The Regulatory Wave of the Future

Having pushed governments to their democratic limits, green groups are now increasingly focusing on leveraging the financial sector to achieve their regulatory ends.

Two tests case of this strategy will be played out in Australia over the next week.  The first is a campaign run by the Wilderness Society against the Tasmanian timber company Gunns Ltd.  The second is a Greenpeace campaign against the large biotechnology multinational Monsanto.  Both campaigns attempt to use advice from friendly financial analysts to convince investors, specifically banks and superfunds, to stop these firms from undertaking activity.  In each case, the disliked activity -- logging of native timber in the case of Gunns and developing and selling genetically modified seed in the case of Monsanto -- is approved by governments, is profitable and is central to the firms' financial strategy.

This is not just some more green madness.  Banks and super funds are actively considering the strategy.  Indeed BT, a large Australian funds management company, now owned by Westpac, has announced that it will abstain from voting during Friday's general meeting on whether Gunns accedes to the Wilderness Society demands.  That is, it has decided not to express an opinion on behalf of its unit holders on a decision, which on the Wilderness Society's own research, will reduce earnings per share by 11 per cent and increase the riskiness of the Gunns' earnings profile.

Why would otherwise hard-nose bankers support actions that reduce returns?

Well, the reasons are three fold.  First the banks are concerned with protecting their brand name.  The new stakeholder groups, such as the Wilderness Society and Greenpeace, are masters of brand-mail.  They have, and will, undermine the reputation of firms that do not support their views;  witness the anti-Nike Campaign.  On the other hand, they will promote the brands of firms that do cater to their desires, as witnessed by Westpac's ascendency to the top of the "ethical ratings".

Second, the banks are concerned with regulatory risks.  The new stakeholders have been highly successful in getting what they want through the democratic process.  The banks may make the judgement that, while reluctant now to accede to the new stakeholders' demands, government eventually will.  Moreover, individual banks may see the new stakeholders as ideal partners in lobbying for regulations that give them a competitive advantage.

Third, banks may be lured by the promised wave of "ethical investment".  Ethical funds, which take into consideration non-financial factors in the selection of investments, are growing at a double digit rate (albeit from a miniscule level).  Moreover, many large industry funds, which play a pivotal role in the funds management industry, are particularly enamoured with ethical investment principles and may direct monies accordingly.

The strategy is, however, flawed -- not only from the perspective of society and investors, but from the banks that jump on the bandwagon.

There is no doubt that the risk of brand-mail is real and the results are personally painful to the executives involved.  However, there is little evidence that it has a real impact in the market place.  Just look at Nike.  Despite the-mother-of-all-campaigns it has out-performed its competitors in terms of market share and stock value.

While the new stakeholders have influence beyond their numbers, it is, in the end, limited.  In the case of Tasmania, they have successfully locked away the lion's share of the State's forest and shut down all logging companies, bar Gunns.  The cost of this is now clear to Tasmanians, and the community strongly supports Gunns.  Indeed, Gunns has what other firms would die for:  strong bipartisan community support, resource security guaranteed by a joint Act of the Commonwealth and Tasmanian parliaments, and a union militantly on side.  This is why the Wilderness Society is seeking solace in Sydney.

Investors are likely to become more discerning about the ethical standards of their investments.  However, as with society in general, the view of what is ethical in the market will vary widely.  To some, like Greenpeace activists, GM crops are unethical.  On the other hand, to the better informed, banning GM crops from people scraping a living out of subsistence agriculture, is not just unethical but inhumane.

In the end, however, financial result will rule.  Firms like Gunns and Monsanto which have been star performers in an otherwise dismal market will always be able to get low-cost funding -- even if a few banks say "no".

ADVERTISEMENT

Tunnel Vision With Cars

Road construction is proving to be the Bracks Government's Achilles heel.

The Labor Government appears to unable to avoiding empowering NIMBYs, the anti-car brigades and other special interest groups.  It succumbed again to these groups this week when it decided not to proceed with further investigation of a tunnel connecting the Eastern and the Tullamarine freeways.

While such a tunnel is no lay-down-misere, it clearly warrants further investigation.

The Kennett Government first proposed the project.  Although previously critical, Labor in Government agreed to investigate it and its high level Infrastructure Planning Council offered support for it.

Instead of following the Infrastructure Planning Council's recommendations to investigate the project within a statewide framework, the Government opted for a more narrowly based review.  It gave the task to the Northern Central City Corridor Study (NCCCS).  This considered it from the limited perspective of the areas just north of the city.  Clearly the effect of a tunnel on the area through which it passes needs to be considered.  However, its statewide benefits potentially overwhelm the local issues as the area functions as a major transit hub.

The NCCCS went further to bias the result against a tunnel option.  It allowed its community consultative committee to become stacked with anti-car and anti-tunnel advocates and to include few voices with a statewide perspective.  It adopted a target of reducing the proportion of total trips taken by cars.  Since a tunnel would redirect traffic from routes outside the NCCCS study area, it would necessarily violate this target and in doing so benefit the wider community.

Even so, the NCCCS could not avoid giving the tunnel high marks.  It recognised the tunnel would significantly reduce congestion in the local area and by reducing congestion help public transport demand.  It acknowledged the tunnel would not harm heritage values and would provide planners with flexibility to improve amenity values.  It also accepted that the tunnel would improve air quality and reduce noise.  Indeed, the study found "improved public transport and the east-west tunnel would best address the objective of catering to increased residential population in the inner north and surrounding area".

But the study recommended against the tunnel.  It did so partly because it failed to consider the many economic benefits it would bring to areas other than the inner north area.  In addition, it failed to consider that commercial users place a particularly high value on such a tunnel.  It also evaluated the tunnel option solely on a no-toll and no-public/private partnership basis.

Despite all these biases, the best tunnel option (the study examined three) was estimated to have a benefit/ cost ratio of 1.2:1 (benefits exceeding cost by 20 per cent).  This is high enough by itself to warrant further study.

But, under pressure by the NIMBYs, the study disregarded its own calculations and recommended against a tunnel.

For its part, the Government bowed to the wishes of a noisy group of appointees which adopted a biased, local perspective.

Given that the faults of the NCCCS are enshrined in the Government's Melbourne 2030 Planning Strategy, we can expect this process to undermine road development into the future.  So much for Government's motto of "Linking Victoria for all Victorians".

