Inquiry into Privatisation of Regional Infrastructure and Government Business Enterprises

Submission to the House of Representatives Standing Committee on
Transport and Regional Services

SUMMARY

Over the past decade, the electricity and gas industries have seen considerable improvements in efficiency with lower prices and increased reliability.  These improvements have been evident both in the urban and rural areas.

While some rural areas have seen lower employment levels as a result of increased efficiency in the energy supply industries, the higher levels of employment in the industries under their integrated state monopoly structures were not sustainable and presented an unsound basis for prosperity.  In any case, the strained financial circumstances in which State Governments found themselves by the early 1990s were already bringing major cuts to GBE employment levels.

Deregulation and privatisation have been the means by which the improvements to prices, reliability and efficiency have been brought about.  Deregulation has involved disaggregating formerly integrated supply industries so that different segments of the supply chain are no longer affiliated and, where possible, competition is introduced within the different segments.  In general, this process accompanied by privatisation has resulted in a superior outcome than when supply businesses have been left under public ownership.  This reflects the inherently stronger incentive structures in private as opposed to public ownership.

Privatisation also relieves governments from the potential conflict of interest they have as an asset owner and as the law maker and upholder which creates the environment within which private and public enterprises operate.  That conflict of interest, the elimination of which was a major goal of national competition policy, can reduce the confidence of the private sector that a level playing field is in place and lead to investment uncertainty.

Finally, some deficiencies of the system are evident where the deregulation has not gone far enough.  Important in this respect is the ever-present danger that regulatory authorities will fail to achieve their objective of replicating a market outcome.  Regulatory authorities are prone to capture by populist interests and to set prices below their appropriate levels. ⁽¹⁾

Like other organisations, regulatory agencies also resist vacating an opportunity to regulate and find rationales to remain exercising control even when, as with most of gas transmission, competition offers adequate restraints on major suppliers.  Under such circumstances retaining regulatory control is likely to bring inefficiencies.

IMPETUS TO AUSTRALIAN INFRASTRUCTURE REFORM

Reforms in Australia were spurred by three different but associated factors:

• seeking improved management efficiency,
• neutrality in the dealings of state enterprises with other parties, and
• privatisation of assets both to better meet these goals and to relieve budgetary pressures.

It was in fact the Hawke Labor Government that, initially in the mid-1980s, first embarked on some rather tepid movements in the direction of deregulation.  These progressively became more serious, especially in the early 1990s following a report on competition policy chaired by businessman/academic Fred Hilmer.

As well as attempting to dismantle layers of government restraint of business, deregulation had three other dimensions:

• placing government business entities on a footing similar to private businesses and at arms length from the political process;
• ensuring "open access" by users of and suppliers to natural monopoly facilities like electricity lines and rail tracks;  and
• terminating as the exclusive preserve of government entities, certain activities including infrastructural facilities.

All three of these competition enhancing policy dimensions were predicated on the premise that the outcome would be lower cost supply and a better matching of the products consumers want with those producers provide.  These expectations of improved outcomes have been amply born out in the gas and electricity supply industries

COMPETITION POLICY AND THE ELECTRICITY
AND GAS INDUSTRIES

The National Competition Policy operates in two broad fronts:

• the review of laws that restrict competition;  and
• a national access regime and price controls over "essential facilities".

The basis of the Australian reforms and privatisations, in line with those in other jurisdictions, was a disaggregation of the previous monopoly over electricity supply into generation, long distance transmission, local distribution and retailing.

In the case of gas, production (the equivalent of generation) was always independently owned.  A long standing concern, albeit one that is receding somewhat, was with the concentration of production resources.  The New South Wales, Victorian and South Australian markets each were served by a monopoly gas source.  Efforts were made by the ACCC to force a competitive supply by requiring the different joint venture partners in Bass Strait and the Cooper Basin to market separately.  This would however have required the abrogation of contracts.

Electricity disaggregation was planned in Victoria concurrently with the privatisation but other states also embarked on a disaggregation of the industry.  Disaggregation in Australia, leveraging off the mistakes made in the UK, was conscious of the need to maximize the role of competition to provide the discipline for the promotion of efficiency and to prevent price gouging.

In Victoria and South Australia, generation was disaggregated to the maximum extent practicable -- essentially into seven separate Victorian suppliers and five in South Australia.  Queensland was similarly comprehensive but the NSW Government was unable to divide its generation units among more than three businesses due to trade union opposition.  Even in NSW this has proven to be generally adequate to ensure a competitive price, especially since there is additional rivalry from the Snowy/Victoria and latterly from Queensland.

It was intended for generation and retailing to operate in a totally deregulated market with distribution and transmission, which were viewed as "essential facilities" or natural monopolies, to be regulated.

At the onset, generation, transmission and distribution/retailing were to be structurally separated but there were no specific long-term measures to prevent re-aggregation.

Although retailing and distribution were sold as combined units, they were to be "ring fenced" to prevent the distribution business favouring its affiliate.  In the event all five of the original Victorian host distribution business/retailers now have separate companies handling the two activities.

Retail was a part of the electricity industry envisaged as being contestable and requiring no more regulation than is required of other retail activities.  In fact, although commercial supply is now largely deregulated, governments have been cautious about deregulating household supply.  Both in NSW and Victoria, retail competition at the household level has been accompanied by safety nets that make it unattractive for retailers to poach customers.  This on-going regulation of retail supply has resulted in some market confusion and is reported to have been the straw that resulted in two of the five original owners of Victorian retailers exiting the market.  Commercial customers have seen a churn rate from their host retailer of about 40% but the regulations in place have meant that fewer households have switched retailer.

Other developments have not followed the path that was expected.  In the case of transmission, a centrally planned provision was envisaged.  However, a situation recognised from the outset was that transmission and new generation are alternatives.  If transmission is provided free or at regulated prices this may discourage a more rational and lower cost development of new generation.

This led to provision being made for entrepreneurial interconnects in the National Electricity Law.  And Transenergie, a subsidiary of Hydro Quebec, has started building these entrepreneurial links.  This has in turn given rise to issues concerning the circumstances under which a regulated augmentation of links should be permitted.  The danger is that links which are financed by a compulsory charge on the customer, might lead to incentives to site generation in places that are distant from major markets.  If someone else is paying for transmission, the rational generation business will have little regard for the costs involved.

PRIVATISATION IN AUSTRALIA

"Until self-trained economist Edwin Chadwick came along, 19th-century Britain had a huge problem with its convicts bound for Australia:  most were dying before they reached the "fatal shore" down under.  Chadwick, however, proposed a solution as effective has it was simple.  Instead of paying sea captains by the number of convicts that boarded their ships, he suggested paying them for the number of convicts who disembarked from their ships -- under their own power.  It worked.  Soon after Chadwick's policy was implemented, convict survival rates surged to over 90 percent."

"Entrepreneurial Economics for Fun, Profit, and a Better World,"
by Alex Tabarrok (May, 2002)

Private ownership uses those same insights that Chadwick discovered two centuries ago.  It is based on incentives and, harnessed with competition to meet market needs, is the most powerful means of promoting efficiency and high living standards.

Fifteen years ago, following a century of increasing government ownership, it was a new concept.

Over the past dozen years, well in excess of $100 billion of previously owned government businesses have been sold to the private sector.  In terms of industry sector these were dominated first by the government's half float of Telstra and secondly by the electricity and gas industry.  Electricity and gas comprised 27 per cent of the sales.

Moreover, the sums raised from privatisation understates the magnitudes involved since, concurrent with and subsequent to it, there has been considerable new private investment in areas formerly reserved for government.

Privatisation in Australia was sparked by the Thatcherite revolution.

The Federal Labor Government in the 13 years from 1982 privatised areas where government business entities were heavily involved in a competitive business environment.  The entities included the Commonwealth Bank, Qantas and the Moomba to Sydney pipeline business.

Massive impetus to privatisation was given by a collapse of State Government financial instrumentalities in the early 1990s.  Not only did this reveal mismanagement that shook the confidence of those championing State owned business, but the consequences also placed the State Governments that had presided over these businesses in a parlous financial position.

The most serious was that of Victoria and the Liberal/National Government elected in 1992 embarked on a vigorous privatisation program.  Victoria's privatisations were worth $30 billion, equivalent to twice the value of the other states combined.

Revenues raised by privatisation in each jurisdiction are shown in Chart 1.

Chart 1

Sales of Victorian electricity assets between 1993 and 1999 realised $21.4 billion, with gas assets realising a further $6.5 billion.  These funds comprised the lion's share of the State's $30 billion asset sales and were used to pay off State debt which was reduced from 26.7% of State Gross Product to 3.1% in June 2000.

According to the Auditor-General, ⁽²⁾ excluding certain franchise fees and other payments the estimated sales values and the average Price/Earnings as follows:

Table 1

SALE PROCEEDS AND EARNINGS MULTIPLES
ACHIEVED FROM THE SALE OF ELECTRICITY ENTITIES ^(a)

	PowerNet Victoria	Southern Hydro Ltd	Electricity generation businesses	Electricity distribution businesses
P/E multiples Average	12.3	14.5	12.0	13.9
Sale proceeds ($m)	2,545	398	9,001	8,270

^(a) The earnings multiples are based on projected earnings before depreciation, interest, tax and abnormal items (EBDIT), as per the Information Memorandum for each company (in nominal dollars).

The Auditor-General put the annual savings, net of dividends that might otherwise have been expected, in 1997/98 at $760 million, a sum that would have been expected to increase year by year.  This was equivalent to some 9 per cent of the State Government's own taxation raisings.  Furthermore, the debt alleviation and other reforms to State Government finances led the debt rating agencies to raise the State's rating from A-1 to AAA.  This brought about further savings in terms of interest charged on debt.

Although Victoria's asset sales progressed somewhat independently of the National Competition Policy reforms, the sales actually brought a melding of the deregulation, and privatisation policy strands targeted at business efficiency.

