forecasts of improved efficiency of wind, new sources of power and vast new economies denting demand for electricity will not eventuate.  Commercially developed new gas fired generation remains possible in a political environment where a carbon tax is threatened.  However this is more expensive than coal power and undermines Australia's cost competitiveness.

The corollary is that new investment in electricity generation will require government indemnification guarantees against the possibility of a carbon tax.  This in turn means government control over new capital expenditures and takes us back to the past of politically managed investments gradually unravelling the vast productivity increases that privatisation has brought.

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Who should run the biggest business in the country?

Peter Garrett displayed "monumental incompetence" when it came to managing the government's insulation scheme, claimed Tony Abbott in February.

Put aside for a moment whether Abbott is right.

The federal government spends nearly 28 per cent of our GDP.  It's the biggest business in the country.  So imagine being Prime Minister.  Imagine choosing who makes up your cabinet -- who should be in charge of all that?

They've all got to be politicians with a spot in federal parliament.  That's the first major hurdle.

Skills that make someone an effective politician are not necessarily skills that make someone an effective manager of a national, multi-billion dollar enterprise.

It's a rare preselection which takes into account a candidate's capacity to run a large enterprise.  The art of politics is the art of accumulating rank and power at the expense of others -- not the first priority when looking for a capable manager.

Sure, everyone claims to have "leadership qualities" (parliament is full of future Prime Ministers) but few claim to be future executives.

Nevertheless, out of this less-than-inspiring crop of 226, you can only pick from your team.  Labor has 115 MPs and Senators.  And there are nearly 50 cabinet, ministerial, and parliamentary secretary positions to fill.

You have to take into account seniority and potential, youthfulness and senility.  Then factions -- you don't want your controversial pick for the Parliamentary Secretary for Social Inclusion and the Voluntary Sector to be the reason you are rolled two years down the track.

And you've got to get the gender and geographic balance right.

All that is before you start considering who would actually be good at managing a government department.  Or who is interested in the department you'd like for them.  A parliamentary secretary for ageing in the Howard government reportedly once let it slip that he was less interested in his portfolio than his real "passion" -- foreign affairs.

You have to hope that the best people are in the safe seats.

It's a bad look for your government if at the next election you hold power but lose your three most important ministers in one per cent swing.

Choosing from such a limited pool, the question isn't why ministers fail.  It's how they ever succeed.

So one of the weakest attacks you can make on a government is that it is incompetent -- could you expect anything else?  Oppositions like claiming the other side is incompetent because it implies they would do better even if they had the exact same policies.

That way, when the opposition identifies widespread failures, it need not undermine all the grand plans they have for their turn in power.

The Labor Party in opposition was no exception.  They were fairly certain the Howard government was the most incapable, inept, and (lest-we-forget) most "out-of-touch" in Australia's history.

But the Rudd government's problem isn't incompetence.  It's ambition.

In early 2009, the insulation scheme seemed like a small element of the Rudd government's stimulus package, but, in retrospect, it was actually a pretty big deal.  It is hard to imagine any government minister, no matter how skilled at policy implementation, could dump $2.7 billion into an industry and not have it flooded with dodgy operators out to make a quick buck.

Yet this was the whole point -- funneling (presumably unemployed) workers into an industry which required little skill.  In one stroke of a multi-billion dollar pen, the Prime Minister could save the economy and save the environment.

Over-ambition, not incompetence, explains why the government is still struggling to deliver its election promises.  The school laptop program has still barely started, and the GP super clinics, and the childcare drop off centres.  FuelWatch and Grocery Choice have been abandoned.

But it's only by chance we've been able to peek behind the curtain to see other government policies which have been badly undercooked.

Yourhealth.gov.au was supposed to be a major health initiative -- a forum for consultation where Australians can go with their ideas about the health system.  But according to a whistleblower writing in The Sunday Age, it was done in a weekend;  conceived on a Friday, released on a Monday afternoon.

And, as we learnt from the Godwin Grech affair last year, Ozcar -- the "vital" bailout package of the automotive sector -- was entrusted to a solitary, sickly bureaucrat, clearly in way above his head.  Grech was the only one the Treasury Department put to work on it.  So every time he took time off work, progress on the apparently essential bailout simply stopped.

These make the insulation scheme look like an exemplary model of policy implementation.

Dealing with policy failures is not a matter of shuffling around ministers, or even voting out governments.  The surest way to avoid policy failures is to have fewer policies.

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Face facts and adapt to warmer world

It might not seem like it, but climate sceptics and climate alarmists agree on a fair bit.  One of the biggest flaws with both Kevin Rudd's emissions trading scheme and Tony Abbott's direct action plan isn't that they are great big taxes or climate con jobs.  It's that they are futile.

Any Australian cut in carbon dioxide emissions is worthless if not part of a global effort.  And right now it looks like the chances of a global agreement on serious emissions cuts are effectively nil.  You don't have to be a sceptic or alarmist to understand a policy that can't achieve its goal is a failure before it starts.

The Copenhagen meeting reminded the world the domestic politics and pressures of emerging economies like China and India cannot easily be submerged by a global flood of environmental goodwill.  And without including those two polluters, a global agreement will be meaningless.

Worse, it will look meaningless.  That is a bigger problem for leaders like Kevin Rudd who wanted success in Copenhagen to endorse their leadership at home.  Foreign policy is domestic politics with translators.

There will be another United Nations climate meeting in Mexico City later this year.  Don't get your hopes up.  Yvo de Boer, the UN climate chief who retired in February, told the Financial Times he did not expect an emissions treaty in 2010 either.  And public support for emissions reduction is dwindling.  If you, like our Prime Minister, believe climate change is the greatest moral challenge of our time, you're probably pretty glum.

But we haven't had the genuine debate about climate policy.

We could keep trying to stop global warming with taxes, industry plans, corporate welfare, solar panel and insulation subsidies, and fruitless diplomacy.  Or we could try to adapt to it.  After all, the problem with global warming isn't the warming per se, it's the consequences of warming.

Climate change has a disproportionate impact on the poor.  The developing world has neither the resources nor the infrastructure to cope with changes in climate.  Bangladesh is more at risk from climate change than Holland, even though both are susceptible to flooding.

Bangladesh doesn't need global carbon dioxide emissions to stabilise.  Bangladesh needs to become like Holland.  The poor need to get rich.  They need economic growth.  It also makes countries resilient against disasters not caused by climate change, like the earthquake in Haiti.

Growth produces increasing living standards, jobs, innovation, and individual wellbeing.  Because growth is strongest in countries with liberalised markets, rule of law, and representative institutions, it carries with it equality and human rights.  By contrast, at best, trading economic growth for lower emissions will just leave us with lower emissions.  And we'll be poorer.

Without an emissions treaty, there's still reason for optimism.  The Intergovernmental Panel on Climate Change says by the end of the century, per capita income will have doubled, at least.  The world could be 20 times richer.