Power in ACCC's Hands

Allan Fels, in his last month at the ACCC, left a poisoned chalice to successor Graeme Samuel.  Fels opposed a consortium's acquisition of the giant Loy Yang generator, putting at risk the resolution of its financial distress.

Loy Yang is one of the lowest cost electricity generators in Australia.  But former Treasurer Alan Stockdale got a great price for the asset, a price paid by buyers who expected electricity prices to rise.  Instead they fell and the firm has spent three years dancing on the edge of bankruptcy.

A consortium comprising AGL, Tokyo Electric and the Commonwealth Bank is the only white knight offering to prevent this.  In opposing the move, the ACCC wants to see an electricity market with retailers, line companies and generators under separate ownership.  It argues that with the takeover of Loy Yang AGL would become an integrated generator and retailer of electricity, which would be followed by Origin and TXU seeking similar liaisons.  The upshot would mean restricted opportunities for new players to break in.

It is doubtful that the ACCC should place itself in the position of imposing its own favoured industrial structure on a sector but, that aside, its opposition is harmful to the industry and consumers.

Loy Yang's parlous financial state makes it a classic "failing firm".  Although it is not about to cease producing electricity, its financial distress means that retailers are somewhat cautious in taking out longer term contracts with it.  In his prime at the ACCC, Allan Fels argued forcefully that a "failing firm" made a strong case for overriding opposition to mergers that bring greater concentration.  Such a firm, as well as denying value to shareholders and others, means a poorly working market.

In addition, the ACCC failed to understand the changes taking place in the electricity industry.  Retailers have taken energetic steps to operate at arms length from other producers in the electricity chain, even where they have common ownership.  AGL's retailer Agility is fully autonomous from the rest of the company, while Powercor actually sold its own host retailer to Origin.

These developments stem from the retail manager's need to minimise the risk of inadequate electricity contract cover.  Prices can suddenly increase a hundred fold and the uncontracted retailer can face enormous losses.  The retail manager therefore requires the maximum available sources of energy of energy contracts and cannot afford to jeopardise supplier arrangements.  Favouring a particular source, divulging contract information, etc. will make others reluctant to deal.  Hence though regulation requires "chinese walls" between different company activities, separation is now driven by commercial factors.

It must also be remembered that AGL is only taking a 35 per cent stake.  The acquisition's co-owners would not allow AGL to obtain better value from the shares than they get for themselves.  AGL would, therefore, readily offer any assurances that it would operate its interests independently, because it automatically faces these same disciplines from its own and its partners' self interest.

But all this requires some means by which Graeme Samuel can avoid the Fels poisoned chalice and not emerge looking like a pansy.

ADVERTISEMENT

Charities' That Are Really Political Lobbyists Must Be Exposed

This is not about the Government silencing critics.  It's about accountability.

The response of the non-profit sector to the Howard Government's draft charity legislation is an example of the sector's aversion to accountability.

The legislation was condemned as an attempt by the Government to "silence its critics".  This response itself illustrates the problem, which is that a growing proportion of the sector has moved away from providing services to political lobbying.

This trend has been masked from the community by poor standards of transparency and accountability and is not only at odds with the original intent of the law but with the expectations of the community.  It has also spawned dangerous liaisons between business and political parties and charities.

The draft legislation correctly attempts to limit the politicisation of the sector and its attendant problems.

Over the past decade successive governments have indirectly relaxed the definition of charities by allowing ministers to give gift-recipient status for a wider range of purposes, including the environment, culture, education and health.  This has resulted in a large increase in the number of "charities".

The draft legislation accepts the need for a wider range of charitable purposes and for these to be explicitly spelt out in the law rather than being left to the discretion of ministers.

The bill also takes the next step and codifies a short list of disqualifying purposes.  These are:  illegal activities;  advocating a political party or cause;  supporting a candidate for political office;  and attempting to change the law or government policy.

The first three disqualifying purposes, which so far have received little attention, will threaten the charity status of several organisations.

For example Greenpeace, which regularly engages in trespass and other breaches of the law, would have its charity status threatened by a requirement to not break the law.  The Wilderness Society and many other environmental groups regularly run marginal-seat campaigns during elections and their charity status would be threatened by a rule against such action.

Indeed, green groups and the green parties are increasingly acting as political tag teams.  This behaviour is a matter for them, but it should not be funded by government.  The law excludes political parties from becoming charities.  It is vital that it also prevents charities from becoming de facto political parties.

The most controversial issue in the draft legislation is the clause restricting lobbying, that is, attempting to change the law or government policy.  The reaction from the sector on this clause was disingenuous.  The draft does not rule out lobbying.  What it does is exclude organisations from accessing charity status whose "dominant purpose" is lobbying.  Charities such as Anglicare, St Vincent de Paul and the Red Cross that are primarily involved in service delivery will not be affected and will be able to lobby governments on behalf of their clients.

The clause is consistent with US and Canadian charity laws, and both those countries boast far more vibrant charitable sectors than Australia.  In the US, charities that have the most common legal status are able to spend up to 5 per cent of their revenue on lobbying.  The Internal Revenue Service audits them each year and requires that their lobbying activities be fully disclosed and itemised.

The Australian draft legislation poses a challenge for some environmental groups.  They often do not provide any services other than lobbying.  These groups would be forced to change, and, I think, for the better.  For example, instead of just chaining themselves to trees, the Wilderness Society might be forced to get their hands dirty and plant trees or hire scientists rather than political activists.

Charity status comes at great cost to taxpayers and with huge benefits to organisations.  Charity status, in effect, gives an exemption from all Commonwealth, state and local taxes.  The taxpayers' subsidy to charities stands at $1.4 billion a year and is growing rapidly.  The primary beneficiaries are the employees of the charities, who are exempt from fringe benefits tax.

Any responsible government must restrict access to this privileged status.  It must also guard against the privilege being exploited, and ensure "charity" status does not give its holders improper political standing.  Importantly, government must also ensure that the personal benefits that come with the status do not pervert the sector.

ADVERTISEMENT

Charitable Lobbies

The Treasurer has assured charities that the Charities Bill 2003 Exposure Draft, does not attempt to restrict criticism of public policy by recognised charities.  There is no change from existing practice.  But should there be?