Electricity and gas asset sales across Australia raised over $38 billion during the decade to 2001.  Aside from Victoria, only in South Australia were assets comprehensively privatised.

Chart 2 illustrates the sector's asset sales by State

Chart 2

OUTCOMES OF THE NATIONAL ELECTRICITY AND GAS REFORMS

PRICE OUTCOMES

In real terms electricity prices have been reduced over the six years to 2002/3, years that roughly corresponded to the period during which privatisation and market provision took place.  Except for larger customers, the period was largely characterised by price controls rather than a true market provision.  Nonetheless an increasing share of the market became contestable even though price caps were in place for the smaller customers.

Having prices being set by government institutions is highly imperfect.  However, the institutions advising on the price setting are somewhat at arms length from the political process and are, therefore, more attuned to the need to ensure prices are cost-reflective rather than politically set.

In the period under consideration, electricity prices were reduced for almost all customers.  Those customers in rural areas saw a lesser degree of price falls as suppliers sought opportunities to rebalance their tariffs away from the cross subsidies that were (and remain) in place.  Of course, it could be argued that those cross subsidies confer a benefit on the customers who see lower prices but that benefit can only be at the expense of the customers doing the subsidising.  And the subsidies create artificial incentives to consume more power where it is more expensive to do so and less power where it is cheaper to do so.  The net effect of the pluses and minuses is negative for the community as a whole.

Chart 3 illustrates the price movements that have occurred (expressed in 2002 cents per kwh).  Farming tariffs are used as a proxy for the regional prices.

Chart 3Source:  Productivity Commission

These price outcomes stem from a number of different factors that are addressed in subsequent part of this submission.  Chief among them are the lower costs brought about by privatisation and corporatisation including:

• eliminating over-manning at power stations;  thus in Victoria, there were in the early 1990s some 10,000 people employed in electricity generation compared to less than 2,000 direct employees today (to which should be added the equivalent of about 500 in employee equivalents involved in contracted-out work);  this has taken place in a system that has increased its output by 35 per cent.
• improving the operations of the power stations so that they are available to run for a greater amount of time;
• reducing distribution costs from innovations like live-wire maintenance;  and
• outsourcing generally, including competitive bidding for extensions and augmentations.

These and other economies have more than offset the increased costs that have developed as a result of the load becoming more peaky and requiring increased capacity due to the growth of summer air-conditioning demand.

SYSTEM RELIABILITY

Increased prominence has been given to system reliability after well publicised area-wide failures in the north east of the North America and in Italy.  Some have placed the blame on such failures on the market system putting a greater priority on profit maximisation and correspondingly reduced emphasis on built-in redundancy.

A sample of two major failures is a slender basis for building an empirically based case.  This is especially so when it is considered that the other major failure -- and one involving a more prolonged outage -- was that of the publicly owned system serving Auckland.  Even in this case some writers (e.g. John Quiggin) have sought to portray it as a failure of privatisation since the New Zealand system had been corporatised. ⁽³⁾

It is however likely to be more than coincidence that the recent failures in Italy and the north east of North America were widespread.  This is because systems have developed to be far more integrated over the past few years.  The increased integration has been put into place to allow trading of power so that supply is at lower costs and to allow greater sharing of power in emergencies, with the first of these being the dominant motivation.  Increased integration, as well as offering back-up to combat a localised outage, also brings the potential to create rolling outages as a result of the integration.  This was the case in both the recent major outages.

Even so, the US Federal Energy Regulatory Commission (FERC) has sought to encourage greater integration with its proposal for a Standard Market Design with all significant supplies and loads being brought within one of five regional groupings.  This is facing opposition, though largely from jurisdictions that would see power from their areas exported to high price areas, thereby raising the price in the exporting area.

One disturbing feature in the developments of integrated markets in the USA has been the lag in new transmission developments.  The following chart illustrates a seemingly accelerating decline in transmission relative to demand.

Chart 4Source  FERC

The reduction in transmission capacity in relation to demand doubtless contributed to the rolling breakdown in the north east and was also a factor in the Californian "system meltdown".  The reasons for the US reduced capacity build include opposition by local NIMBY groups to power lines crossing land near to them and the difficulties in arranging for adequate remuneration.  The (FERC) has sought to encourage increased transmission including through approving "merchant" transmission that is built entrepreneurially and which depends on users' willingness to pay for its viability.  Such plants with present alternating current technology present considerable control problems.  They are practical with direct current and Australia has two of the most notable examples, though neither has proven to be commercially viable.

Lack of transmission capacity is not a major issue for system reliability in Australia's electricity industry.  Those seeking transmission augmentations largely make their case on cost savings through the availability of cheaper power.  This reflects a situation of overbuilding of electricity transmission (and of base load power plants) under the integrated government systems that prevailed prior to national competition policy.

At issue with transmission in Australia and elsewhere is determining the appropriate incentives to build the correct amount of new capacity.  The problem is plagued by the natural monopoly features thought to be inherent in electricity transmission and the alternative means of meeting load growth through either transmission and generation.  Where generation is market-provided and transmission is supplied by a regulator deeming a market to require it, there are great risks of the alternative decision routes creating inefficiencies.  These arise either because the regulated approval is over-conservative or because the threat of such approval might undercut the profit projections for a new merchant capacity generator.

The Australian transmission grid, much of which was overbuilt under the integrated state supply systems, has continued to expand as shown in the chart below.  Even so, the means of bringing new transmission capacity on stream and at the right time continues to be an area of considerable discord in Australia and elsewhere.

Chart 5Source  ESAA

POWER STATIONS' EFFICIENCY LEVELS

Since markets provided the disciplines to force improvement, there have been some quite dramatic advances in outcomes.  The availability of power stations to run is one indicator of the readiness of power stations to offer electricity into the grid.  A high level of availability will mean a system that needs less reserve capacity, thereby making cost savings, and/or a system that is more reliable due to the capacity ready to be called into supply.

Chart 6 shows the improvements in power stations' availabilities to run across the different jurisdictions.  The privatised Victorian system's performance is on a par with that in other jurisdictions in spite of it being based on brown coal stations which are intrinsically less flexible than gas and black coal fuelled stations.  The privatised South Australian system is now leading in availability to run.

Chart 6Source ESAA

An even more impressive outcome emerges from analysing labour productivity.  Measured in terms of electricity output per employee, over the eleven years from 1990/1 productivity increases of 79 per cent, 130 per cent 42 per cent and 103 per cent were achieved for NSW, Victoria, Queensland and South Australia respectively.  While this overstates the increase as a result of the greater use of contractors, it is clear that a vast upsurge in efficiency has taken place.  The increased output per worker has been achieved with lower pool prices and contract prices that even in nominal dollar terms remain below the levels set on the basis of accountants' advice for the vesting contracts.

Moreover, this has been achieved without major new capital spending.  The legacy of over-build from the pre-competition era was such that there has been little augmentation over the past decade.  And where new plant has been built, much of it is in peaking capacity which tends to be more labour intensive as a result of its irregular usage.

Chart 7 illustrates productivity improvements.

Chart 7Source:  ESAA

It is true that these improvements in productivity had an adverse effect on the employment in areas where generation takes place, especially the Latrobe and Hunter Valleys.  However, employing excessive numbers of people is not a sound means of ensuring sustainable economies, either national or regional.  In many cases the electricity businesses in the pre-Hilmer era were used as a sink for job creation but such policies, a re-run of which can be observed in the case being made for subsidising wind power, are always likely to be counter-productive.

There are those that argue, again in the context of wind power, that early action to catch a wave of the future will leave Australia well placed to reap rewards as the technology develops.  Such notions are ill-conceived and have little empirical support.  Of all the new technology based developments the world over one is hard pressed to find a single instance of subsidies and successful enduring government winner-picking.  Certainly not the telephone, the computer (IBM got nothing) the jet engine, the motor car, the tv.  Certainly not man-made fibres, the airplane, software or microchips.  Indeed, as attested to by countless failed government created "technology parks" (including our very own "multifunctionpolis"), government patronage often brings the kiss of death.

THE RELIABILITY OF DISTRIBUTION BUSINESSES

For Victoria, while comprehensive data was not kept of reliability prior to disaggregation and privatisation, there is sufficient evidence available to be confident that the reliability of the system has improved.  This is shown in Chart 8.

Victoria's Essential Services Commission collects data by distribution business.  The two charts below outline the data on minutes off supply.  They show a progressive improvement in all five distribution businesses and a marked improvement since 1993/4, the last full year of operations of the SECV.  Although the reliability of the rural system, a proxy for which can be seen on the second part of the chart with Powercor and TXU, is not on a par with the urban system it has shown a clear improvement over the period.  Rural systems generally are not as reliable as urban systems for a number of reasons.  These include the inherent thinness of demand and consequent inability to justify the same level of built-in redundancy, and the longer distances that crews must travel to fix breakdowns.

Chart 8
Source:  http://www.esc.vic.gov.au/apps/page/user/pdf/ElecDistReport_CalendarYr2002_August03.pdf

IPART of New South Wales also collects this sort of data for the state's corporatised distribution businesses.  As the following table shows, the number of planned interruptions in NSW appears to have increased over recent years, particularly outside of the main urban area covered by EnergyAustralia.

Unfortunately information is not available on unplanned outages and the history is not readily available for earlier years.