Take such predictions with a grain of salt:  imagine a bunch of geniuses in 1910 trying to guess what the economy in 2000 would look like.  Or what the chemical make-up of the atmosphere would be.  (We think we're pretty smart, well so did our ancestors.)

But the IPCC predicts economic costs of global warming will be a tiny fraction of that growth -- between 1 per cent and and 5 per cent of gross domestic product.  As the environmental economist Richard Tol wrote in January, "a deep recession wreaks as much havoc in a year as climate change would do in a century.  Climate change is therefore not the biggest problem of humankind."  (Tol is an IPCC lead author and therefore not a crackpot.)

It doesn't really matter whether climate change is caused by humans or part of a natural cycle.  It might halve the yield of crops planted in the poorest parts of the world.  But if those farmers used the advanced techniques of rich countries, they could more than make up for it.

Malaria caused by rising temperatures could be combated by a co-ordinated political effort to reduce global emissions.  Or we could concentrate a fraction of that effort on developing a malaria vaccine.

Growth will fortify us against a climate that always changes.

For if you can't cure the disease, manage the symptoms

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Fat lot of good campaign against junk food is doing

The debate over obesity and public health is usually black and white.  It's obvious who the bad guys are:  junk food peddlers.

But last year, Cadbury, Coca-Cola, Mars, Nestle, PepsiCo and about a dozen other firms committed to cut advertising of unhealthy products to children.  This week, a spokesman for the Responsible Children's Marketing Initiative said that "television advertising to children of certain foods has virtually ceased during children's programs".  The firms are also reducing sugar and salt in some products.

Sounds good?  Well, the president of the Public Health Association of Australia described it as "incredibly feeble".  Not "a step in the right direction", or "good, but they could do more", but literally so feeble it defies credibility.

Call this the "Healthy Menu Choices" conundrum.

For decades, corporations have been told they need to get "socially responsible" and think about more than just profits.  And few corporations are more harangued than those selling unhealthy food.  They have been demonised by the expanding public health establishment, who are certain children's minds are being warped and their bellies expanded by the sinister alliance of sugar and advertising.

Milton Friedman wrote in 1970 that the only social responsibility of business was to increase its profits -- profits being how businesses figure out whether they're providing value.  Friedman wrote in vain.  Corporate philanthropy has become a bigger and bigger part of the business world.  For the food industry, this corporate social responsibility means placating public health activists.

So McDonald's -- the very embodiment of unhealthy eating -- has introduced salads.  It has struck a deal with the Heart Foundation.  In New Zealand, it has a relationship with Weight Watchers.  Through the responsible marketing initiative, the confectionery industry is trying to show it is as supportive of a healthy Australia as chocolate makers ever could be.

Yet for all these attempts at conciliation, food companies just get demonised more.  Each effort is condemned.  If everything they do is going to be dismissed as the cynical expansion of corporate power, why should they try?

There's a big anti-business component to the push for a nanny state.  Many public health activists believe the blame for obesity lies with corporations -- not with the choices of the people who buy unhealthy food.  In the activists' view, marketing is making people eat things that they would rather avoid, if only they weren't so entranced by all the flashing lights and catchy jingles.

Hence the attention public health activists pay to multinationals, and the lack of attention they pay to, say, local fish and chip shops, pizzerias or Indian restaurants.  Or Gordon Ramsay's new restaurant -- sometimes rich people eat bad things, too.

Last year, McDonald's started sponsoring a maths tutoring program, Maths Online, for Australian students.  The program charged students $40 a month, but McDonald's sponsorship means it is now free.

The McDonald's logo is displayed at the bottom of the front page.  It's not like kids are multiplying cheeseburgers and dividing Happy Meals.  But, of course, one prominent public health activist, nutritionist Rosemary Stanton, celebrated by asking:  "Are we happy [to] sell our children to McDonald's?"

The public health establishment likes to see itself as a bunch of impartial medical professionals, but it is a coalition of self-styled consumer advocates, "lifestyle advisers" and politicised academics.  They see our health as a standoff between corporate profits and the health profession.

But the reality is more mundane, and more frustrating:  not everybody believes that every fatty steak is doing them damage.

Certainly, most Australians value their fitness, weight, and life expectancy.  But that is not all they value.  Unhealthy food sells not because of insidious corporate messaging, but because people like it.  Reducing the capacity of corporations to advertise their products won't stop people wanting fatty or salty food.  Unless you believe our primal taste instincts were invented in a boardroom.

So when public health types reduce complex issues of obesity and unhealthy lifestyles to a diatribe about the power of big business, it's an emotional argument -- not an honest one.

Individuals -- and in the case of children, their parents -- are the ones who choose what they eat.  If public health activists want to influence that, they'll give up the anti-corporate grandstanding and start treating us as if we make our own decisions.

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Public service needs to improve productivity

Public service departments' policy advice has become politicised under ALP governments.

Increasingly, departments have hidden and distorted data to prevent it being used to criticise their ministers' decisions.  Some departmental heads even complained about being forced to do this.

Though not immune from such politicisation, the Productivity Commission has so far remained an impartial federal agency.

For 40 years, federal governments have accepted the discipline of seeking analysis and advice from the PC before embarking on policy actions.  That advice is rigorously developed and made public.

The PC's messages have not been unblemished.  Its examination of housing under-estimated the crucial effect of government land restraints on prices.  And in its gambling review, the PC sails close to the "nanny state" solution of having government protect people from their own poor judgments.

But such flaws in hundreds of pearls are inevitable.  Most of the reports have clinically analysed issues and showed how we can get better value by improved policy approaches.

This week's release of its report on Murray-Darling water was no exception.  It criticised the confusing objectives and poor targeting of the Federal Government's environmental buy-back plan.  And it demonstrated that, if irrigation water usage was to be reduced, direct purchases would be the least expensive approach.

In the words of PC chairman Gary Banks, its key approach "is to free up the supply side of our economy to enable it to respond more effectively to opportunities on the demand side".

Stripped of jargon, this means that lighter regulatory burdens on business bring productivity improvements by lowering costs and increasing competition.

In the case of tariffs, successive PC reports have resulted in Australian trade restraints becoming confined to relatively isolated areas like cars.

Comparable reforms have stemmed from recommendations covering non-traded services like the professions, hospitals, and airports.

Allied to the deregulation in product and service markets, the Howard government substantially reduced labour market controls.

It became easier for firms to dismiss workers who were not up to the job, fostered greater scope for wage incentives and generally allowed management to manage.

The combinations of these reforms brought a productivity boost to Australia during the 1990s and since then they have allowed us to benefit from China's economic expansion.

However, the reforms have largely been confined to the private sector and the number of public servants has sharply increased.  Although it is difficult to measure public sector productivity, this doesn't seem to have improved.

In fact, in its report "Blueprint for Reform of Australian Government Administration", the federal public service acknowledged its poor coordination capabilities and a deterioration in its internal policy analysis skills forcing an outsourcing of tasks to private consultants.

But, rather than calling for lower pay for under-performance, the blueprint recommended increased pay!