Charities used to help the poor, now they want to overcome inequality.  Russell Rollason of Anglicare said on Thursday, "Is the role of charities and churches simply to apply band aids to the victims of our competitive society or should charities actively contribute to a fairer more just Australia?"  Why not just run for Parliament, Russell?

Charities, and other public beneficial organisations, argue that times have moved on.  Charity is not all soup kitchens, it is advocacy work.  To the layman, that means lobbying.  It means lobbying government to change the law and/ or provide programs for the purposes that the organisation argues are beneficial.  Should other lobbies be similarly tax-advantaged -- business, for example?  I am not proposing it, but if one organisation is granted a tax-advantage for lobbying, why not another?

Should a government not inquire from time to time if a group has changed the way it does business?  At present, the ATO does not have the resources to audit tax-advantaged organisations.  At present, and until 2004 when the law changes, it is not even possible to ask the ATO if an organisation is a charity!  This is not to say that funds are improperly used or that organisations are not audited under State legislation, but the department that gives them Commonwealth tax status does not test it.

Then there is the question of the lobbying arm of charities.  For example, the Australian Council of Social Services does not undertake charity work, it is a policy and political lobbyist.  Should such organisations have tax-free status?  Indeed, ACOSS receives direct government funding for these purposes.  This is hardly a government that is about to quieten the welfare or other lobbies.  The Commonwealth funds just about every peak lobby group in the charity, environment, migrant, arts, indigenous, human rights -- ad infinitum -- sectors.

What if the government were to fund the ATO to run an audit on a range of organisations and found that they were spending more time on lobbying than charity?  It could remove their status.  In doing so, it would have to argue a case of what is too much lobbying.  It may even follow the US path of specifying how much lobbying may be undertaken by charities.  Governments have the right to test the credentials of charities, and they do not have to accept the shift from amelioration work to policy-work.  However, it is probably unwise to be too specific about how much policy-work is acceptable.  After all, governments want policy work from NGOs.

A way through this, the need for public scrutiny and the insistence that charitable work involves lobbying, is to let the donors decide.

If charities were required to publish how much money they spent in raising their funds, and how much they spent on policy work, then donors could 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.

In 2004 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.

ADVERTISEMENT

Clothing Industry Has Been Stitched Up

Five years ago in Melbourne and Sydney there was a flourishing second hand trade in industrial sewing machines with each reconditioned device worth around $5000.  There are now several derelict warehouses containing hundreds of un-saleable machines-testimony to the near defunct state of the Australian clothing manufacturing industry.

Usually tariff reductions are blamed for the collapse of the clothing industry but this excuse hides a more devastating public policy process that has stalled the capacity of the industry to restructure and find a new future in a tariff-free world.

But something has happened to the clothing sector is creeping up on other industries as diverse as car manufacturing and call centres, and is targeted to happen to the labour hire industry and could strike any industry.

In NSW and Victoria, the clothing manufacturing industry has had legislation applied to it that effectively controls the price of products through every level of the manufacturing chain.  NSW enacted the Ethical Clothing Trades Act 2002 and Victoria introduced the Outworker (Improved Protection) Act 2003.

These acts enshrine a system of legislated price fixing which destroys the capacity of a market to operate within the manufacturing process and kills the ability of the industry to creatively experiment and respond to competitive pressures.

Clothing manufacturing functions like manufacturing in most industries.  Rather than production being exclusively conducted by monolithic companies, the manufacturing process normally involves chains of cascading contracts.  Companies and people specialise in aspects of production and trade their goods and services using normal commercial contracts.

In clothing, designers create the ideas.  A shirt or skirt could have 10 independent businesses making different parts of the item.  In information technology, dozens of different people can independently design the components of a program.  Call centers operate through networks of contracted specialist providers.  The essence of labour hire is that recruitment, human resources, payroll and other labour-related functions are undertaken through contract chains using elements of several possible models.

This idea of market mechanisms being used to create products and services is a standard feature of a functioning economy.  The common link is that all processes require freedom of commercial contract tied to the prevention of price fixing.

What has been different in the clothing manufacturing sector is that the cascading contract process has been subject to a long and intensive campaign of demonisation.  Anti-industry activists have claimed that there is something sinister about the way cascading contracts operate in clothing manufacturing.

The NSW and Victorian response was to pass legislation that requires every level of the contract chain, from retailer through each clothing manufacturer, to be liable for the labour rates applied to small businesses at the end of the contract chain.  Because a shirt is no more than a piece of cloth with multiple inputs of labour at every level, the law effectively fixes the price of clothing through the contract chain.

Where labour rates are normally and correctly addressed through industrial relations legislation, in the clothing sector industrial relations objectives are being controlled through commercial contract regulation.  In Victoria and NSW, where 90 percent of the industry operates the governments have established policing bureaucracies to oversee the legislation.

The outcome is a system of state forced price fixing through the manufacturing chain.  The legislation operates via a voluntary code of practice, which in NSW is triggered to become mandatory this year.  However the voluntary code is not benign because bureaucrat and activist enforcers, ensure that manufacturers suffer brand damage if not in compliance.

The outcome is that any process of contract clothing manufacturing now involves reference to a massive state imposed rule book governing everything from the price to be paid for a button to be sewn, to the cost of folding a shirt into a presentation box.  Nothing happens without bureaucratic approval which means that nothing happens.

The solution for Australian manufactures has been to become importers.  The outcome is that where, under declining tariff protection the Australian industry could have spent its energy looking for creative new local solutions, instead the entrepreneurial spirit has been crushed and jobs killed.

This, first of its kind legislation required and received Australian Consumer and Competition Commission approval and is promoted by the union movement as a priority model for other industries.

ADVERTISEMENT

The Great Land Grab

If drought, fire and pestilence were not enough, the man on the land is now facing a larger threat -- a run-away bureaucracy attempting to nationalise his land.

Not satisfied with locking away an ever-increasing proportion of the nation's land in national parks, governments have turned their attention to private land.  They have passed a plethora of overlapping and inconsistent regulations, administered by a multitude of government bodies, to regulate native vegetation.  The net effect of this has been the nationalisation of sizeable proportion of farms.