Table A4.5  Number of planned interruptions to supply

DNSP	1998/99	1999/00	2000/01	2001/02
Australian Inland	185	363	442	749
Country Energy				6,419
Advance Energy	1,519	1,687	1,648
Great Southern Energy	2,380	2,613	2,142
North Power	1,766	2,470	2,553
Energy Australia	850	983	986	967
Integral Energy	1,428	2,156	2,886	2,841
Total	8,129	10,272	10,657	10,976

Table A4.6  Number and percentage of planned interruptions to supply where
DNSPs did not provide the required notice to affected customers

DNSP	1998/99		1999/00		2000/01		2001/02
	No.	%	No.	%	No.	%	No.	%
Australian Inland	0	0.0	4	1.1	11	2.5	0	0.00
Country Energy							92	1.4
Advance Energy	37	2.4	18	1.1	20	1.2
Great Southern Energy	na	na	na	na	29	0.9
North Power	14	0.8	4	0.2	12	0.5
Energy Australia	20	2.4	20	2.0	12	1.2	4	0.4
Integral Energy 53	na	na	14	0.6	73	2.5	7	0.2
Total	71	0.9	60	0.6	148	1.4	103	0.9

Source:  Electricity distribution and retail licences Compliance report for 2001/02 Report to the Minister for Energy;  http://www.ipart.nsw.gov.au/,

Although the information for NSW is fragmentary, this indicator would appear to suggest the system in that State has not shown the degree of improved reliability that is apparent in the privatised Victorian system.  Other evidence that may similarly be interpreted to show other than an expected level of improvement includes data on call centre drop outs and street light repairs.

GAS SUPPLY INDUSTRY EFFICIENCY LEVELS

The gas industry has seen quite remarkable improvements in efficiency over the past decade.  Sales per employee in terms of gigajoules have increased more than fourfold.

Sales and employment are shown in the following chart.

Chart 9Source:  AGA

Real gas prices have tended to fall in Victoria.  For business tariff customers in Victoria and WA have declined by between 4 per cent and 25 per cent.  Prices for small business in non-metropolitan WA increased by around 5 per cent over the decade to 2001.

For household users in Victoria, prices in 2000/1 were 7 per cent above 1990/1 levels but 7 per cent below 1993/4 levels.  The table below summarises the trend for TXU, a major rural supplier.  Household tariffs were fixed by regulation over the period and therefore do not indicate market factors.

Real gas price trends -- households, TXU Retail (Victoria)
1990-91 to 2000-01 (index 1990-91=100)

	Metropolitan and non-metropolitan
1990-91	100.0
1991-92	103.5
1992-93	106.1
1993-94	114.0
1994-95	113.4
1995-96	109.9
1996-97	110.7
1997-98	111.9
1998-99	109.8
1999-00	104.6
2000-01	107.4

Note  Real price indexes were calculated using the tariff applicable to average annual consumption level of 57.8 GJ.  Consumption during the winter months June to September was assumed to be 55 per cent of annual consumption.  Tariffs were deflated by the CPI (All groups) for Melbourne.  The nominal price series for 2000-01 exclude the Goods and Services Tax.  Prior to January 1999, prices were based on Gas and Fuel Corporation tariffs.

Data source:  PC estimates based on ABS (Consumer Price Index, Australia, Cat. no. 6401.0);  Vistoria Government Gazette (1997 and previous issues);  Victoria Government Gazette (1998).

Real average prices for (mainly large) business contract customers, which are not fixed by regulation, appear to have declined in Victoria and WA.  The trends for individual contract customers will depend on the extent of their unique transmission, distribution and retail charges.  The figures below illustrate this.

Real gas price trends -- business, AlintaGas (WA)
1990-91 to 2000-01

Real price trends -- business, TXU Retail (Victoria)
1990-91 to 2000-01

Note:  Price indexes were calculated using an annual consumption level of 500 GJ for a small business and 10,000 GJ for a medium sized business.  The pattern of consumption is assumed to be uniform throughout the year.  Prices were deflated by the CPI (All groups) for Melbourne.  The nominal price series for 2000-01 exclude the Goods and Services Tax.  Business prices do not vary between metropolitan and non-metropolitan areas because uniform tariffs apply throughout TXU Retail's franchise area.  Prior to January 1999, prices were based on Gas and Fuel Corporation tariffs.

Data source:  PC estimates based on ABS (Consumer Price Index, Australia, Cat. no. 6401.0);  Vistoria Government Gazette (1997 and previous issues);  Victoria Government Gazette (1998).

There is little trend data on reliability of gas services but the ESC in Victoria assessed reliability to have remained stable between 1999 and 2001.

GAS TRANSMISSION DEVELOPMENTS

Existing gas pipelines have not required any special incentives for expansion to ensure on-going system security and to meet augmented demand.  One exception to this appears to be the Dampier to Bunbury Natural Gas Pipeline which has a regulated price cap imposed upon set at a level that the pipeline owners' claim will not only require its sale but will also make expansion of capacity to meet demand growth nonviable.

Price capping will always carry the potential for regulatory mistakes, like that claimed to have taken place with the DBNG pipeline, and consequent under-building.  For this reason and to allow a market (rather than politically) determined expansions government institutions should exit regulation of pipelines that are not presently in place and of those where more than one pipeline serving a load allows workable competition.

The ending of the regulated monopolies in gas pipeline provision that followed from National Competition Policy brought a raft of new pipelines including the Duke Energy pipeline from Bass Strait to Horsley Park (Sydney) and the SEA Gas line from Port Campbell to Adelaide.  However there is clear evidence that the regulatory arrangements are causing a hiatus in new developments.  One example of this is the decision by Duke Energy, one of the most aggressive builders of new pipelines, to cease examining new build opportunities.  Duke Energy has cited regulatory measures as the reason for this decision.

Table 2 below identifies recent new pipeline projects.

Table 2

Project	Potential consumers	Competitive tender held	Estimated project value	Outcome
Tasmania (2002)	385,000	Yes	$200.0m	Project delayed -- ongoing government funding negotiations with preferred distributor
Loddon-Murray Region (2001)	15,000	Yes	$50.0m	Project shelved
North Bellarine Peninsula (2000)	4,000	No	$11.0m	Proceeding following government funding -- completion due 2004
Barwon Heads (2000)	1,300	No	-	Project deferred
Cardinia Shire (1999)	2,300	No	-	Completed
Yarra Ranges (1999)	14,000	Yes	$16.0m	Project shelved
East Gippsland (1999)	22,000	Yes	$14.0m	Project delayed
Central Ranges (1999)	50,000	Proposed	$96.0m	Project delayed

Source:  AGA

GOVERNMENT AND ENERGY OPERATIONS

Deregulation has enhanced the level of improvement, confirming the judgements stemming from applied economic theory which would predict positive outcomes from clear ownership rules and a competitive environment.  The present arrangements with either private ownership or publicly owned entities operating under company law have brought vast improvements in efficiency and lower prices with increased reliability.  Few would argue for a return to integrated monopolies in the energy supply industry.

Indeed, it is Government intervention that has given rise to many of the developments where the energy market has not delivered as beneficial an outcome as might have been hoped.  These intrusions go beyond the sort of commercially directed interventions discussed above and include regulatory over-reach by the "independent regulatory agency", the ACCC.  Such over-reach has had a disincentive effect and has distorted investment decisions, particularly with respect to gas.

Privatisation is often cited as having brought increased prices and reduced reliability.  However, a cool assessment of the Australian energy sector has shown it to have brought the opposite effect.  Privatisation offers advantages over corporatisation in four areas.

First, governments as owners are always likely to interfere or place particular pressures on the management to operate in ways that are not fully commercial.  This may well be the case, for example, with the enterprise agreements.  The corporatised firms in NSW and Queensland are aware of their shareholders' opposition to Australian Workplace Agreements that involve a much reduced role for trade unions.  Accordingly it is unlikely that they would seek such an approach rather than Enterprise Based Agreements, especially such agreements that did not involve a key role for trade unions.  Such restrictions on management options would tend to reduce the firms' relative efficiencies.

Secondly, government ownership has the potential for appointments that are based on patronage rather than management capabilities.  NSW government firms learned some very hard lessons about the dangers of not ensuring fully professional management.  One was delivered by Victorian retailer Powercor, which signed contracts for electricity from NSW's Pacific Power at knock down prices.  The NSW Government tried to wriggle out of the contracts but the courts upheld the contract.  As a result, NSW taxpayers have incurred a loss of some $600 million.

Thirdly, ownership even when there is arms length management, cannot eradicate the conflict of interest between the government as a player and the government as the upholder of the law.  An example of this is illustrated by the NSW Government's actions with regard to an unwelcome contract signed by EnergyAustralia.  EnergyAustralia, the biggest retailer in the NSW (and in Australia), signed a 35 year deal with an American firm for two new power stations, Redbank 1 and 2.

Soon after the deal was struck, the price in the market halved and remains 30 per cent below the Redbank contract price.  Some estimates put the contract loss on at $750 million.  Redbank 1 has been operating for the past two years.  But Redbank 2 is still not built and the NSW Government set up an inquiry into it.  Citing greenhouse gas emissions, the Government has refused it development approval, thus avoiding an onerous contract.  Using approval processes to cancel debts smacks of banana republic government practice and could undermine confidence in this and other areas.

A further example of the over-use of government influence in pressing for a commercial outcome is seen with the NSW electricity transmission operations.  The NSW Government also placed a major priority on having the authorities approve a new regulated electricity transmission line to South Australia.  In pursuing this regulated investment approval for a line that would benefit the state owned power stations the NSW government became a participant in an activity which should have been resolved by commercial considerations and established regulatory procedures.

Another instance of counterproductive policy approaches that are only likely to occur with government ownership was cited by the Parer inquiry. ⁽⁴⁾  The Parer committee was highly critical of arrangements that NSW and Queensland have in place to try to prevent electricity price volatility.  These involve a form of mandatory insurance.  The Parer report argues that the arrangements impede competition and market efficiency.

Fourthly, government owned firms have a greatly reduced capacity to transform their management.  Private firms' owners have an exit strategy involving selling the business to new owners where these owners consider they can operate it more profitably.  Such reselling has occurred on at least a dozen occasions with the Victorian and South Australian privatised gas and electricity businesses.

---

ENDNOTES

1.  Regulatory arrangements may also place an undue priority on risk avoidance and therefore place upward pressure on contract prices, a feature of the regulated prices in South Australia which rose 25 per cent in 2003.

2.  http://www.audit.vic.gov.au/mp98/mp98t&f.htm, paras 3.8204-3.8206

3.  The most well known Australian failure, Victoria's gas outage in 1998, was for a system that had always been under private ownership.