This illustrates the deficiencies caused by the public sector's lack of market competition in setting appropriate rewards and penalties.

And the much enlarged role of the public sector under the Rudd Government intensifies the difficulties of achieving future productivity gains on which higher living standards depend.

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Treasuring impartiality

Treasury Secretary Ken Henry has offered support to the Government on climate change and water allocations.  His Malthusian theme is that we are depleting our resources, a course that we cannot reverse because of "free riders".

The political nature of his comments illustrates the partisan nature of the Treasury today.  The Prime Minister's departmental head, Terry Moran, is seeking innovative policy advice with the launch of his blueprint for the "world's best public service".  But that is anchored in the Westminster tradition, which leaves the adoption and the promotion of policy advice to the elected government.  Should he wish to take part in the political campaign he favours, Mr Henry's appropriate route is to seek representational office as a Labor or Greens Party member.

Aside from the role of providing "frank and fearless" advice on policy approaches to ministers, the second role of public servants involves service delivery -- carrying out the government's policies.  In terms of numbers and expenditures, the latter role has long been vastly more significant.

Hard-core political advice has traditionally been confined to Ministerial staffs.  These and the Opposition's staff are, like the public service, also paid for by the taxpayer.

Over recent decades ministerial staff numbers have quadrupled.  Moreover, we have seen a progressive fracturing of the advice provision and policy propagation walls.

Nobody nowadays bats an eyelid when the Victorian Government environment department puts out soothing ads promoting its desalination plant.  Lost is the irony that the ads seek to persuade the people paying for them about the merits of the expenditures the government has incurred, ostensibly on their behalf.  Few even delve into their message which promotes a project that provides water at five times what it would cost from a new dam and involves a wasteful $3.5 billion investment.

The address by Treasury Secretary Ken Henry shows another dimension of the descent into the corrupt use of the taxpayer's money.  Public servants are now out there promoting the agenda of the government.  Ken Henry's activities in this direction are in fact dwarfed by those of public servants in other agencies like those of the one-dimensional Department of Climate Change.

But Ken Henry's foray into politics highlight the degraded nature of Treasury, which was once a rock of impartiality, but is now removing itself from the "frank, impartial and non-partisan" which are the bedrock qualities according to the Blueprint for Reform of Australian Government Administration.  The Treasury has already been a willing participant in conjuring numbers that hide the costs of the government's carbon reduction program.  And in that same process it has sought to obscure the triviality of the economic effects of global warming even if it is taking place.

Perhaps epitomising the Commonwealth Treasury's fall from grace was its job advertisement for a speechwriter with a remuneration of $157,505 per annum.  That's not a bad salary for writing some flowery language to tell 'We the People' how astute government is at spending the money it takes from us.

This raises the issue of just what do public servants contribute.  Mark Steyn has commented that, "The new class war in the Western world is between 'public servants' and the rest of us."  The struggle is between those who earn income from supplying goods and services which people will willingly pay for, and those whose income depends on revenues forcibly extracted from taxpayers.

Unfortunately the electorate is unaware of this struggle.  Thus, in the Rudd/Abbott health debate Mr. Rudd's favourability soared whenever he said the government will work to fix the health problem and used homespun phrases like "little one" or "mums and dads want practical action now".  It mattered little that Mr Rudd's proposals simply mean shuffling the funding from state to Commonwealth bureaucrats and in the process further duplicating areas of bureaucracy.

Though few people want to interest themselves in politics they believe that government can fix problems nagging at them.  Even the recent pink batts and school buildings fiascos have not persuaded them of the innate inefficiency of politically and bureaucratically operated activities.

If governments are to have such roles, this elevates the role of the impartial administratively competent bureaucrat.

Unfortunately, not only do we have bureaucrats camping on the political turf but that's become the path to advancement.  Those heading up most agencies now largely come from the central agencies of Treasury, Finance and Prime Ministers and are appointed because of their policy acumen and political reliability.  Those same people are seldom well-equipped to manage service delivery.  Hence, not only are "we the people" paying for bureaucrats as well as politicians to propagate their views to us, but the process paves the way to an undermining of administrative efficiency.

There's the future challenge for the Australian Public Service.

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Liberal leadership aftershocks

The resignation of Nick Minchin last week is a reminder that the aftershocks of the late November leadership mania are still reverberating around the Liberal Party.

It was Nick Minchin's role in the revolt against Malcolm Turnbull which sparked off the debacle that gave Tony Abbott the leadership.  And the two men's views on climate change are very similar.

But climate change isn't the only issue in Australian politics.

The near fatal accident of Nick Minchin's son was the trigger for his resignation.

But right now there is an underlying tension within the party over Tony Abbott's paid parental leave scheme.  And there is some speculation that Minchin, as one of the Party's most stalwart Dries, was deeply unhappy with the abrupt change in the Coalition's stance on the issue.

The paid parental leave scheme -- funded by a tax levied only on Australia's most profitable businesses -- is anathema to the free marketeers within the party.  It's just not very "neo-liberal".

Indeed, on the day the parental leave policy was announced one senior Liberal told The Australian's Samantha Maiden, that such a scheme resembles "a typical 1930s socialist impost on big business".  This was before the senior Liberal learnt that it was Abbott who proposed it.

When Abbott said that parental leave would be instituted "over this government's dead body" he wasn't speaking for himself, but for the government.  Abbott has different views.  But opposition to parental leave was the view -- still is the view -- of much of the federal parliamentary Liberal Party.

So it might seem odd, but Abbott and the leader he overthrew are quite similar.

Like Malcolm Turnbull, Tony Abbott has a firm idea of the direction he wants to take the Liberal Party and the conservative movement.  And as Malcolm Turnbull discovered before him, this may not be a direction the party wants to be taken.

The direction Abbott would like to take the Liberal Party is all set out in his book, Battlelines, point by point.

Nevertheless, in November, as the shadow cabinet faced an escalating series of resignations, no-one was pulling Battlelines down off the shelves to fully consider the pros and cons of Abbott's philosophy of government.

Abbott's book is a quirky mixture of policy, philosophy and personal chronicle -- more fun than Peter Costello's memoirs, but nowhere near as fun as The Latham Diaries.

It was seen as a curiosity at best.

Nobody in the party room was under any illusions about Abbott's personal views, but neither did many expect him as leader to pursue each and every policy set out in his manifesto.

The alliance between free marketeers and the conservatives who supported (very un-free market) middle class welfare and family tax benefits was stable under John Howard -- he spent his career traversing both the radical dry wing of the Liberal party and its conservative wing.

Certainly, Howard favoured one side more than the other.  George Brandis said in his Deakin lecture last year that "For Howard, it was as much a conservative party as a liberal party;  indeed, with the passage of time, rather more the former than the latter".

But having been in the public eye for decades, Liberal free marketeers could still believe that Howard was one of them.

Unlike Howard, Abbott doesn't want to straddle these two Liberal camps.  Abbott, as "keeper of the conservative conscience" within the parliamentary party, sees government's job to protect society from the bleakness of the market economy.