Take the example of Jim Hoggett, who runs a small cattle and goat farm in central NSW.  As documented in a recent submission to the Productivity Commission, he faces a gauntlet of no fewer than 26 separate pieces of legislation and 10 different government bodies governing the use of native vegetation on his property.  Moreover, the legislation is vague, inconsistent, subject to frequent changes and wide ranging.  The government regulators have immense power, limited resources and little knowledge of, or concern with, the commercial use of the land.

Despite being logged repeatedly over the years, the timbered areas which account for over half the property, including regrowth forest, trees in pastures and cropped areas, and trees along the creek, have all been quarantined from commercial use.  These trees are not unique, indeed there is a national park nearby which contains thousands of hectares of them.

The Hoggetts are also required to make a detailed inventory of the native flora and fauna on the property, develop a native vegetation management plan, submit the plan to multiple agencies for approval, submit to regular inspection and are legally liable for damage done to any native vegetation on their property.  In short, they have been turned into unpaid national park rangers.

The Hoggetts conservatively estimate the cost of the native vegetation legislation to be $35,000 per year in outgoings and forgone income.  This is a sizeable proportion of the potential farm income and is not fully tax deductible.

The Hoggetts, being keen conservationists, would like to plant more native vegetation on the more marginal pastures.  However, because this would result in the land being excised from commercial use, they have decided not to do so.

One of the most perverse aspects of these regulations is that they discriminate against the farmers who have done most to preserve native vegetation.  For example, the Hoggetts' neighbour is little affected by the native vegetation laws because he long ago eliminated most native vegetation on his property and has prevented it from regenerating.  Since the law only focuses on preserving remnants, his farm has nothing to preserve or protect, nor is he interested in doing so.

While the Hoggetts' farm is in NSW, Victorian farmers face a similar morass of laws and regulators with a similar result.

Australia's farmers, thorough voluntary processes, such as Landcare, have led the world in regenerating native vegetation.  They are now getting punished for their efforts and their land is being stolen.

This time, Hanrahan's lament, "We'll all be rooned, before the year is out" is on the mark;  not through drought, fire and pestilence, but through needless legislation.

ADVERTISEMENT

Received Evidence for Deterioration in Water Quality in the River Murray

Address to Water Forum No. 2,
Canberra, 25 July 2003

"Facts do not cease to exist because they are ignored."

Aldous Huxley

INTRODUCTION

It is rare for both sides of federal politics to agree.  Both the Government and Opposition agree that saving the River Murray is a national priority.  Both the Government and Opposition have canvassed the possibility of taking water from irrigators to increase environmental flows -- in the case of the Opposition, 1,500 gigalitres.

Why such drastic action?  The river is apparently very sick.  What is wrong with it?  According to the Wentworth Group, ^[1] The Economist magazine, ^[2] and everyone in Ticky Fullerton's book Watershed, including Ticky Fullerton, ^[3] a major problem is deteriorating water quality, in particular a worsening salinity problem.

The CSIRO website includes the statement, "... look at Australia's largest and most developed river system, the Murray-Darling Basin, shows the nature of the problem we face.  Salt levels are rising in almost all of the Basin's rivers and now exceed WHO guidelines for drinking water in many areas.  Business as usual is not an option.  If we do nothing, the salinity of the Lower River Murray -- where Adelaide pumps out its drinking water -- will eventually rise to exceed WHO guidelines."

But the facts do not support these claims of deteriorating water quality.

Key water quality indicators include turbidity (a measure of sediment load), nitrogen and phosphorus (nutrient levels) and electrical conductivity (saltiness).  According to the Australian Water Resources Assessment 2000 we spend $142-$168 million each year on water quality monitoring.  So let us consider the water quality data for key sites in the River Murray.

SALINITY LEVELS

While Ticky Fullerton's 354-page book laments deteriorating water quality, no water quality data are provided.  There were no data to accompany the very powerful statement on the CSIRO website.  There is no current information on water quality trends for key sites on the CSIRO or Murray Darling Basin Commission (MDBC) websites.

Daily readings for salinity from 1938 are available on request from the MDBC for Morgan, South Australia.  Morgan is the key indicator locality for water quality in the Murray Darling Basin.  Morgan is just upstream of the pipeline off-takes for Adelaide's water supply.  Its use as an indicator site emphasizes the relative importance of river salinity impacts on all water users in the system.

The yearly averages for salinity measured in EC units for Morgan are plotted in Figure 1.  Current salinity levels at Morgan are equivalent to pre-World War 2 levels!

Figure 1

A plot of salinity levels for just the last 20 years suggests salinity levels are dropping at this key indicator site, Figure 2.  Water quality is improving!

The MDBC provided me with more information for other sites.  There is no deterioration in salinity levels at Swan Hill or Yarrawonga, Figure 2.

Figure 2

The CSIRO website reads, "Salt levels are rising in almost all of the Basin's rivers and now exceed WHO guidelines for drinking water in many areas ... If we do nothing, the salinity of the Lower River Murray -- where Adelaide pumps out its drinking water -- will eventually rise to exceed WHO guidelines."

WHO guideline levels are 800 ECs.  Salinity levels are not approaching 800 ECs at key sites in NSW and Victoria.  Salinity levels are not increasing at key sites in NSW and Victoria.  Salinity levels are dropping at the key site in the Murray Darling Basin, Morgan.  Salinity levels are high in the lower reaches of the river and only exceed WHO guide levels near the river mouth as you might expect, Figure 3.  Someone is misleading the Australian public!

Figure 3

I queried my findings directly with the MDBC.  In response, Dr Pradeep Sharma, Senior Modelling Engineer, replied, "Thanks to major investments in the salinity mitigation works undertaken in the Murray Darling Basin over the last decade, I would like to concur with the conclusion that average salinity in the River Murray has in effect improved during the last decade."

TURBIDITY

Turbidity is a measure of the suspended sediment load.  Turbidity levels generally rise with increased discharge (eg. increased rainfall).  Australia's inland river systems are considered to be naturally relatively turbid.

Since European settlement the most significant change to water quality in many inland river systems is thought to be an increased sediment input from the early years of land clearing and the introduction of sheep, cattle and rabbits.  As a result of improved management practices over recent decades, erosion is likely to have stabilized or reduced to pre-European levels. ^[4]

According to plots from data sourced directly from the MDBC, turbidity levels (NTU) at both Morgan and Swan Hill appear to be relatively stable (Figure 4).  Turbidity has been measured at both sites since 1978.  Average yearly turbidity levels have not increased over this period.