4.  http://www.energymarketreview.org/

Corporate Effort

Support for reform has faded, but business can still pick up the pace.

The business sector -- more specifically, the large resources companies - played a key role in economic reform.  During the 1970s and 1980s, they maintained large teams of policy people on staff, who made seminal submissions to virtually every inquiry, study or investigation.  They funded a host of independent analyses from universities, think-tanks and consultancies.  They provided leadership and backbone to the many business groups that then promoted reform.  They gave courage and political support to politicians, and their leaders participated directly in the debate.

This no longer happens.  The policy teams are largely gone.  The financial support for independent research has declined and in many cases has been shifted to anti-market groups.  Business groups, with some exceptions, have gone quiet and politicians receive little public support from business for further reform.

This does not mean that business has gone into hibernation.  As a result of deregulation and market-based reform, companies have been on a treadmill of internal reform to increase efficiency.  Indeed, the pace of change has been unprecedented.  Companies have understandably shifted their focus from changing the economy to changing themselves.

To a degree, this is to be welcomed.  Few businesses have taken full advantage of the scope for internal reform and the opportunities that are allowed under the present regulatory framework.  And therefore, even on a public-benefit basis, the best return for their effort lies with internal reform.

There are other reasons for the shift in focus from economic to internal reform.  First, many of the big-ticket reforms that affect the private sector have been done, with the big exception of reform of the labor markets, which remains incomplete.  Second, the remaining reforms are, in the main, outside the expertise and operation of the business sector, such as higher education, public hospitals, and welfare.  While private hospitals and universities exist and could expand, the public sector will remain the dominant funder and provider.  Third, companies and industries have become more global and therefore less focused on Australia and its reform needs.  Fourth, corporations are increasingly unwilling to risk what is left of their reputations to promote market-based reform.  Corporations, in large part because of their role in promoting and implementing market-based reform, have been subject to a concerted campaign of "brand-mail" by the opponents of reform.

A recent example of this campaigning is the RepuTex Index, which provides a public soapbox for anti-market advocacy groups such as Greenpeace, the ACTU and the Ethics Network, to shame and blame corporations.  Of course, the excesses of the dot-com bubble, many cases of corporate fraud and other examples of managerial capitalism run riot have not helped the standing of the sector in the public's eye.  Finally, business leaders, like politicians, have become lazy, content to reap the benefits of past reforms while not pushing for more.  If this continues, Australia's capacity to compete and prosper will also begin to wane.

What it means is that a key source of support for reform has waned.  This has contributed to the pace of reform slowing at the national level and going into reverse at the state level.  However, the main fault lies not with business but with short-sighted politicians and the excessive power given to fringe political parties.

Nevertheless, business support for economic reform can be mobilised.  First, reform of the Business Council of Australia (BCA) is needed.  The BCA is potentially an important institution as it brings together the big corporations across all sectors.  During the 1980s and early 1990s, its contribution to reform was profound.  It lost its way in the mid-1990s when it was restructured to allow select chief executives to speak on behalf of the corporate sector as a whole.  Because its members were not willing to put their own companies' reputations on the line for the greater good, the BCA has since avoided taking a stand on most tough issues and has gone quiet on reform.  This can be changed by emulating the structure and personnel of the New Zealand Business Roundtable, which has kept the torch of reform burning despite a hostile government.  The ascendancy of Hugh Morgan to the presidency of the BCA is a very positive sign.

Second, even though companies have gone global and the "branch office" mentality reigns, global corporations can be persuaded to invest in public-interest issues in Australia.  After all, they did so in a big way in the 1980s.  For example, while the multinationals have cut policy staff in Australia, they have expanded these resources in the region, often in Singapore.  These companies need to be convinced that investing in policy change in Australia is worth their while.

Third, businesses should recognise that good corporate citizenship does not just mean giving money to charity (worthy though it is).  It also means helping make the case for reform.  Reform is, after all, not only good for shareholders but for society as a whole.

Team Bracks Now Facing the Hard Yards

It is approaching crunch time for the Bracks Government on fiscal policy.

The pressure for even more spending is mounting and while the state's finances are in good shape, they are based on fragile foundations.

The evidence was provided in and by the reaction to the Financial Report of Victoria 2002-03 released this week.

The Report indicated that the States budget sector ended the 2002-03 fiscal year with a surplus of $236 million and net debt of $1.3 billion.  While the realised surplus was half the level forecasted in the budget, the fact that the budget was in surplus and debt levels low, set off calls for many quarters for more spending and borrowing.

Naturally these pressures exist in any democracy.  The calls for more spending and borrowing however, overlooked a number of crucial factors.

First, under accrual accounting standards adopted by governments in the 1990s, the budget bottom-line is the difference between recurrent revenue and recurrent spending.  It does not include spending on new capital works.  Indeed it measures the amount of funding, available to invest in new assets.  Therefore pushing the budget into deficit, as demanded by many, would result in the borrowing to pay the wages bill.  This was that very action that brought the Cain/ Kirner Governments and the state's economy to a halt over a decade ago.

Second, spending on public infrastructure is currently at very high levels and the problem lies not with it quantity but its quality.  The State Government directly spent a total of $3.3 billion on capital works in 2002-03.  This was 25 per cent more than the previous year.  Much "public" investment is now, however "off-budget" and undertaken by the private sector through the Private-Public Partnerships (PPP) and the privatised businesses.  In 2002-03 alone the State Government made commitments through the PPP program to capital works totalling $4.5 billion.  The privatised businesses also have a hefty capital works programme underway.

Third, the budget surplus was only achieved as a result of massive $900 million revenue windfall from the housing boom.  While the housing market, with the exception of the inner city apartment sector, is unlikely to collapse, turnover is expected to slow in the near term.

Fourth, the Government once again failed to control public sector wages.  During 2002-03 the public sector wages bill grew by 7.7 per cent and was $500 million over-budget.  As a result expenditure growth once again outstripped revenue growth, despite the revenue windfall.  Moreover, decisions were made during the year that resulted in a 10 per cent increase in future wages liabilities.

More ominously the public sector unions have begun campaigns for huge increases in wages which even if meet half way will send the budget into the red.

As the Auditor General warned last year, the State's finances are, despite there rosy appearance, in a fragile state.  The budget is excessively reliant on income from a housing bubble and the government has proving unable to control public sector wages growth.

The last thing the State economy needs is a reversion to the policies of the distant past, where the government borrows supposedly for infrastructure, but with the proceeds used to fund declining revenue and excessive wages bill.  And the Bracks Government knows it.

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Report 5. Petrochemical Industry

Capacity to Manage Index

Overall Ratings, Petrochemical Industry

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Report 4. Transport Industry

Capacity to Manage Index

Overall Ratings, Transport Industry

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Report 3. Automotive Industry

Capacity to Manage Index

Overall Ratings, Automobile Industry

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Report 1 & 2. Food and Construction Industries

Capacity to Manage Index

Overall Ratings, Construction Companies

Overall Ratings, Food Manufacturing Industry

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Competition Better than Regulatory Compulsion

We have now seen almost a decade of contention over the regulatory regime for controlling Australia's natural gas supply.  The present warzone is a Productivity Commission Review.

Behind arguments about regulated price outcomes is a four-way conflict.  Pipeliners want to build new facilities and obtain any blue sky that might emerge;  they also want existing pipelines to escape regulatory control and "inadequate returns" of regulated prices.  By contrast, various user groups want to see low charges, based on marginal costs.  Gas suppliers also want to see carriage prices kept as low as possible to increase demand for the commodity.  Arbitrating these divergent interests are the regulators for whom retention and expansion of existing powers constitutes a further, separate interest.

The current regime, centred on regulatory price determinations, replaced state government control and ownership.  Within the framework of National Competition Policy (NCP), this has promoted competition by smashing the previous gas pipeline monopolies.  But it has left regulators, like the ACCC, to "scientifically" determine prices for gas carriage based on their estimates of the market price that would prevail if there was active competition.

Whether or not pipeline price reductions required by regulators replicated competitive outcomes, these price reductions were one-off.  They translated the lower costs resulting from privatisation/ corporatisation into lower prices.  Scope for further reductions is unlikely to be so spectacular and is best achieved by real competition increasing efficiencies rather than regulatory compulsion.

Greater scope for allowing competition to assume its conventional role of market "regulator" is developing.  Pipeline-on-pipeline competition is already in place in Sydney and will soon also be in Adelaide.  The dominant sources of gas -- Cooper and Bass Strait -- are already competing with each other and additional sources are emerging.

A deregulated system is essential for new investment.  Claims that benign ACCC oversight has created the certainty for a boom in pipeline construction do not stand up to scrutiny.  There are just too many distorted investments, like the SEA Gas line in South Australia, and investments that have not proceeded, for this view to have any credibility.

We can never attain the Holy Grail of perfect competition, comprising many buyers and sellers in gas or other line-based supply industries.  And even the ACCC acknowledges workable competition is better than the synthetic variety regulators must apply.  But it is yet to recognise that as few as two sources of competition bring cleaner market outcomes than a regulator.

For a healthy and growing industry, regulation must be relaxed in three areas.

First, regulators should exit control over greenfield pipelines giving entrepreneurs time to profit fully from spotting opportunities for new pipelines without these being killed by price and service conditions.

Secondly, regulators should exit regulatory oversight where a load centre is served by more than one major pipeline serving.

Thirdly, for monopoly gas pipelines we should now move from the present price setting system.  Essentially, this is profit-capping.  Price-capping based on economy-wide price and productivity movements must be used to improve incentives for productivity gains.

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Checking on Charities

Jim McGinty is cutting non-government organisations (NGOs) out of the health funding loop.  What is that all about?  After all, the NGOs are just trying to help.

It is about a government, duly elected by the people of West Australia, determining who shall help it deliver the best services at the lowest cost.  Sometimes NGOs do the job well, sometimes they do not.