And instead of letting society flourish independently, as free marketeers would argue, Abbott believes government should actively build society in its preferred image.

As he told The Australian in March:

"You can't run a decent society without a strong economic base ... while I think it is important that the national government promote and develop a strong economy, it's by no means the only or even, at every point, the main task of government."

Abbott's distinctly conservative approach is at odds with the other philosophical objective of the many in theLiberal Party -- the primacy of the individual and importance of individual liberty.  Launching Battlelines last year, Abbott made this explicit:  "Individuals are only realised in a social context".

So an Abbott government is not likely to be a small government.

If Tony Abbott personifies the conservative social-democrat side of John Howard's legacy, then Nick Minchin personifies the radical free market side.  Certainly, Minchin is big on "family values", but for free marketeers, family values complement dry economic policies like low taxes and small government.  For Abbott, family values trump those policies.

As many others have noted, Abbott's vision of renewed conservatism with the Liberal Party is informed by fairly deep reading and reflection.

It is not, however, a vision uniformly shared within the party he leads.

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Opposition should bank on flexibility

With the devastation of the 2007 election defeat having receded and the appetite for a real contest later this year intensifying, it seems the coalition has come to accept that while industrial relations will not be the principal front on which the election will be fought, it is neither possible nor credible to avoid the subject.  On the contrary, its prospects demand a posture that exhibits confidence without arrogance and balance without timidity.

One area where the coalition can press forward in a way which highlights one of the emerging failures of the new industrial relations system the government has introduced is, surprisingly enough, flexibility in agreement-making between employers and employees.

Throughout much of the last government's term, the then opposition was very effective at seizing on Australian workplace agreements (AWAs), in particular, to depict the Howard government's workplace relations system as a pernicious, Dickensian throw-back.

So it's hard at first to think that individual agreement making might afford the opposition an opportunity to demonstrate real initiative without courting a fierce counterattack from the government that it is attempting to restore the previous system.

There is a way the opposition can craft a policy on more flexible agreement-making that addresses a major problem of rigidity facing businesses, large and small alike, while protecting itself from attacks.

The first point to note is that the Rudd government bas a system of individual statutory contracts, however much it might characterise these agreements otherwise.  They can be made under either modern awards or enterprise agreements.

Take modem awards.  Every modem award must contain a flexibility term allowing the employer and an employee, if they both wish, to agree to terms varying the effect of the modem award if it is done to meet their genuine needs.

The Fair Work Act makes it clear that these individual contracts are taken to be terms of the modem award likewise, all enterprise agreements must contain flexibility terms.  If they don't, they are taken to include a model flexibility clause.

As with flexibility agreements made under modem awards, a flexibility arrangement made under an enterprise agreement is taken to be a term of the enterprise agreement.  Here's the main technical and political point:  individual flexibility agreements under the government's system require no third party review or approval.

All flexibility agreements, whether made under a modern award or enterprise agreement, must provide that the employee will be better off overall, but that's of little or no relevance unless either parry initiates a dispute about whether the flexibility agreement satisfies this condition or the Office of the Fair Work Ombudsman inspects the agreement of its own volition.

For business, in particular, the scope of individual flexibility arrangements under the government's system depends on what the relevant modem award or enterprise agreement permits.  In practice, this means that the range of matters over which employees and their employers can agree upon will be limited to the matters that Fair Work Australia has prescribed in the modern award, or which the employer and unions involved in bargaining have agreed to prescribe in an enterprise agreement

So while the Fair Work Act provides that individual flexibility agreements under modem awards and enterprise agreements cannot be expressed to require, in effect, union approval, this provision is quite disingenuous.  The flexibility clauses in modern awards and enterprise agreements have already been severely curtailed before they are available to be utilised directly by employees and their employers.

The evidence for this?  The standard modern award flexibility clause limits the range of matters over which employees and their employers can directly agree upon to just live matters.  Under enterprise agreements, the range is usually limited to the same matters unless the parties have agreed to expand or contract those matters.

For the opposition, this means that in formulating a more flexible system of agreement-making it can look at a policy option which primarily does two things.

First, it unhinges the ability of individual employees and their employers to enter into flexibility arrangements from the very limited range of matters that modern awards and enterprise agreements prescribe while retaining the better off overall test.

Secondly, and in order to ensure that protections are properly in place, the coalition should consider third parry review before individual flexibility agreements can operate, unlike now.  Ultimately, the coalition can give business the greater flexibility it needs while giving employees protections they deserve.

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NSW: nice and mediocre

At the rate it's going, NSW will end up like Europe.  A nice place to go for a holiday, but you wouldn't want to live there.  Or start a business there.  As amusing as it is to contemplate a voting system in Tasmania that no one understands, and an election campaign in South Australia that centred on the status of the personal relationships of the premier, state elections are no laughing matter.  State governments are not unimportant.

The decisions of state governments can have an impact across the national economy.  Take, for example, Victoria and its water crisis.  Successive Labor governments have refused to build new dams for Melbourne's growing population.  This policy, when combined with the effects of a drought, produced what in hindsight was always going to be inevitable -- a water crisis.

As a state election is to be held in November this year, the government needed to be seen to be doing something.  So it is that Victoria will have the country's largest desalination plant.

The problem is that to get the plant completed by the end of next year, the Brumby government has been forced to sign a contract that will make the builders pay workers the highest construction wages in the country.  Already the estimated cost of the plant has gone from $3.1 billion three years ago to $3.5 billion today.

Carpenters on the site will earn at least $200,000, which is 30 per cent above the industry standard.  A worker lucky enough to be employed on the Victorian desalination plant could earn up to 40 per cent more than someone doing the same job on the Sydney desalination plant.

These wage rates have set the standard for infrastructure projects across the country.  The desalination plant was a political priority for John Brumby.  He is willing to allow the contractors to pay a premium of 30 per cent to the union movement to guarantee industrial peace and to have the project delivered on time.

There's no reason to believe that Kevin Rudd will act any differently if the national broadband network is ever built -- a project 10 times the cost of Brumby's desalination plant.

Thanks to Victoria, workers on the broadband network will have a new industry standard against which to make their wage demands.

Next week will be the 15-year anniversary of Labor coming to power in NSW and the next NSW state election will be held on March 26, 2011 -- in exactly one year.

The state is in desperate need of regime change, yet the Liberals' Barry O'Farrell is no certainty to beat premier Kristina Keneally.  As O'Farrell recently pointed out, since 1995 the gross state product of NSW has increased by 46 per cent.

The comparable figure for Queensland is 90 per cent and for Western Australia, 80 per cent.  But because of those states' natural resources, perhaps they are an unfair comparison.  Compared with Victoria, NSW has lagged -- Victoria's gross state product has grown 65 per cent.

But the shocking thing (at least for anyone who still believes Sydney is the capital of the "premier state" is that even South Australia and Tasmania have outperformed NSW.  South Australia's gross state product has increased in the past decade and a half by 51 per cent, and that of Tasmania by 48 per cent.