Figure 4

Mean daily turbidity levels at Morgan exceeded 400 nephelometric turbidity units (NTU) in July 1983 (Figure 5).  The relatively high turbidity levels during the second half of 1983 contributed to the high yearly average in 1983 (Figure 4).  The high levels may have been a consequence of drought-breaking rains carrying higher than usual sediment loads because of increased erosion from reduced vegetation cover as a consequence of the drought in the early 1980s.

Figure 5

During years of low mean turbidity, mean daily values for both Morgan and Swan Hill are typically in the 20-40 NTU range (Figure 6).

Figure 6

NITROGEN AND PHOSPHORUS

It is generally believed that algal blooms in inland rivers are due to elevated nutrient levels, particularly phosphorus.  While it was thought that the major sources of these nutrients was agricultural fertilisers, sewerage treatment plants and feedlots, the most recent and relevant report on the MDBC website suggested that a large proportion of the phosphorus may come from natural sources -- in particular, basalt-derived soil. ^[5]

Whatever the origin of the phosphorus, a plot of yearly average phosphorus levels (mg/l) for key sites in the middle and lower basin show levels have been stable since data were first collected in 1978, Figure 7 (data sourced directly from the MDBC).

Figure 7

High nitrate levels can be an indication of excess runoff from agricultural fertilisers.  Nitrate levels also appear to be stable for key sites, at least since levels were first measured by the MDBC in 1978, Figure 8.

Figure 8

IN CONCLUSION

On 16 July 2003, The Australian newspaper published some hard data showing actual water quality trends for the Murray River.  The article began with the claim that salinity levels in the Murray River have been halved since 1982.  However, the graph showing declining salt levels at Morgan did not accord with the title of the story, "Murray salinity tipped to rise".  The journalist, Richard Sproull, was quoting from Matthew Kendall of the Murray Darling Basin Commission who was apparently quoting from a 1999 drainage strategy report when he said that he was expecting salinity levels to rise.  According to the reports on the website, this has been the prediction since at least 1998 and it has been consistently proven wrong.  Perhaps the computer models need an overhaul?  Salinity levels at Morgan are now at pre-World War II levels.

We have spent billions of dollars over the last two decades on environmental programmes;  it should not be surprising that the condition of our rivers is improving.

Large quantities of salt have always entered the Murray River from seepage of saline groundwater.  The largest increases are usually noticed during low flow periods, for example during drought.  Given the current extended drought across the basin the low salt reading at Morgan is even more remarkable.  Why isn't this good news story being reported?

On the basis of the received evidence, instead of revering our expert environmentalists and vilifying our farming communities, we could take a lead from Bob Carter who, in his letter to the Editor of The Australian on 17 July 2003 in response to the story of 16, wrote, "That Murray River water quality is continuously improving, as shown by a halving of salinity content at Morgan since 1982, is about the best environmental news that Australians could have wished for.  It is also a tribute to the many land owners and managers who have modified their land use practices towards just such an end.  A better treatment for such good news would have been a full front-page article with the banner headline 'Murray River Saved' ".

Should a single Murray irrigator lose water allocation on the basis of the misinformation currently being promulgated by high-profile scientists from our most respected research institution, it will be a travesty of justice.

To quote Greg Easterbrook, "the Western World today is on the verge of the greatest ecological renewal that humankind has known;  perhaps the greatest that the Earth has known.  Environmentalists deserve the credit for this remarkable turn of events.  Yet our political and cultural institutions continue to read from a script of instant doomsday.  Environmentalists, who are surely on the right side of history, are increasingly on the wrong side of the present, risking their credibility by proclaiming emergencies that do not exist."

But I would go further, and suggest we have institutional failure of the highest order when both sides of politics eagerly sign up to a myth promulgated by our most respected research institution, the CSIRO.

---

ENDNOTES

1.  The preamble to the Wentworth Group's seminar document a Blueprint for a Living Continent begins with the statement, "Salinity and deteriorating water quality are seriously affecting the sustainability of Australia's agricultural production, the conservation of biological diversity and the viability of our infrastructure and regional communities."

2.  An article in The Economist on 12th July 2003 began, "The depleted Murray's salt levels are rising, leaving Adelaide, one of Australia's biggest cities, facing a big problem:  its water supply will be undrinkable in 20 years unless a way can be found to restore the river to health."

3.  For example, page 66 of Watershed:  "So just how serious is the plight of the Murray-Darling?  Doug Shears, arguably Australia's most powerful agri-businessman and head of Berri Ltd, says it couldn't be more so.  "If the deterioration over the next 20 years is anything like the last, the Murray will be unusable for anything let alone agriculture." The problem is twofold.  There isn't enough water in the system and what is left is rapidly getting brinier and brinier."

4.  Rivers as Ecological Systems:  The Murray Darling Basin.  Murray Darling Basin Commission, 2001.  pg 48.

5.  The Darling River:  Algal Growth and the Cycling and Sources of Nutrients.  R.L. Oliver, B.T. Hart, J. Olley, M. Grace, C. Rees and G. Caitcheon.  MDBC Project M386.  1999.

The Green Movement: Time to Get Serious

An address to the Victorian Farmers Federation 24th Annual Conference,
Melbourne, 22-23 July, 2003

History is replete with examples of societies allowing narrowly based interest groups to latch onto a valid issue, to present a distorted prognosis that eventually become mainstream, and in the process do great harm not only to society at large, but to the initial issue.

Society has allowed these groups to claim, and to be given the status of "representatives" of the environment on a false basis.

This process has unfolded in the Western world over the last thirty years with respect to the environment.  Activists, often with a hatred of commerce and modernity, have captured the institutions, the prognosis and the communication of environmental issues.

Many of their initial campaigns were valid and have had significant and positive impacts, for example, the move to clean waterways through the treatment of effluent.

Conservation of the environment is a growing mainstream value.  As people become wealthier and more easily satisfy the necessities of life, they naturally seek more aspirational values, such as preserving the environment.