Similarly, my study of Commonwealth-NGO relations for the Prime Minister's Community-Business Partnership, and the Federal Treasurer's Bill defining charities are part of the same thinking.  Governments need to test the credentials and effectiveness of those NGOs (which include charities) who want to use public funds to act on behalf of interest groups.  This is not only a government right, but also a responsibility.

NGOs come in all types and sizes, always non-profit, sometimes charitable, sometimes glorified lobbyists, some international, some local, some want to save the world, some want to save themselves.  They are vehicles for private initiative to pursue public purposes.  Few matters of public policy pass without an NGO spokesperson voicing an opinion.  They have, in some regards, become the official opposition.  Their growth in recent times is an "associational revolution", and reflects an enthusiasm for citizens to participate more directly in public problem-solving.

NGOs are private associations and as such should be left alone, unless they use public money or have privileged access to politicians.  Then the politicians should ensure that they and the public know who they are, whom they represent, why they receive government funds, why their view is preferred to another group, and, if they provide a service, how effective and efficient are they.

For example, right now charities are arguing the toss with the Commonwealth government about what they are required to do to obtain tax advantages -- valued in total at around $4 billion per year.  At present, there is an assumption that a donor understands the purpose of the charity when making a donation.  This may be true when the charity's methods are direct such as giving aid to the poor, planting trees, and writing letters to foreign governments on behalf of political prisoners.

As the methods and definition of charities have widened however, the assumption of donor knowledge does not hold.  Few charities just provide direct aid to the poor.  Most put a great deal of effort and resources into lobbying governments to do that work for them.  For example, lobbying government to provide more generous welfare benefits, to provide shelter for women, to protect the environment and to teach people how to be good parents.  Few charities however disclose to the public -- or governments for that matter -- the extent or nature of their lobbying or its effectiveness.  The trend towards lobbying can undermine a charities link with the community and its self-help ethos.

The states have the responsibility for regulating the fund raising activities of charities.  However, they do so poorly.  Requirements vary immensely between states, enforcement is generally lax, and oversight low key.  At the Federal level regulatory oversight is if anything weaker.

At present, the Australian Tax Office does not audit charities, despite the millions lost in tax revenue.  Indeed, the ATO struggles to be able to determine whether an organisation is a charity or not.  While some charities apply extremely high standards of disclosure, the norm for the sector as a whole is poor.

The key is not heavy-handed regulation, but disclosure.  The motto should be informed giving.  Charities should be required to publish how much money they spend in raising their funds, how much they spend on policy work, and how much they spend on administration.  This would provide the information necessary for donors to decide whether or not to give.  The donor market would be better informed, not just of "the cause" -- the pictures of felled trees, and hungry children -- but the efficiency with which the funds are gathered and applied to the purpose, and how much is spent on the conferences, education, propaganda and lobbying.

It would be good to be able to check the ATO website for an annual form lodged by these organisations that told the story not only of charity status, but how efficient they were, and whether they preferred to be policy people, or help out in the old way.

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Interference Driving up Electricity Prices

When markets replaced integrated electricity supply systems, Victoria parcelled the State Electricity Commission into a dozen components and sold them off.  New South Wales also reformed its system into separate generating and distribution businesses but retained them under state ownership.

NSW government firms learned some very hard lessons.  One was delivered by Victorian retailer Powercor, which signed contracts for electricity from NSW's Pacific Power at knock down prices.  The NSW Government tried to wriggle out of the contracts but the courts would have no bar of this.  As a result, NSW taxpayers have incurred a loss of some $600 million.

A further imprudent commercial decision was taken by energyAustralia, the biggest retailer in the NSW (and in Australia).  This involved a 35 year deal with an American firm for two new power stations, Redbank 1 and 2.

Soon after the deal was struck, the price in the market halved and remains 30 per cent below the Redbank contract price.  Some estimates put the contract loss on at $750 million.  Again the NSW Government sought to renege on the deal.  And again the courts refused to overturn it.  After all, if one of the largest businesses in the country could simply tear up a contract that no longer suited them what would any contract be worth?

Redbank 1 has been operating for the past two years.  But Redbank 2 is still not built and the NSW Government set up an inquiry into it.  Citing greenhouse gas emissions, the Government has refused it development approval, thus avoiding an onerous contract.  Various Carr Government funded green groups chipped in with a chorus of opposition to the project.

Using approval processes to cancel debts smacks of banana republic government practice.  That aside, opposition to the development on environmental grounds is ironical.  A few years ago there would have been green accolades for the Redbank project because it uses waste coal which could otherwise pollute the Hunter River.

Victoria has its own wrangle over environmental approvals with power stations.  Hazelwood Power, which had been scheduled for decommissioning in 2004, was sold.  Its private sector owners have revitalised it and extended its life by decades.  But that extension requires changes to the mining license boundary.  While this would normally be a formality, Minister Theophanous is making it conditional on costly greenhouse gas savings.

Playing the Green Card to energise radical environmentalists is a risky political game.  Giving green lobbyists a voice in deciding which sort of power stations might be built can rebound savagely on power system security.

To see this we only have to look at California.  In California, new power station approvals ground to a halt as a result of green and local NIMBY objections.  The electricity market, which had design deficiencies anyway, became vulnerable to shortages.  Those shortages caused widespread black-outs.  The government panicked and bought additional electricity supplies in a sellers market at exorbitant costs.  These costs almost bankrupted the Californian State Treasury.  Along came Arnie and the rest, as they say, is history.

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Just a Couple of Suits Talking

Conventional wisdom in the media argues that voters need more election debates in the campaign.  As The Australian put it yesterday:  "The great debate [between John Howard and Kim Beazley on Sunday] proved how important it is for our leaders to argue face-to-face in front of voters so they can make an informed choice".

Yet academic research suggests that voters don't find debates all that useful.  Although the academic literature, primarily from the US, can be contradictory at times, a few conclusions do stand out.

The first is that while election debates may attract a large audience, the main effect seems to be a reinforcement of pre-existing opinions.  These were the findings of the first studies in the wake of the 1960 Nixon-Kennedy presidential debates.  When one reads journalistic accounts of these debates, we are told of youthful, confident and telegenic John Kennedy using the first televised debates to defeat a tired Richard Nixon, who was still recovering from the flu.  Yet the academic studies of these debates cast doubt on the media's mythology and show that most voters didn't change their minds and that the debates only served to harden the voters' attitudes to the candidates.  The studies showed that the debates were not decisive, with a number of studies even giving the result to Nixon by a slim majority.

Subsequent studies have tended to confirm these findings.  Reflecting this consensus, communications scholars David Sears and Steven Chaffee have noted that "the information flow stimulated by debates tends to be translated by voters into evaluations that coincide with prior political predispositions".  In plain language, after viewing the debate on Sunday, without the benefit of post-debate analysis, Liberals would have thought Howard won, while Laborites would have seen Beazley as the victor.

A second conclusion that we can take from the academic research is that direct viewing of debates results in only minor shifts in votes.  Studies of the Reagan-Mondale debates in 1984 showed that three out of every four undecideds who used debates as a cue to make their voting decision thought Walter Mondale won the debate.  The Harris poll gave the result to Mondale by 61 per cent to 19 per cent.  History shows that Mondale lost in a landslide to Ronald Reagan.  Unfortunately for Mondale, what the studies revealed is that only a small percentage of those undecided use debates as their principal frame of reference for casting a vote.

The Nine network's exercise with the worm, which showed what an audience of undecided voters was thinking, was entertaining.  It will also assist the press gallery in its assessment of the "winner".

But it is largely irrelevant.  Given the level of cognitive dissonance in Australian swinging voters, the chances are that these voters, who really don't like politics much, would have watched the Seven and Ten networks on Sunday night instead of the debates on Nine or the ABC.

This tendency to avoid politics where possible is the reason political parties invest so heavily in highly intrusive forms of communication such as electronic advertising and direct mail.  Question marks over the effect of debates are further compounded by Australia's Westminster system, where local issues and local candidates often matter far more to voters than the leaders and certainly more than any debate.  This is particularly the case as one heads farther from the capital cities to regional and rural Australia, where many marginal seats are concentrated.

One area where the research does support the importance of debates is in the area of agenda-setting.  A fairly constant finding is that political debates do have an agenda-setting effect.  Paul Keating's tour de force in 1993 is regarded as a decisive debate.  Still, the debate's real impact for Keating was in its ability to focus the media on his agenda of the GST and not on Opposition leader John Hewson's agenda of income tax cuts.  It is questionable how many swinging voters, who generally dislike aggression, would have been won over to Keating's side immediately by his rather brutal demolition of Hewson.

Academic research simply does not accord debates with the degree of importance that the media does.  And it is the media -- not the voters -- who are driving this demand for debates.  No doubt the public would much prefer to have their usual programming.  The election debates are for the benefit of the press gallery, not the voters.  If the media wants another debate, they should say so.  But they shouldn't use the voters as the justification for their demands.

Social Responsibility and Society

Corporate social responsibility may be couched in the language of reasonableness and fairness, but in reality it is a racket that threatens many shareholders and workers.

This racket is illustrated by the RepuTex Rating System, released this week.

RepuTex says it assesses companies for governance, environmental and social impact and workplace practices, judged by 19 groups including the Wilderness Society, the Australian Shareholders Association and Standards Australia.

In part, it provides a soapbox for activists such as the Wilderness Society to blame, shame and praise corporations in a variety of areas.

The process is clothed in an appearance of independence and rigour.  However, from the list of the assessors it appears they are chosen for their influence in the media and their desire to get something from corporations rather than their technical expertise.  It seems inevitable that their evaluations will reflect little more than their agendas.

The strength of the process, however, is in the susceptibility of large corporations to "brandmail".  Corporate reputations are highly valuable and fickle.  Corporations will often appease groups that attack their reputations with conciliatory gestures to their aims, and donations.  RepuTex appears to be perfectly placed to exploit this process.