Maybe the Olympics are to blame.  Premiers were so intent on making Sydney an "international city" and showing it off to the rest of the world, they thought making the trains run on time was beneath them.

If the Commonwealth did somehow succeed in gaining responsibility for the nation's health system, it couldn't do a worse job than NSW health ministers at running the state's hospitals.

On the conservative side of politics it's no wonder the Liberals have all but abandoned a commitment to federalism.  Their last four leaders -- Howard, Nelson, Turnbull, and now Abbott -- have all come from a city where nothing ever seems to work.

Fifteen uninterrupted years of Labor government in NSW has bred a political culture of mediocrity.  In the same ways, mediocrity is worse than corruption.  You can send people to jail for corruption.  But what do you do about mediocre policy, mediocre politicians, and a mediocre system of public administration.

In NSW, the government, public service, and union movement comprise a triumvirate that has long lost any sense of the public good.

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Follow the leader

Are you confused by the state of centre-right politics in this country?  Probably never more so than this fortnight.

Tony Abbott staked his claim in the climate change debate with a vocal dislike of great big new taxes.  But now he's proposed his own.  The opposition can't coherently claim that an emissions trading scheme is nothing more than a giant burden on business while at the same time imposing a different giant burden on business in the form of a big-business-financed parental leave scheme.

Perplexed?  You're not alone.

In his March Quarterly Essay, "What's Right?  The Future of Conservatism in Australia," lawyer and academic Waleed Aly distinguishes between liberals, conservatives, neo-liberals and neo-conservatives.  For Aly, the latter two aren't American-style "nuke Iran for freedom" neo-cons but a cross between social conservatives and free marketeers.

Then Aly finds liberal conservatives, cultural fundamentalists and neo-liberal neo-conservatives -- which I think are the bad bits of all of the above.  Clearly, a broad church is a complicated church.

I guess this bewildering catalogue of ideologies is some progress.  For a lot of people, "conservative" seems to be used to describe anyone critical of the Labor Party, with the exception of Bob Brown.

To Aly, all this confusion is because there aren't any real conservatives left in Australia.

Conservatives value older institutions -- such as the family and common law -- not because they're old fuddy-duddies but because those institutions are the end product of centuries of trial and error.  Sticking with what we know works is better than following the plan to reorganise society that you sketched on a pub coaster at 3am in the Elephant and Wheelbarrow last night.  Even if you're really smart.

But Aly claims that the conservative temperament of hesitant, evolutionary change has been hijacked by crazy neo-liberals with their crazy free-market ideas.

If only.

The fanatically neo-liberal, deregulation-obsessed Howard government actually passed more pages of law than any previous government.  Government is no smaller, no lower taxing, no more conducive to individual liberty than it was a decade ago.  On many measures, it's worse.

There is no party in the Federal Parliament pushing anything near what has come to be called neo-liberalism -- the potent combination of social liberalism and economic liberalism.  There is no party explicitly arguing that government should stay out of both the boardroom and the bedroom.

Neo-liberals only like the free market because it allows individuals to pursue their own goals -- just as other voluntary relationships, such as communities and clubs, do.

But the truth is there's very little ideology in Australian politics.  Australia's political culture has always been somewhat apprehensive about obviously high-minded philosophies of government.

Australia's political institutions were formed in the mid-19th century, when utilitarianism was the height of ideological fashion.

Utilitarianism is an intensely practical political philosophy that says the purpose of government should be simply to seek the greatest good for the greatest number.  No more, no less.

You might get fancy things such as individual liberty or social equality out of that.  But, then again, you might not.

The contrast with the United States couldn't be stronger.  America was founded at the height of the revolutionary period, when kings were killed for fanciful ideals.

Take the American Tea Party movement -- a genuine, grassroots manifestation of deeply held political beliefs.  Certainly, it's an uncomfortable coalition between serious right-of-centre activists and crazed conspiracy theorists pretty sure that President Barack Obama is a dastardly Muslim, but could you imagine any remotely similar movement in Australia?

The ideological passion -- whether coherent or weird and manic -- just isn't here.  Even Australia's most aggressive public controversies are banally practical.

The boat-people controversy is just a debate about the most efficient way to process asylum seekers, not a debate about immigration or open borders.

Australia joined the Coalition of the Willing in Iraq because it was seen as a nice way to reinforce our bond with the US, not because of a dream for liberty in the Middle East.

The history and culture wars seem deeply ideological, but take this week's dispute over whether official events should be led by an acknowledgment of traditional Aboriginal owners.  It's hardly a timeless philosophical struggle between value systems -- just an inanely repetitive discussion about how "proud" we should be of the founding of the country.

Sure, our lack of ideological fervour sounds like a recipe for harmony.  But without any philosophical beliefs about what government should -- and, perhaps more importantly, shouldn't -- do, Australian political parties tend to drift aimlessly.  Especially in opposition.

Right now it seems the federal opposition has tried to substitute political philosophy with an incoherent populism.

To be fair, this is a problem that some in the Liberal Party seem to be aware of.  Late last year, Queensland senator George Brandis made a speech championing the Liberal Party's small "l" liberal tradition, and shadow treasurer Joe Hockey felt moved this month to title a speech "In defence of liberty".

The conservatives, too, are trying to stake their claim.  Tony Abbott's book, Battlelines, was supposed to be a definitive statement of conservative philosophy as it can be applied to Australia.

But in Abbott's tenure as Opposition Leader so far, Coalition policies have swung wildly between extremes.  They're implacably opposed to carbon emissions trading -- that would be an odious tax -- but keenly supportive of carbon emissions regulation and subsidies, which, they seem to imagine, will be almost cost-free and of no economic consequence.

This policy incoherence isn't because they are blinded by a firmly held ideology.  It's because they're blind without one.

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Heading backwards with power generation

Thirteen years ago the Kennett government's sale of Victoria's generators raised $10 billion (about $14 billion in today's money).  Now, the NSW Government is desperate to raise funds by selling assets.

NSW generators, like Victoria's, are overwhelmingly coal-fired.

The Federal Government's climate-change policy has vastly devalued coal-fired generators anywhere in Australia.

Capital-intensive businesses such as electricity generators can be valued on two different bases.

The first uses multiples of their annual profits.  The other takes initial investment outlays and adjusts these for improvements and writedowns.

In principle, the two methods should give the same answer if appropriate adjustments are made.

This is clearly not the case with coal-based electricity generators.  The value of these generators has been written down in anticipation of extra charges if the carbon tax is brought in.

Thus, Loy Yang A in the Latrobe Valley has an equity value of only $500 million placed on it by part-owner AGL.  Added to its debt, this values the firm at about $3.5 billion.

On privatisation Loy Yang A raised $4.8 billion (about $6.7 billion in today's dollars).

It is an asset with a life of many decades, has been well-maintained and has had its capacity increased.