Despite the validity of the earlier environmental actions, and the fact that environmentalism has become a mainstream value, far too few Green groups have changed.  Instead, too many remain radical, seeking to exploit environmental concerns as a means of revolutionising society and controlling commerce.  Too many have become watermelons.

Despite being fundamentally at odds with the broader interests of society, the deep Greens have gained significant influence and are doing great damage to the environment, to society and to civil society.

For evidence one need look no further than the three million hectares of forest burnt this last summer in Eastern Australia.  There is no doubt that the accumulative influence of the Greens -- closing down state forests, stopping logging of native forests, creating additional national parks, reducing controlled burning, closing access roads -- contributed greatly to this disaster.  They have now shifted their focus from forestry to farming, and are busily spinning their destructive web.

How did it get this way?

Well, society has failed to impose accepted standards of representativeness, and deep Greens have exploited our tolerance.  Society has allowed these groups to claim, and to be given the status of "representatives" of the environment on a false basis.

Greenpeace regularly makes such claims, and it is given this status in the media, the bureaucracy, with advisory bodies and in the community.  Yet Greenpeace Australia has a membership of just 51 people -- that is, only 51 people have a direct say in the policies of the organisation.  While Greenpeace welcomes donations, the activists that "own" it keep tight control over its policies and values.  WWF has a similar structure.  The Australian Conservation Foundation (ACF) is a much more open and democratic organisation, due to its conservative roots.  However, it has, over the years, become dominated by deep Green activists.

Green groups eschew institutional democracy, because democracy is slow and tedious in decision-making, forces compromise and trade-offs, and limits the power of extremists.  The ability of Green groups to be undemocratic gives them a great advantage in their dealings with democratic organisations such as VFF and our political parties.

Our society gives standing to institutions and people because they bring specialised knowledge and skills to bear on an issue.  Most Green groups have no such expertise other than political advocacy.  Few undertake research and few have scientific expertise.  For example, when Greenpeace recently employed three biotechnology campaigners -- the job description made no reference to knowledge of the science or technology, or even to the industries affected, but rather to experience in campaigning.  WWF's lead campaigner to protect the Great Barrier Reef against sugarcane farmers has a degree in opera.  The ACF's chief water campaigner has an arts degree.  And we regular see Peter Garrett -- a rock singer with a law degree -- lecturing against biotechnology.

The Green groups' sole expertise lies with political action and communication -- they are, in effect, Saatchi and Saatchi with a cause.

Yet we have allowed the spin merchants to present themselves as experts, summarising the "received" research on biotechnology, diagnosing the state of the Murray River and lecturing farmers on improving farm management.  We have allowed the spin to masquerade as science.  As outlined in detail by Bjorn Lomborg in his book The Sceptical Environmentalist, this has not only led to a gross perversion of policy priorities, but it is starting to pollute the pursuit of science itself.

We can only preserve the environment, improve our farming sector and continue to make a living on the land with rigorous, robust science.  For evidence, one need look no further than the latest big environmental campaign, the campaign to save the mighty Murray from you, the farmers.

Over the last four weeks there have been four TV "docu-dramas" about the Murray.  All had the same message, the same sources and the same actors.  My fellow panellist today, Tim Fisher of the ACF, was one of the main actors.  The ACF claims that

The mighty Murray is in crisis, and this poses a real threat to water supplies, tourism, fishing industries, regional economies and plant and animal life.

One of the main indicators was the closing of the mighty Murray mouth.  ACF states

The mouth of the Murray River closed recently for only the second time in the last 8000 years.

Well, CSIRO is on record as predicting that in a one-in-a-hundred-year drought, such we are now experiencing, the river would be dry at Albury.

But there is no need for projection.  All one would need to do is talk to a few established families on the river, such as Doug McDonald of Murrabit, who can provide conclusive evidence that the river has not always flowed steadily to the sea.

The McDonald family crosses the mighty Murray, December 1914

Another alleged indicator of the River's decline is rising salinity.

Salinity is the new sign of Satan.  While rising salinity is the chant heard from every urban barbecue in Kew, its existence in the Murray (up to the SA border) is based on spin rather than science.

Salinity Levels at Morgan

Salinity levels at Morgan in SA have not shown any upward trend since 1938 and if anything they have declined since 1982.  Indeed the MDBC admitted to this in a recent interview reported in The Australian.

Turbidity Levels, 1978-2002
(Yearly averages based on available daily means)

Another ACF claim is that the river is becoming polluted with sediment and agricultural pollutants.  Again, the evidence on suspended solids does not back up the claims.

What does the ACF recommend?  Well at least the extraction of 1,500 gigalitres, or 20 per cent of irrigators' maximum water take.  This, they say, will only deliver a "moderate" probability of restoring the river to health.  This is code for the first tranche of extraction.

As with their diagnosis of the river's ailments, their diagnosis of its cure is not supported by the evidence.  Two separate scientific panels have examined the issues on behalf of the MDBC and both concluded that "there is limited information upon which to make quantitative links between hydrology and the ecological health of the river and floodplain".

On its Website, the ACF expresses no concern or consideration for the impact its policies will have on communities and on the families of irrigators.  While they proudly advocate a precautionary approach to the environment, they express no caution with respect to the economy and the community.

What is the basis for the ACF claims?  Clearly, it is not the science, nor is it the interests of farmers.  I suspect it is a belief in the inevitable destructiveness of commerce and modernity and that the ends justify their means.

One thing is clear:  the farming community must confront the Green movement.  The Greens are developing a "victim versus villain" scenario, where they play the role of saviour.  In the latest version of this drama, farmers are the villains and the victim is Mother Nature.  They, the Greens, are going to save the environment from you, the farmers.  Already, according to the Ethical Investor magazine, farming is now our country's most environmentally destructive industry.

In short, the focus of the Green movement has shifted from forests and mining to agriculture.  It is not just the Murray River, however.  They have a comprehensive set of campaigns against the sector including,

• Biotechnology;
• Land management;
• Native vegetation;
• Biodiversity;
• Pesticides;  and
• Salinity.

The Greens have convinced large sections of the public that you -- the farmers -- are the villains raping mother-earth.

They have direct links with the fast-growing, urban-based Green parties which offer the intoxicating option to voters of being radical, but without the responsibility.  They have sway over the mainstream parties.  Simon Crean, for example, recently committed to the ACF demand of removing 20 per cent of irrigators' water.