Not surprisingly, Westpac comes out on top of the RepuTex rating -- as it does in most similar ratings.  Westpac has come to the conclusion that, in the end, the values and wishes of activists will probably prevail and, even if they don't, they must be catered for as their influence and capacity for damage are too great to ignore.  Moreover, it believes that there is money to be made from being friendly with them.  Accordingly, Westpac has embraced groups such as the Wilderness Society as stakeholders.

One such example is BT Funds Management (a fully owned subsidiary of Westpac) and its actions at a recent extraordinary meeting of Tasmanian-based logging company Gunns' shareholders.  The meeting was brought about by Wilderness Society activist-shareholders.

During the past 20 years, the native timber industry in Tasmania has been the subject of an intensive process of investigation and consultation through a regional forest agreement.  The RFA in Tasmania was finalised in 1996 and resulted in a great reduction in native forest open to logging;  a plan to phase out logging of old-growth forests and a strategy designed to shift the timber industry from native forests to private plantations.

The Wilderness Society -- a loose group of anti-logging activists -- was involved in the RFA process and achieved much of what it wanted.  The community, however, decided not to ban logging of old-growth timber immediately, as demanded by the society, but to phase it out over decades to allow time and money to shift to private plantations.

As a result, Gunns has what other logging firms would die for:  strong bipartisan community support;  resource security guaranteed by a joint act of the federal and Tasmanian parliaments;  and a union militantly onside.  Indeed, the process has been a model of community consultation and sustainable development.

Unable to get traction against Gunns in Tasmania, the Wilderness Society refocused its campaign on Gunns' financial backers, including Westpac and the Commonwealth Bank.  As part of this campaign, the Wilderness Society succeeded in getting an extraordinary meeting of Gunns' shareholders to vote on a proposal to immediately stop logging in old-growth areas.

The proposal was accompanied by research sponsored by the Wilderness Society that predicted the proposal, if accepted, would reduce earnings per share by "only" 11 per cent but would also increase the riskiness of Gunns' earnings profile.  Gunns provided research that showed the impact would be greater.

As part of this campaign, the Wilderness Society warned that "Westpac would be judged by its success in preventing Gunns Ltd from logging old-growth forests".  The Commonwealth Bank was given a similar warning.

At the extraordinary meeting, BT abstained from voting.  The Commonwealth Bank voted against the motion on the grounds that it was against its shareholders' interests -- which it clearly was.

True to its word, in the RepuTex rating the Wilderness Society and other environmental judges ranked Westpac high and the Commonwealth Bank low.

After long, detailed and inclusive deliberations, the Tasmanian and federal governments decided to let old-growth logging continue for a period and on a sustainable basis.  Gunns and its shareholders, acting on the decisions, invested in good faith.

However, Westpac (through BT) ignored the decision process in an effort to placate the demands of the vocal few.

The RepuTex Rating and the Gunns example highlight the fundamental flaw of corporate social responsibility, which is, in the end, just another attempt by the great and good to usurp the rights of ordinary people.

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Time for Tax Cuts

The unexpectedly large budget surplus has again raised the spectre of tax cuts, and not before time.

The tax reform of a few years ago did little to improve the burden of taxation.  Indeed, we came through the exercise not only with crushingly high levels of taxation on personal income but a higher overall burden of taxation.

The Federal Government ended the last fiscal year with a surplus of $7.9 billion -- almost double the level forecast in May at budget time.  The main reason for the large surplus is once again buoyant tax receipts.

While the government has yet to release revised forward estimates, the expectation is for large surpluses into the future.  This, along with a concerted effort to trim the fat that has accumulated around most areas of spending, is enough to provide a major reduction in taxation.

The case for tax cuts is strong.  Australia has a particularly onerous taxation system in comparison to other countries and as a share of earnings.

As detailed in a recent report by KPMG (a large accounting firm), Australia's total tax take represents 31.8 per cent of GDP (excluding social security taxes).  This makes us the sixth most taxed economy in the developed word and clearly ahead of all our major international competitors such as the US, Japan, UK, Singapore and Hong Kong.

Australia's tax position is particularly out of sync where it counts the most;  that is, on the corporate tax front.  Even after the recent reduction in the corporate tax rate (from 34 to 30 per cent), Australia is ranked the second highest taxing economy (after Luxemburg) on corporate incomes and is some 75 per cent higher than the OECD average.  The problem lies not so much with our tax rate, but with the way it's collected.

The other key area of concern is the taxation of personal income.  While Australia's overall tax take of personal income is only just above the OECD average, its impact on middle to high income earners is onerous in the extreme.  The top marginal tax rate is not only high, but it kicks in at a low level of income relative to over countries.  For example, the UK has a top marginal tax rate of 40 per cent which kicks in at an income of AU$83,900.  In contrast Australia's top marginal tax rate is 48.5 per cent and it cuts in a $62,500, or 1.2 of full time average annual incomes.

To put this in practical terms, KPMG showed that in order to be able to buy an average home in "middle" Sydney, a homebuyer needs earnings that place him or her on the highest marginal tax rate and who will, as a consequence, lose almost half of each additional dollar earned to tax.

The tax system thus provides a huge disincentive to work, save or study and encourages businesses and skilled workers to seek their fortune elsewhere.  It also encourages people to waste scare resource on minimising taxes.

The Howard Government tried to raise the threshold for the top marginal tax rate to $75,000 as part of the tax reform package, but this was thwarted by the Senate.  It's now time to try again but to do more.

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How Do We Prioritise Our Resources?

A Lecture to a Luncheon hosted by Quadrant,
Pavilion on the Park, 1 Art Gallery Road,
Sydney, 3 October 2003

I USED to be a member of Greenpeace, worried about the environment, thought everything was coming apart, when I read an interview with American economist Julian Simon, where he said, "listen, that's not true.  It's not actually what the data shows."

My immediate reaction was that it was right-wing American propaganda, and I really was just pretty content to leave it at that, had he not said what I always tell students:  go and check the data.  It was only in the Autumn of 1997 that I started realising that a lot of the things he said were actually true.  I thought it important to get that information out.  I thought I should do so, so I published some articles in a Queensland paper.  It blew up into probably the biggest debate we've ever had since the Second World War.  That certainly indicates that this really is an incredibly important debate, and one that we really need to have.

A dossier that Greenpeace had compiled was, unfortunately, only one side of the argument, but it is what you'd expect from an interest group.  And that tells us why this is an important discussion.

Let me just give you an overview of the two important points I'm trying to focus on.  One is to remove the myths.  To the extent that we believe that doomsday is nigh, I would like to try to show you some of the data and convince you that that is not true.  The other is not to say that there are no problems, but to say, of all the remaining problems, which ones should we want to focus on?  Because, really, there's only one bag of money, but there are lots of good things we'd like to do.

As long as we believe in the myth that things are going to hell, we're unlikely to make sound judgements.  We really need to get the right data in order to make the best possible decisions.

So, are things really getting better?  Yes, on many accounts.  We have more leisure time, greater security, fewer accidents, more education, more amenities, higher incomes, fewer starving, more food, and a healthier and a longer life.  This is not just true for the industrialised world, but also, perhaps more surprisingly, for the developing world.

Let me just show you one of those graphs that -- and you'll have to forgive me -- I think is sexy.  The best information that we have about the world -- and also I should just mention, I'm not making up my own data -- come from the best sources in the world, typically the UN organisation.  This is from the Food and Agricultural Organisation of the UN, from 2001 [Figure 1].

What we see here is the caloric availability for the developed and developing world from 1961 until 2000.  If we look at the developed world, we have more than 3,000 calories per person per day.  If we have any problem, it's probably being too fat.  The main problem, of course, is in the developing world, where we actually have a dramatic increase in the availability of calories.  From 1961, the average person in the developing world had 1,932 calories;  on average just about what it takes to sustain life.  Today, that number is up around 2,650 calories per person per day.  It's a dramatic increase -- about 40 per cent -- and of course it's also testimony that people are actually living much better lives.

I want to point out two things though.  I am only saying that things are getting better.  It's not that things are fine and that there are no problems.  To say, "things are getting better", is a scientific judgement, whereas to say "things are fine" is a political judgement.  So, all I am saying is that, scientifically, things are going the right way;  that this graph is actually moving up.  I'm not saying that, hey, they have 2,650 calories, that's fine, they don't need any more.  We can say that not only have things moved in the right direction, but that we can do even more.

The other point is to say that there are lies, damn lies and statistics.  It is true that you can lie with statistics, but they are also the only source that we really have to understand how the world works.  Figure 1 shows an average.  It could be true, for instance, that the middle class in the developing world is eating up that extra stuff.  But that's not actually true.

The UN has made estimates of the number of people starving in the developing world since 1970.  In 1970, about 35 per cent of all people in the developing world were starving.  Today, that number is down to 17 per cent.  In 2030, the UN expects it to be down to 6 per cent [Figure 2].  The point again is to say that it's much, much better to live in a world where only 6 per cent of those in developing nations are starving, than one where 35 per cent are starving.  But it doesn't mean that there's no problem.

In 2030, there will be 400 million people starving -- unnecessarily so.  But it's not because we can't produce the food.  It's because they don't have the money to buy it.  So again we can say that things are moving in the right direction.  We can still identify problems, and start thinking about what, in fact, the most important problems are.

With all these things getting better, however, is it true that all the environmental indicators are going in the right direction too?  Well, generally, yes.  Not all, but most of the important ones certainly are, and especially for the developed world where we are rich.  We really have succeeded in creating a better world.  But many people will argue that it is not sustainable.  One of the main questions asked is, will there be enough of both natural and artificial resources?  I showed you one thing with food.  There will be more people, but at the same time we'll actually be able to feed them even better, by the best predictions that we have from the UN, till 2030.  But what about resources?