The prospective carbon tax has devalued Loy Yang A's worth and this also would apply to the NSW generators.

A prospective carbon tax makes selling coal-based power stations extremely difficult because today's profit is no guide to future prospects.

The intended tax also makes it too risky to build new generators.

As demand increases, this lack of new supply means higher prices.

These are already showing up in company profits.

There is no real substitute for coal-based electricity -- wind and solar can only be bit-players, while gas is expensive and also will eventually incur carbon charges.

Hence, the regulatory risk from the prospective carbon tax is suffocating the normal market processes whereby high profits attract new plant building.  Unless new coal-fired generator capacity is built, electricity prices will rise.

The regulatory risk that prevents private firms from building new power stations has another dimension.  It means that in future the government itself will have to underwrite the investment risk entailed in building new capacity.

This means new electricity generation will be dictated less by market needs and more by government agendas.  Unfortunately, that returns us to the bad old days before the Kennett-Stockdale privatisation reforms forged the existing low-cost and efficient Victorian electricity industry.

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It's time misguided land starvation was stopped

With boom times returning to WA, the housing market is once again overheating.  The median house price in Perth is now $512,000, according to the December quarter figures from Australian Property Monitors, putting it beyond the reach of any new homeowner without substantial savings or parental support.

Even in the new suburbs, prices have left all but the most affluent with no foot on the home-ownership ladder.

Typical of these is Ballajura, where the average house costs almost $400,000.  That's up 60 per cent from $260,000 five years ago.  The suburb's average house price increase has massively outpaced prices in general, which are up only 15 per cent.  And more importantly for the prospective buyer, house prices have far outpaced average earnings.

It is not difficult to pinpoint the cause of this price escalation.

During the second half of last year, new lots approved for building in Perth and Peel were running at an annual rate of under 9000.  This is extraordinarily low.  Even in the mid 2000s, when supply was being far outpaced by demand, annual new lot releases were running at more than 15,000.

Last year in my report, The Great Lock Out, I reported how, over the past two decades, Perth had been transformed from one of the most affordable housing markets in Australia to having the unenviable reputation of rivalling Sydney as the least affordable.

The reasons for this were shown to lie squarely with the Government's land-starvation policy.  The Government just won't allow enough blocks to be developed for housing, thereby preventing competition from driving down prices.

This has stemmed from unfounded fears of the high cost of providing new infrastructure, a mania for central planning and groundless opposition to urban sprawl in a State that has more natural bush and farmland than anywhere else in the world.

Government resistance to allowing land to be used for housing has also been abetted by ministerial dreams of creating a compact city with teeming inner suburbs populated by bohemian theatregoers and by downright contempt for new-homebuyers' preference for McMansions on individual lots.

With a new Government in WA we might have expected to see a reappraisal of the restrictive land release policy.  Instead, the figures show Perth going backwards in new housing development permits.  This is particularly unfortunate with population growth at 3 per cent a year and every expectation of a strong renewal of resource based development.

Rather than tightening the vice over new development approvals, now is the time for energetic action to remove restraints on land availability.  Predictably, the upshot of the intensified squeeze on land availability has been skyrocketing prices.  Land, as with any other product, will see prices rise if supply is rationed.

Land around Perth is particularly suitable for home building.  It is flat and sandy.  On the city edge, the land is overwhelmingly used for farming and is worth at most $20,000 a hectare.  Even with allocations of the land to common space, each hectare can accommodate at least 10 decent-sized blocks.  Developing the land grading, roads, water, sewerage and so on costs at most $65,000 a block, so we should be seeing lots ready for building on at under $70,000 all around Perth.

Instead, because supply is rationed by the Government we see lot prices at $200,000.  In other words, Government policy is inflating land values by around $130,000 a lot.  That's terrific if you're a landowner who has got development approval but it is a cruel injustice on the people who don't have a house of their own.  Forcing those without a home of their own younger and less affluent people to pay an additional $130,000 means a monthly mortgage bill of more than $1000.

A liberalisation of Perth's highly restrictive planning policies would see three- bedroom, two-garage houses on an average sized block at $250,000.  And unlike most other policies, bringing about such a benefit costs the taxpayer nothing.  The excess prices are the result of Government policies giving windfall gains to landowners and developers who win the right to convert raw land into land for housing.

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The ghost of Liberals past

Could the historical Robert Menzies be anywhere near as good as the Robert Menzies that exists in everybody's minds?

Last week, Tony Abbott told a Sydney Liberal branch that the Liberals could win power if they embraced Menzies' lessons -- small government, and free markets.

This was, of course, a few days before he announced the super parental leave scheme, which will impose a substantial special tax on Australia's most profitable businesses, in order to fund the middle class welfare policy to end all middle class welfare policies.

The Sydney Morning Herald's political editor quickly damned the Abbott scheme, claiming that the opposition leader should have at the same time "apologised to the spirit of ... Robert Menzies", for abandoning his free enterprise ideals.  To which The Australian quickly replied that Menzies was himself a big supporter of the welfare state.

During the Howard years there was an endless stream of columns claiming that John Howard had "betrayed the Menzies vision".  Or "abandoned his legacy", as if Menzies would have crossed the floor against Howard, if only the passage of time had given him a chance.

Menzies is either a stick to be wielded against the modern Liberal Party, or a divining rod for seeking its future direction.  But like a divining rod, those who use Menzies' legacy are revealing more about themselves than about Menzies.

Nevertheless, when Bob Brown states on Twitter that "Tony Abbott's new front bench makes Sir Robert Menzies look pink", it's a fair point.  Menzies does look a little pink these days.

The post-war Menzies government was centralist enough to be a blank slate upon which anybody can impose their ideal vision of the past.  Well, at least it was centralist by the standards of the time.  With the hindsight of half a century, the Menzies government was a protectionist government, supportive of high levels of regulation, restrictive industrial laws, and, most damningly, the White Australia Policy.

So if Menzies really was a free marketeer, he certainly hid it well.  The Australian economy in the middle of last century had levels of interference that would make the Greens blush.

The Menzies government was better than its predecessor, which tried to outright nationalise the banking system.  But the conservative victory in 1949 was no breakthrough for free-enterprise, despite the subsequent myth making.

Trade policy is an obvious indicator of a government's philosophical beliefs.  And on free trade, Menzies looks very bad.  With the possible exception of 1950 and 1951, when import controls were temporarily lifted in response to American demand, Australia's markets were tightly regulated by the federal government, with import licensing and quota restrictions meant to protect industry from dastardly foreign competition.

After more than a decade of conservative government, those import restrictions were lifted in 1960, and the work of micromanaging the economy was left to tariffs.  But it was Gough Whitlam, of all people, who started the real work of opening the Australian economy to the world, when he cut tariffs 25 per cent across the board.

We have a habit of thinking that being right equates with success, and being wrong equates with failure.

But just because some certain political leader was successful -- and Menzies certainly was successful, if measured simply by years on the job -- doesn't mean they are an idol against which we should measure our values.  If right-of-centre Australians want to evoke the spirit of their philosophical ancestors, they'd do better to remember their glorious failures.