The Greens have become ensconced in positions of influence in the bureaucracy, research institutes, advisory bodies, and regulatory agencies, and are getting paid to do it.

These organisations have become wealthy, sometimes in the extreme.  In Australia, Greenpeace, WWF and ACF alone have a combined annual revenue in excess of $30 million.  On a global scale, the combined budgets of the Greenpeace and WWF networks exceeds $1 billion.  An increasing proportion of their funding is coming from governments, corporations, international agencies and private foundations.  This means that they are even more independent of the community.

Worse, they have seduced the media and our children into believing that they are the true spokesmen for the bush.

What to do?

Develop links with real environmental groups, preferably those made up of people who understand, and who come from, the land.  Environmentalists and farmers are natural allies.  Indeed, farmers are natural environmentalists.  Many environmental groups seek to preserve the environment through modern agriculture.  These groups are often small and under funded and in the business of doing practical things rather than politics.  They get shouted out by the watermelons.  They should be fostered and supported.

When a group comes foreword demanding to be "community stakeholders", make sure that they are.  That is, require institutional democracy for the community.  This is particularly important for the many advisory boards through which government polices now impact on the agricultural sector.

Demand transparency in their dealings with corporations, with governments and, most importantly, with political parties.  Green NGOs increasingly offer political services of a non-kosher type to institutions in exchange for money and influence.

Much of their funding is coming from overseas.  For example, the funding for WWF's anti-sugarcane campaign was funded fully by US sources, particularly the World Bank and large multinational corporations.  These funders' interests lie not in saving the GBR but in securing friendly voices in the NGO movement.

If groups claim expertise, ensure they have it.  Most importantly, when they lie or distort, treat them like pariahs.  Enforce a "no lie" rule.

Be vigilant and counter them all.  Support the VFF and other groups to respond to every lie, every distortion, every campaign, and every lobbying effort.

Defend your property rights and reclaim the science.

NGOs Must Become More Accountable

A recent study by the London-based One World Trust of the accountability of international organisations, multinational corporations and non-government organisations found that Rio Tinto and Glaxo SmithKline were more accountable than NGOs such as World Wildlife Fund, Oxfam and Care.  Ironically, finishing at the top of the table was the International Committee of the Red Cross.

In Australia the Red Cross in its Bali appeal did what every other charity does.  It saw a good cause and launched an appeal around it.

Usually people just give money and trust the charity to do the right thing, an easy assumption to make with the Red Cross, as it is one of the best-run charities.  Only this time people asked where the money went and were unhappy about the answers they received.

It highlighted a central problem in the charitable sector a disconnect between how charities spend their money and why people give them money.  In Australia, the relationship between donors and charities can best be described as don't ask, don't tell.

But how has it come to this?  First and foremost, non-profit organisations lack shareholders and aggressive external stakeholders demanding transparency and efficiency.  They do not have stockbrokers and analysts expertly combing through their books.

They are governed by non-profit disclosure and fund-raising laws at a state level, but these are vague and not enforced.  The task of setting standards of behaviour and disclosure is left up to organisational insiders the board, staff and active members.  In short, no one is looking critically from the outside.  This has bred laxity, poor standards and abuse.

If a business raises funds from the public, it must provide a prospectus detailing purpose, performance targets and proposed allocation of funds.  Failure to comply with this prospectus usually means prosecution by the Australian Securities and Investments Commission.

Many charities do not even provide the basic data required by law.  For example, a recent survey of 89 NSW charities, carried out by a research organisation, Givewell, found that 37 per cent did not disclose the cost of fund-raising, including administration and marketing costs.

Another recent review of 22 not-for-profit organisations undertaken by the Institute of Chartered Accountants found:  limited reporting of objectives;  the majority failed to explain their organisational structure and decision-making processes;  inadequate disclosure of relationship with other groups;  limited use of statistical performance information;  failure to disclose investment policies;  inadequate disclosure of grant-making activities;  and inadequate disclosure of risk management approaches.

Organisations included in this survey were at the top end of the industry and included Care, WWF, World Vision and the MS Society, with a combined annual income of more than $550 million.

Treasurer Peter Costello recently addressed the theme of trust in the charitable sector.  Costello noted that charities would have to do better if they wanted to keep the public trust.  Inefficiency is corrosive of trust.  And trust is the currency of the charitable sector.

Costello perceptively homed in on the area holding back the promotion of social capital the declining levels of trust in the institutions which foster it, such as the churches and charities.

The problem for some charities in rebuilding the public's trust is that this trust has been built on myths, specifically that the sector is run by small, indigenous organisations managed by volunteers.

While many groups conform to this stereotype, the reality is that a large share of the charitable dollar is taken by Australian branch offices, or franchises, of large multinational charities like Care, World Vision, Greenpeace, WWF and Oxfam.

Charity is big business.  A Johns Hopkins University study of the charitable sector in 22 countries estimates their combined annual expenditure was $US1 trillion ($1.54 trillion).  Whether the sector likes it or not, it will have to reform if it is to survive and regain the public's trust.  Otherwise, many other charities will find out for themselves what the Red Cross discovered:  when you wear a halo and sprout wings, you hit the ground harder when you fall, because you have further to fall.

ADVERTISEMENT

WA Gets Its Share of Canberra Pie

Since Federation, the States have blamed the Commonwealth for their every budgetary woe.  Dr Gallop is at it again, blaming the Commonwealth's stinginess for the recent rises in State taxes.

Is there anything to the Premier's recent claim or is it just another attempted ball pass?

As with all things related to money and taxes, the answer is complicated, but it is mostly "no".  While the system by which Commonwealth grants are allocated to the States is rigged against Western Australia and other wealthy States, the WA Government is not being starved of revenue by the Commonwealth.

In the last State budget, the Government announced large increases in stamp duties on house conveyancing and insurance policies over the next four years.  These came on top of tax increases in each of the Gallop Government's two previous budgets.  These tax increases under the Gallop Government have increased tax receipts by around $400 million -- equivalent to 11 per cent of the State's total tax receipts -- and have pushed WA into the ranks of the higher taxing States.