This is one of the main fears that we all had back in the 1970s:  the feeling that we would run out of everything.  Let me just show you one graph which looks at oil [Figure 3].  An old Princeton Professor a couple of years ago said we've been running out of oil ever since I was a kid.  And, yes, that's true, we've always worried about it.  Nevertheless, if you take a look at 1920, we know how much oil the world used.  We also know how much oil the world thought was left over.  Divide those two numbers and you get how many years was left over at 1920 consumption.  With these numbers we find that there were 10 years left over in 1920.  So, not surprisingly the American Bureau of Mines came out and said, "in 10 years' time we'll run out of oil".  Now, you may be forgiven for thinking that in 1930 we'd be down to zero, but in 1930 we'd used 10 years' worth of oil and yet at this new higher level of consumption in 1930 we still had about 10 years' worth of oil at the new higher level.

Now that might be a little surprising.  Not so surprising was that the American Bureau of Mines came out and said that in 10 years' time the world would run out of oil.  So you might be forgiven for thinking that at least in 1940 we should be down to zero.  The surprising thing was that despite the fact that we had now used 20 years' worth of oil, we used more oil in 1940 than we did in 1930 or in 1920, there was still eight years' worth of oil at this new even higher level of consumption, and so on and so on.

The curious thing is, the more we used, and the more we use, the more that is left over.  This is not the same thing as saying that the Earth is not round.  Of course it's not.  The point is that the myth-driven idea that there is only so much, and when we've used that up we're done for, is silly.  It's a little bit like going home to your fridge and looking in there and saying, "whoa, I've only got food for three days", so you're going to die in four.  Basically, what we've done is that we've been able to find more resources and utilise these resources more efficiently, and in the long term, of course, we'll also substitute.

When we look at oil, at the present moment we know that we have enough fossil fuels for about 50 years.  But if we take all the shale oil that's commercially available within the next 25 years, we have another 100–150 years.  If we take all the shale oil that exists, we have enough oil for the next 5,000 years.  However, the real point, of course, is that long before that, we'll have switched to other resources, probably renewables or fusion or something we haven't even thought of.  Sheikh Yamani, the guy who founded OPEC, loves to point out that the Oil Age is going to come to an end, but not for lack of oil.  Just like the Stone Age came to an end, but not for lack of stone.  It wasn't like, Oh, God, we've run out of flint, we've got to move to bronze, right?  The idea was that we actually found better alternatives and this will happen with oil.

This principle also holds true for coal, non-fossil fuel and non-renewable resources, the most important ones being cement, aluminium, iron, copper and zinc.  Of course, nobody every worries about running out of cement.  But the other resources, despite the fact that we've increased our consumption globally over the last 50 years anywhere from 2 to 25 times, have all shown increasing user consumption, not decreasing user consumption.  The economist would, of course, say that this is because the price has dropped on all basic materials over the last 150 years by about 80 per cent.  It's become more abundant, not more scarce.

Clearly we have a myth that just doesn't stand up to scrutiny.  We're actually leaving our kids and grand-kids with a greater availability of resources.  We're using up the easily accessible iron ore, but at the same time we are leaving them with technology that enables them to dig deeper and use less good iron ore even more cheaply.  So we really need to reassess our understanding of what the problem actually is.  Again, my main point is to say that not only have things been getting better but they're likely to continue to get better into the future.

Air pollution is by far the most important environmental problem.  The US Environmental Protection Agency estimates that anywhere from 86 to 96 per cent of all social benefits that stem from any kind of environmental regulation come from regulating just one pollutant, namely, particulate air pollution.  However, most people in the developed world believe that air pollution is a fairly recent phenomenon that's getting worse and worse.  But that's just simply not true.

Let me just show you the graph for London which is the one that we have for the longest period of time [Figure 4].  Here we have particulate air pollution, showing smoke from 1585, where it has increased up to about 1890, and from then on declined dramatically, so that today it's now down below what it was in 1585.  We need to tell people it's not true when you think that air pollution is getting worse.  For London it's improved over the last 110 years.  Actually, London air has never been cleaner since medieval times.

Notice that this is not saying that we shouldn't do anything about it.  We can also say we want to do even more.  Because particulate air pollution is such an important issue, however, it makes sense to invest very heavily in more technology and get a worthwhile environmental benefit.  We should invest in things that are smart.

You will notice that whilst decreasing air pollution is true for all developed countries it is not true if you live in Beijing or Bangkok.  There, things are actually getting worse and worse [Figure 5].  But it's not very surprising either.  That's exactly what we saw in London.  Basically, if you don't have any industry, you don't have any pollution, but you don't have any money either.  So you say, cool, when I get industrialised, I can start buying food for my kids, give them an education, maybe buy stuff for myself, and so never mind, I cough.  That was the trade-off that Londoners and many of the rest of us made, and it's only once you get sufficiently rich, at around US$3,000 PPP [purchasing price parity] per person, you start saying, Ah, now it would actually be nice to cough a little less.

And so you buy some environment.  Already, if you look at some of the richest developing countries such as Mexico and Chile, we've seen declining levels of air pollution both in Mexico City and Santiago, exactly for that reason.  So the point is, not only have things been getting better, we're actually cleaning up.  We're leaving a cleaner world for our kids and grandkids -- certainly in the developed world -- and it's likely to happen in the developing world once they get sufficiently rich too.

These are the important facts to get out to the public.  But, of course, the question still remains:  are we dealing sensibly with the problems that are still there?

I'll now just give you a very quick run-down on global warming.  First of all, I'd like to say global warming is happening and it is important.  The total cost of global warming is not, by any standards, trivial.  It's going to be somewhere around five to eight trillion US dollars.  Yet, I would still maintain that we need to question how important this is, and what we are going to do about it.

Furthermore, global warming is a limited problem, basically because eventually we'll move over to other fuels.  We know that renewables have been coming down in price about 50 per cent per decade over the last 30 years, so it's very, very unlikely to expect that we are still going to use massive amounts of carbon fuels by the end of this century.  This, of course, is important because you have all heard the predictions from the UN climate panel saying, it's going to be somewhere between 1.4 degrees and 5.8 degrees warmer, but only if we continue to use massive amounts of fossil fuels into the twenty-second century.  It just simply won't happen.  It is far more likely to have the median outcome of two to three degrees warming which is also the median outcome from the UN climate panel.

Well, I would actually argue that Kyoto will do very little good.  Kyoto is just not going to do very much good at a very high price.  Let me show you [Figure 6] the climate models from one of the lead authors of the 1996 UN climate panel report.  All the models show essentially the same thing.  If we don't do anything with global warming, this particular model predicts that over the next 110 years we'll get a temperature increase of about 2.1 degrees.  But if we follow Kyoto and if the US and Australia were also in, and if everybody kept to their Kyoto requirements all the way till the end of the twenty-first century, then what would actually happen is that we'd get slightly less global warming.  We'd end at 1.9 degrees, or, to put it more clearly, the temperature that we would have had in 2094, we would postpone until 2100.

So basically, doing Kyoto will mean that the guy in Bangladesh who has to move because his house gets flooded in 2100, can wait until 2106.  I mean, it's a little good, but it's not very much good, right?  On the other hand, the cost is pretty phenomenal.  On all the major macro-economic models, it is estimated that we'll end up paying somewhere between $150 and $350 billion a year -- starting in 2010.  That's not a trivial amount of money.  To give you a sense of proportion, right now we spend about $50 billion globally on helping the Third World.  So we're talking about spending three to seven times that amount to help the developing world very little in a hundred years from now.  I'm simply asking, is that a good investment?

Actually, there are many other things that we could do that would do so much more good.  Just for the cost of Kyoto in one year -- say for 2010 -- we could solve the single biggest problem in the world.  We could give clean drinking water and sanitation to every single human being on earth.  It would save two million lives each year.  Perhaps more importantly, it would save half a billion people from getting seriously ill, every year.  And that's just the cost of Kyoto in 2010.  Then, in 2011, we could do something equally good.  In 2012, we could solve the third biggest problem in the world, and so on.

Likewise, of course, we also need to make sure that in the long term we deal with global warming and we should invest in research and development of renewables that would cost a fraction of what Kyoto would do.  If we could just bring forward the day we shift over to renewables -- by a couple of years around mid-century -- it would do much more good than Kyoto could ever do.

Why is it we don't hear this?  Why is it that it's not an issue?  I meet with a lot of politicians who say, yes, Kyoto's not going to do very much good, but that only shows we need to do much more.  Usually it's not a good argument to say, yeah, the first step is a bad step, so let's take more steps in that direction.  It might be, and we should certainly investigate that, but these models have already been looked at and they tell us that Kyoto's a bad deal and going even further is an even worse deal.

It is important to notice that a lot of environmental legislation does not have as a primary focus the saving of human lives.  For instance, if we're talking about the Bengal tiger, it probably has the opposite effect.  The main point is that when we're looking at policy whose main focus is to save human lives, we should go in and compare how efficiently the different policies do that.

The biggest study on this subject comes from the Harvard Centre for Risk Analysis, connected to Harvard University.  The researchers spent three years going through all of the American legislation where there are published results on the cost and efficiency of saving human lives [Figure 7].  What we basically see is that the typical cost of saving one human life for one year in the health-related area is $19,000.  In the residential area, it costs $36,000 and in transportation it's $56,000.  In the work-related area, it's $350,000 to save one human life over one year, and for the environment, it's $4.2 million.  We could also call this graph "Spot the Bad Investment".

Typically, we make very, very bad investments in the environment when our primary policy focus is to save human lives.  We do so very, very inefficiently and we have to ask that crucial question:  why is it we're willing to spend $4.2 million in saving one human life when we could have saved more than 200 elsewhere?

We've got to face up to the fact that our prioritisations are not free.  This does not mean we shouldn't worry.  This does not mean we shouldn't be concerned, but it means we should start being concerned about the right things.  We must state what it is that's actually important, where it is that we should place our efforts, and make sure that we don't just do something that sounds good, that makes us feel good, but that actually has little effect in doing good in this world.

Green "Truth" Just a Load of Hot Air

The publication of Bjørn Lomborg's meticulously researched tome The Sceptical Environmentalist in 1998 shocked the environmental movement.