Take the nineteenth century politician Bruce Smith, Australia's answer to the great British liberals Richard Cobden and John Bright.

Smith wrote Liberty and Liberalism, a manifesto of free trade and small government, which the Australian Dictionary of Biography helpfully describes as "anachronistic" because he believed in limiting state interference in the economy.  (Economic liberty is so just so ... old-fashioned.)

Smith fervently opposed the White Australian Policy, arguing that the "foundation of the [Immigration Restriction] bill was undoubtedly racial prejudice".  Smith's liberalism was remarkably modern:  "I venture to say that a large part of the scare is founded upon a desire to make political capital by appealing to some of the worst instincts of the more credulous of the people." He should have just said "dog-whistle".

Smith was a big supporter of business.  He helped found and direct the Victorian Employers Union in 1885 and the New South Wales Employers' Union in 1888, as a response of business to the growing trade unions.

Or we could consider George Reid, who was the first and only Free Trade Party Prime Minister.  Or Bert Kelly, the "modest member" who was a dedicated supporter of free trade within Menzies' government, and anticipated the liberalisations of the 1980s and 1990s.

Modern political parties are welcome to celebrate the achievements of their former leaders.  But if they need philosophical inspiration -- and they do -- they'll have to look elsewhere.

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Choosing their villains

State premiers and big business have a lot in common these days.  Neither is much liked at the moment.  State governments, especially Labor ones (which is all of them except Western Australia), are regarded as incompetent.  Big business isn't believed to be incompetent -- just selfish.  For most people, "big business" means either the Big Four banks that price gouge their customers, or mining companies that have got lucky on the China boom.

Anyone foolish enough to try to defend state governments or big business has a hard time of it.  Of course Kristina Keneally and Anna Bligh will say they're doing a good job running their hospitals.  And of course chief executives will say their companies should not be regulated or taxed more than they already are.

The Prime Minister wants to take control of public hospitals from the states and the Opposition Leader wants to increase taxes on big business to fund a paid parental leave scheme.

Although their proposals are quite different in their nature and scope, they bear a striking similarity.  Each is a policy in search of a villain.  It looks as though Kevin Rudd and Tony Abbott started by calculating who it was they wanted to criticise and then made up a policy to justify their attack.

The evidence for such a suspicion isn't hard to find, at least as it applies to Rudd.  Since his health announcement, he has spent at least as much time complaining about how badly state governments run their hospitals as he has explaining the virtues of his alternative.

In addition to the Labor and coalition plans being aimed at soft targets, both Rudd and Abbott are taking on those who, in normal circumstances, would be thought of as their allies.

Early in his term, Rudd made much of "a new era in co-operative federal-state relations".  It was an era lasting all of 18 months.  Attacking the premiers from his own side shows the PM is willing to put the health of the nation ahead of Labor Party politics.  If voters in NSW and Queensland are frustrated that they can't change their state governments because the next state elections are too distant, Rudd will do the next best thing.  He'll take power over hospitals away from the premiers and give it to Canberra.

For Abbott, forcing big business to pay more taxes to fund a seemingly popular policy would have appeared an attractive move politically.  It shows that the coalition is not in thrall to big business lobby groups.  And it satisfies the call for revenge from a number of coalition members of parliament in the wake of the perception that too many business leaders are in lockstep with the Labor government on industrial relations, emissions trading and the stimulus package.

Another similarity between the plans is that both leaders have made promises they claim taxpayers won't have to pay for.  According to Rudd, the problems in national health policy will be fixed by having Canberra bureaucrats instead of state government bureaucrats manage hospital budgets.  Apparently health reform can be achieved without pain to the taxpayer.

And Abbott suggests parents will get the benefit of paid parental leave without taxpayers footing the bill.  Instead, big business will cover the costs of the scheme.

If the Rudd and Abbott plans sound too easy, that's because they are.

Additional taxes on business -- regardless of the size of the business -- are ultimately paid for by employees and consumers.  Contrary to popular belief, not all the profits made by big business go to paying million-dollar bonuses to executives.

In the absence of structural reform that gives incentives for individuals to manage their own health care, rearranging the funding arrangements for hospitals will amount to little more than changing who it is that fills in the paperwork.

Perhaps the most positive thing to say about it is that at least a federal takeover of hospitals is consistent with Labor policy.  Centralising practically every function of state governments is an ambition of Labor prime ministers that long predates Rudd.  In 1944, John Curtin lost a referendum to give the commonwealth control over health.  It's no coincidence that Rudd's health announcement came in the same week that he revealed his national schools curriculum.

There aren't many easier targets than state premiers and big business.  Which is part of the reason why Rudd went after one last week, and Abbott after the other this week.

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Healthcare: bang for buck

There seems to be some "confusion" about recent health spending.  Kevin Rudd told a Q & A audience that the previous government "took a billion dollars out of the public hospital system".

While Chris Uhlmann, on Insiders, claimed that the Howard government had cut spending on public hospitals.  This is an extraordinary claim.  In Uhlmann's defence it looks like he has misinterpreted some statistics put out by the Australian Institute of Health and Welfare.

Paul Sheehan, writing in The Sydney Morning Herald, has called the "Howard cut health spending" meme a big lie and declared that anyone repeating this mantra is lying.  That is a big call -- it is also correct.  Of the many criticisms we can make of the Howard government, not spending isn't one of them.  Indeed, Kevin Rudd came to power promising that "this reckless spending must stop".

The Australian Bureau of Statistics (ABS) report that total Health expenditure by the Commonwealth increased from $21.8 billion in 1998-99 to $39.9 billion in 2006-07 -- the last full financial year of the Howard government.  Equivalent data for the states are from $19.7 billion in 1998-99 to $37.2 billion in 2006-07.  There is no evidence the Howard government stripped money out of health in general.  But what about public hospitals?

The ABS doesn't report down to that level of detail, but the Australian Institute of Health and Welfare does.  Commonwealth funding of public Hospitals rose from $5.9 billion in 1997-98 to $10.7 billion in 2006-07, while state funding of public hospitals rose from just under $7 billion to $14.8 billion over the same period.  There is no evidence to support Kevin Rudd's claim that the Howard government stripped money from public hospitals.  The amount of funding increased in every year and did so by more than GDP growth.

What happened, as Joe Hockey indicated on Insiders, is that the states have dramatically increased their funding of hospitals.  After all, public hospitals are a state responsibility.  That increase is particularly noticeable after the introduction of the GST in 2000.  In other words a Commonwealth tax passed onto the states in full is partly responsible for an increase in state funding to hospitals.  It is that funding that the Commonwealth now wants to take off the states and earmark for health spending.  It that sounds like a bit of a merry-go-round, that's because it is.

It is understandable that the current government wants to differentiate itself from its predecessor.  It is not clear that it should do so by out-spending the Howard government.  Ironically Howard has a reputation of being somewhat hard-hearted;  yet the empirical record is very different.  Andrew Norton of the Centre for Independent Studies has shown that Howard government spending on issues such as Health and Education rose faster than under the previous Keating government.  He has labelled Howard a conservative social democrat.

All governments like to think that increasing the amount of money thrown at problems will solve that problem.  But, as we now know from the Rudd government stimulus package, the quality of spend can be more important than the quantity of spending.  So too with health -- I have shown that the number of back-office bureaucrats has been increasing, while the number of hospital beds per 1000 population has declined.  In the spending we have had over the past fifteen years, the bang for buck has declined.

The bottom line is this;  billions of dollars from both the Commonwealth and states are poured into health and hospitals each year.  The overwhelming bulk of that funding comes from the Commonwealth.  More than 50 per cent of the health dollar comes directly from the Commonwealth through its own budget and another large proportion of it comes indirectly through the GST.  It might be possible to show that the Commonwealth share of public hospital funding declined but only if we think of the GST as a state tax (as the Howard government did) and not, correctly, as a Commonwealth tax (as the Rudd government does).

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Schools should be free to teach what they want

Most people seem to have missed the point about the national curriculum.

The opposition certainly has.  If the national curriculum is as bad as Nationals senator Ron Boswell says -- it "reads like a Marxist learner ... to prepare our young for the anti-capitalist class struggle" -- in a way, that's the (decidedly not Marxist) Howard government's fault.

Taking control of the curriculum out of the hands of the states and into the loving arms of the federal government didn't begin when Kevin Rudd won the 2007 election.

In a speech in 2006, Julie Bishop, the then education minister, argued Canberra needed to grab the school curriculum "out of the hands of ideologues in the state and territory education bureaucracies and give it to, say, a national board of studies".

But last week, after having seen the national curriculum in its proposed glory, Christopher Pyne, the coalition's education spokesman, claimed it imposed "a particular black armband view of our history".  Obviously Bishop's plan didn't work.

There's a lesson here.  Whether we get an Abbott government after this election, a Turnbull government in 2013, or a Joyce-Tuckey government in 2016, that government will need to realise any new powers they grant themselves won't be theirs forever.

Nevertheless, Boswell and Pyne are wrong.  The proposed curriculum is hardly the vanguard of the international socialist movement.  But it does have its peculiarities.

The science curriculum's insistence that science should be taught as a cultural endeavour -- with Asian and Aboriginal perspectives such as the Dreamtime -- seems more like cultural studies.  Worthy in their own right perhaps, but teaching myths in science class is a bit odd.

And its emphasis on "the human responsibility to contribute to sustainability" seems just a touch ideologically loaded.

The history curriculum in year 10 investigates "struggles for freedom and rights", which is great.  But it starts its investigation with the United Nations, as if the concept of human rights just popped up in 1945.

And perhaps having kids learn about "Sorry Day" is laudable.  But it seems a bit much for the apology -- which is a distinctly political achievement of the Rudd government -- to be given curriculum status so soon.

Nevertheless, it's probably not an awful curriculum.  Unfortunately, "not awful" is the best we're going to get from a curriculum designed to be imposed across the country.  It is supposed to equally serve the needs of students attending both Camberwell South Primary School, with 496 relatively well-off students, to Gochin Jiny Jirra School, a remote school in the NT with just 25.

The professed reason for the national curriculum is that there are 80,000 students who move interstate each year.  But there are 3 million students all up.  So the curriculum is being imposed for the convenience of just 2.3 per cent of the student population.

Still, if we know anything about our Kevin Rudd, we know he loves to be in charge of stuff.  A national curriculum is right up his alley, even without John Howard's beat-back-the-leftie-historians agenda.

The federal government seems to believe a national curriculum will be inherently better than state curriculums.  But "national" is not a synonym for "awesome".

If we really wanted a revolution in education, we'd give schools flexibility to tailor the curriculum to the needs and profile of their student body.

At the very least, the study of history, which can be subject to many more interpretations than mathematics, could be left to the discretion of schools.  After all, most of the bitterness over the history wars was about ideological control over the curriculum.

If some parents wanted their children to be taught that capitalism has brought misery and oppression and darkness, they could choose that.  If other parents wanted their children to understand how market relationships lead to mutual gain, and free trade alleviates poverty, they could choose that too.

Until the government gives control of the curriculum back to schools, parents and students will always be somewhat unsatisfied with what Australian children are taught.

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Price of a new house could be so much cheaper

A misdirected email from Justin Madden's office showed the Brumby Government at its manipulative worst.

Following a planning review into the iconic Windsor Hotel redevelopment, the government intended to set up a counterfeit protest group.  Then, having "listened to the community", it would reject the redevelopment recommendation.

But planning laws can wreak even greater damage than this.  By restricting urban development they make houses unaffordable, and we are already seeing Melbourne's house prices increase.

This can only be exacerbated by the Victorian Upper House last week rejecting the Brumby Government proposals for an expansion of Melbourne's urban growth boundary.

The Greens opposed the boundary extension because they disagree with all development other than bicycle paths and inner city wine bars.

The coalition objected to an increase in the Growth Areas Infrastructure Contribution (GAIC) accompanying the proposed extension.  This would have raised to $95,000 the existing $80,000 per hectare fee levied by the government on the sale of land permitted to be developed for housing.

The GAIC is not actually required to fund infrastructure, though few MPs understood this.  In new developments, most infrastructure -- including for roads, drainage, and parkland -- is funded by the developer.  Other infrastructure -- including electricity, water and sewerage -- is supplied commercially.

Either way, the new home owner, not the government, incurs the costs.

The only two major infrastructure categories the government provides are trunk roads and schools.

But trunk roads have to be built anyway and motorists already over-finance them in petrol and vehicle licensing taxes.  Suburban trunk roads also are much cheaper to build than those in the inner city.

With regard to schools, these are needed no matter where children live and again are cheaper to provide in areas on the urban fringe than in the inner suburbs.

The GAIC therefore is simply a tax.

However, it does not add to development costs.  This is because GAIC is imposed on land that has been inflated in value due to government land-use restraints.

Melbourne's edge largely comprises farmland worth about $10,000 a hectare.  But once it is freed from regulations that prevent it being used for housing the land becomes worth $300,000 a hectare.

This inflated cost gets factored into the price of houses and the new home owner cops it.

With the GAIC, the government is trying to get a share of the excess costs its regulations on land use have created.  But it is the scarcity of housing land caused by regulation that raises costs and prices, not the GAIC.

A significant relaxation of the restrictions on land use therefore would reduce the price of developable land and of housing.

Politicians should shift their focus from the GAIC, to permitting more of our vast land resources to be developed for housing.  This would drive down the costs of land, reducing new house prices by more than $50,000.  Such action also would put welcome downward pressure on house prices generally.

Land is like everything else.  Its price responds to demand and supply.  Restraining the use of land for housing creates a scarcity that inflates prices.  That simple lesson seems to be lost on our politicians.

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