Supported by 2930 footnotes and a bibliography that extended to 70 pages, Lomborg clinically examined the grand environmental issues of the day against the scientific evidence.

While far from complacent, his analysis demonstrates that cataclysms are not imminent.  In fact, at least among richer countries, air and water are getting cleaner, forests are expanding, energy supply is getting cheaper and very few species have been recorded as becoming extinct.

In poorer countries, too, the problems have been exaggerated and also can be abated if those countries adopt policies that favour economic growth.

Remember the alarmists' panic about the decline in sperm counts, claims that we're running out of space for waste dumps, the hole in the ozone layer, acid rain?  Lomborg shows how many of the save-the-world solutions of environmentalists were tilting at non-existent problems and would have no effect other than wasting money.

Much of his work looks at tomorrow's problems.  He accepts that global warming will occur, but does not see it as catastrophic, and believes it will be self-correcting over the long term.

More importantly, he shows that the forecast warming is relatively slight.

Such warming and cooling trends are part of the Earth's history and even before the invention of airconditioning, mankind had adapted to much greater temperature swings.

He also shows that all the apparent hardships developed nations have imposed on themselves in agreeing to the Kyoto protocol will have the most trivial effect on global temperature -- at best delaying the trend by six years.

The Intergovernmental Panel on Climate Change found there was no evidence of net change in extreme conditions.

But in any event, as Lomborg claims, with increased wealth comes a capacity to avoid the consequences of hurricanes, heatwaves and cold snaps.

And, as is also clear, increases in wealth are jeopardised by measures to prevent increases in greenhouse gases.

We already can see this in Australia, where the Federal Government has said we must spend $380 million in increased electricity bills for renewable energy.

In addition, Australian governments are pouring subsidies into windmill power and other renewables.

In Queensland, the Government has declared that consumers must forgo cheaper coal-powered electricity and use electricity fuelled by gas.

Lomborg is much reviled by "politically correct" scientists who are often in positions of great influence.

Similarly, contributors to Scientific American, many of whose arguments Lomborg roasted in his book, also piled into the critical feast.  Their arguments also were criticised.

One claim he made that has been targeted as false is that he was once a Greenpeace member.

He was never a Greenpeace member, since membership of that multinational is confined to an elite of a few dozen in each of its country franchises.  He thought offering money and support meant being a member.

He exposed the humbug and specious arguments put by eco-superstars like Paul Ehrlich -- who claims the world is running out of resources, that we will soon face mass starvation and aid to India is simply putting off the day when millions will die.

Resources have become cheaper and India now exports food.

It is not surprising that Lomborg is so reviled.  He uses the best scientific sources to deflate fraudulent claims.

Sadly, many of these claims are endorsed by some who, calling themselves scientists, are simply clothing their green fanaticism with their academic credentials.

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Best Person to Handle Health's Heady Brew

John Howard's unexpected Ministerial reshuffle clearly indicates his own lack of certainty about the next election.  This is not a job-rotation exercise but a clear effort to shore up strengths and reduce weaknesses.

Some of the changes are clearing out dead-wood.  The most significant of these is the retirement of the fascinatingly combative but accident-prone Wilson Tuckey and the demise of Richard Alston who has failed to give us a phone and TV system of North American quality.  Kay Patterson is moved from the demanding Health portfolio where she struggled against the sector's numerous and noisy special interest groups.  The reshuffle means that Ms Gillard, one of the Opposition's rising stars, will now have to confront Tony Abbott -- the Cabinet's most original thinker and one of its best debaters.

Moving the tough no-nonsense Amanda Vanstone to the immigration hot-seat is a master stroke and shifting Phillip Ruddock to the less controversial but still demanding Attorney-General portfolio retains and rewards a late blossoming, loyal and effective performer.

Kevin Andrews' move to the Industrial Relations portfolio replaces the feather-ruffling, reform-insistent Abbott dynamo with a dour politician who must have given up on the prospects of advancement.

The Abbott change is crucial.  On the one hand it removes a source of conflict, somebody who has marked the way forward but whose posture and persistence might be a disadvantage in pushing reform through the often red-tinged Democrats.  Kevin Andrews offers better prospects of achieving an accommodation to inch away at the long march to reforming labour relations.  In the case of the construction sector, labour relations are anchored in Leninist notions of class war and equally important are the public servant unions, which form the backbone of the ALP's support base.

By the same token, health is the area where spending blowouts threaten to derail all developed country budgets.  We have an ageing population, a determination by the baby-boomers to hold and extend their leisure privileges, declining number of working-age providers, and a reservoir of hard luck stories that the media and Opposition can present as screaming out for attention by a cold-hearted government.  Australia's own health expenditure rose nearly 80 per cent per head over the past decade with more exotic cures, increased labour costs and rising expectations all playing their part.

Health also presents a heady brew in view of the three way split in its funding between state and federal governments and individuals and their health funds.  This makes for constant tussles as the three sources of finance each seeks to push the costs on to the others.  The histrionics at the latest CoAG meeting, where the State Premiers staged a public walk-out over health funding, is symptomatic of the tensions in the system.

Tony Abbott promises to be more effective in holding the Commonwealth's corner in these inevitable disputes and offers the best political hope of finding a way to staunch the cost increases.

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"Catastrophe" Overheated

Again newspapers and television are packed with stories of environmental degradation, extreme weather and global warming.  Consider last year's floods in central Europe and the recent hot weather and forest fires for which global warming is blamed, spurring a widespread demand to limit the emissions of greenhouse gases.

This view comes not only from environmental organisations but also from politicians and researchers.  Prominent researcher John Houghton compared extreme weather with weapons of mass destruction and called for political action.  But is this analysis accurate?

The UN's Intergovernmental Panel on Climate Change cannot find any significant development in extreme weather in the 20th century, although there is a tendency that global warming is likely to cause more precipitation.  This is the conclusion of the IPCC's latest report.  Houghton readily cites the World Meteorological Organisation to the effect that global warming has shown itself to give rise to more extreme weather such as heatwaves.  Unfortunately, this much-cited news flash from the WMO was only a press release, not based on any research, and when questioned the WMO acknowledged that its results could be explained merely by "improved monitoring and reporting".

Of course, such distinctions fit badly with the general claim that global warming is becoming a WMD.

The intuition would be that as the weather gets warmer, we will get hotter and, consequently, more people will die from heatwaves.  But this is a severely flawed argument.

Basically, a global temperature increase does not mean that everything just becomes warmer.  Global warming will generally warm minimum temperatures much more than maximum temperatures.  In both hemispheres and for all seasons, night temperatures have increased much more than day temperatures.  Likewise, most warming has taken place in winter rather than summer.  Finally, three-quarters of the warming has taken place the cold areas of Siberia and Canada.

All of these phenomena are, within limits, good for agriculture and people.  Yet we are constantly being told that global warming is what brings on heatwaves such as those we're seeing right now.  Not correct.  Global warming has generally only decreased the number of cold days.  The US, northern and central Europe, China, Australia and New Zealand have experienced fewer frost days, whereas only Australia and NZ have had their maximum temperatures increase.  For the US, there is no upward trend in maximum temperatures and for China they have been declining.

Of course, as global warming goes on, maximum temperatures will also start to increase.  Yet the idea of comparing this with WMDs seems curiously misleading.  Yes, eventually heatwaves will cause more people to die from the extreme high temperatures, but what is neglected is that many more people will not die from cold spells.  In the US, it is estimated that twice as many people die from cold as from heat, and in the UK it is estimated that about 9000 fewer people would die each winter with global warming.  But don't wait up to see the headlines in the next mild winter saying "9000 not dead".

Even if extreme weather is not getting worse, the damaging effects caused by extreme weather are indeed increasing.  But the key factor is not global warming.  The more important factor for explaining the damaging effects of extreme weather is much more direct in its causality:  there are more people in the world, they are wealthier, and many more prefer to live in cities and coastal areas.  Accordingly, extreme weather will affect more people than before and, because people are more affluent, more absolute wealth is likely to be lost.

Florida is an example of this development.  When Florida was hit by a hurricane in September 1926, the economic loss was $US100 million.  In 1992, a similar hurricane destroyed property to the value of $US38 billion.  Clearly a bigger disaster -- but not due to a development in extreme weather.  The explanation comes from economic growth and urbanisation.

In other words, we are probably getting more vulnerable to extreme weather but this is only weakly related to climate change.  It therefore seems tenuous to blame the damage unfolding on global warming and it is meaningless to argue -- as Houghton does -- that the wise political solution is primarily extensive action against global warming.

Although global warming has not had much effect on extreme weather in the past, it might have a greater effect in the future.  According to the IPCC, some extreme weather is likely to develop this century.  However, we lack reliable data about the consequences for the damage caused by extreme weather in the future.

The only available study is about tropical hurricanes.  Here data shows that, although the extent of hurricanes will increase in the future, this effect will contribute to only 5 per cent of the rise in economic damage caused by extreme weather.  The other 95 per cent will be due to societal factors such as economic growth and urbanisation.

If our goal is to reduce vulnerability to extreme weather, limiting carbon emissions is certainly not the most cost-effective way.  In the Kyoto Protocol, industrialised countries have agreed to cut carbon dioxide emissions by 30 per cent in 2010.

This will be extremely expensive and will have only a negligible effect.  The global cost will be large:  the estimates from all macro-economic models show a cost of $US150 billion ($224 billion) to $US350 billion every year.  At the same time, the effect on extreme weather will be marginal:  the climate models show that Kyoto will merely postpone the temperature rise by six years from 2100 to 2106.  Most global warming problems will occur in the Third World, yet these countries have many other, more serious, problems with which to contend.  For the cost of Kyoto, in 2010, we could permanently solve the biggest problem in the world -- we could permanently provide clean drinking water and sanitation for every person in the world.  Should we not deal with the most pressing problems for real people first?

Endorsing Kyoto seems to have become the way to show our willingness to do good.  But we can't do all good things simultaneously.  I would prefer that we got our priorities straight and dealt with the most important issues first.

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