The Government's official excuse for the tax hikes is the "projected low growth in Commonwealth grants to Western Australia (0.9% in 2003-04) which make up 40 per cent of Western Australia's revenue".

This however gives a distorted indication of the Commonwealth's contribution to the State's revenue.  The Commonwealth provides three basic types of grants;  general purpose grants, tied grants and competition policy payments.

General purpose grants, which make up 60 per cent of the Commonwealth Grants to the States, are given with no strings attached and can be used for any purpose.  These grants are expected to increase by 3.3 per cent in 2003-04 in WA.  While the level of growth is not high, it at least keeps up with inflation, population growth and growth in the Commonwealth's revenue.  Additional grants are made to the States for on-passing to local government, universities and others agencies.

The tied grants, as the name implies, are tied to specific purposes or transactions.  While tied grants in aggregate are forecast to decline in 2003-2004 by around 1 per cent, these cuts are not of the Commonwealth's making, nor necessarily to the State's detriment.  The main reason for the decline in tied grants is the forecast reduction in royalties collected from the North West Shelf Project by the Commonwealth and reimbursed in full to the States.  These royalties are expected to decline by $100 million as a result of the higher Aussie dollar, not Commonwealth parsimony.  There are also a range of projects funded by tied grants, such as the additional First Home Owners Scheme, that have been completed and for which no more spending is required by the States.

Indeed, the Commonwealth has actually been quite generous with the large grants tied to the WA Government's own key priority areas.  Grants for public schools, public hospitals, and home and community care are scheduled to increase by 5.8 per cent, 5.4 per cent and 8.8 per cent respectively.

Competition policy payments are scheduled to remain at last year's level as long as the State Government meets agreed reform benchmarks.  However, the Gallop Government's failure to do so to date, particularly in respect of trading hours, puts at risk these payments valued at $58.5 million.

While the Commonwealth is not duding the States, Western Australian does have a valid complaint regarding the sharing of Commonwealth funding amongst the States.  Untied grants, which have grown as a share of total State revenue -- as result of the GST and the removal of seven State taxes -- are allocated on a basis akin to welfare.  That is, the grants are allocated according to need and disability rather than growth and revenue-raising capacity.  As a result, slow-growing States such as Tasmania and South Australia get a larger and growing share of the Commonwealth pie, and wealthy and fast-growing States such as WA and Victoria get less.  Tasmania, for example, gets $1.75 dollars in grants for each $1 its citizens pay in Commonwealth taxes.  In contrast, WA gets back only 98 cents for each $1 paid to the Commonwealth.  While WA's disadvantage is not large now, it is getting worse.

The problem is not just one of fairness, it also affects growth.  The system compensates Tasmania and other States and Territories for actions that undermine growth.  On the other hand, it directs money away from States such as WA, which are growing and which need funds to invest in the infrastructure that underpins that growth.

The system really has outlived its usefulness and needs to be changed.  The problem is getting agreement on a replacement.  The Victorian, NSW and WA Governments (the States that lose from the system) recently funded an inquiry into the system in search of reform.  This, however, achieved little as the beneficiary States refused to co-operate and the Commonwealth Government decided to leave the issue up to the States.

The task is to get Commonwealth leadership on the issue.  I suspect this will only come when the States agree to critically examine not just the sharing of the pie amongst themselves, but also how to ensure greater transparency and value for money for the funds they do receive from the Commonwealth.

ADVERTISEMENT

Who are Charity Donations Really Helping?

At a recent lunch held by Anglicare, Treasurer Peter Costello delivered a sobering message to churches and charities.  That they had to lift their game if they were to retain the public's trust.

The Treasurer's remarks about the churches centered on their shameful handling of sexual abuse issues.  Costello's comments on charities were a reference to the controversy surrounding the venerable Red Cross and the millions it raised for the victims of the terrorist bombing in Bali.

The reasons for this are understandable.  When the story broke in the media, some $6.6 million or 46% of the funds raised were either being spent on projects not related to the victims or held back with the potential to be spent on other projects.  At that time only 54% or $7.7 million had gone directly to the victims of the Bali bombing.

In Red Cross' defence it has to be said that most of the money diverted to "other" projects was spent on worthy projects -- such as research for "spray on skin" for burn victims.  The funds were definitely not squandered on junkets, political activism, talk-fests, or excessive fundraising which is so prevalent in the foreign aid industry.

Nevertheless, the reaction of donors, the media, the public and politicians was savage.  There was a widespread belief that more should have gone directly to the victims.  This was predictable.  The tragedy struck home personally to many Australians.  The Red Cross' Bali Appeal offered a means of combating the sense of powerlessness that many Australians felt after the appeal.

The Red Cross's woes were increased tenfold by way it handled the scrutiny;  namely a lack of candour and openness.

What went wrong?  In short, the lack of transparency that masks the entire charity sector finally caught-up with the Red Cross.

When foreign aid NGOs, like the Red Cross, see a crisis or humanitarian disaster overseas and use the imagery as packaging for a fundraising appeal.

The Bali Appeal differed crucially from appeals in Afghanistan, Iraq, Ethiopia and countless others mounted by aid NGOs.  This time, the victims and beneficiaries were not people in a far off developing world nation;  they were Australians who were aware of how much had been raised and how much they were getting and most importantly, had access to the media.

The point has to be made that if the Red Cross has problems, which is by all measures, one of the most open and best governed charities in this country, the situation elsewhere in the industry is surely grim.

What was the most striking part of the controversy was the absence of groups like Caritas, Care, Plan, Save the Children, World Vision and Oxfam Community Aid Abroad from the debate.  None of these organisations, or the prominent public figures associated with them neither defended nor criticised the Red Cross' handling of the matter.

Disclosure standards in the non-profit sector are poor particularly relative to those applied to business and government.  If for example, business raise funds from the public, they must provide a prospectus detailing purpose, performance targets and proposed allocation of funds.  Failure to comply with this prospectus will usually mean prosecution by regulators.

They also must report to investors on regular basis against the prospectus.  Non-profits almost never do so;  indeed the Red Cross has provided more detail on their Bali Appeal, albeit belatedly, than any recent fundraising drive.  And the salient information only started appearing on the web site after the media started asking questions.  Most charities provide detail in advance and no follow-up detail on their fundraising activities.  In fact, most charities only provide promotional material about themselves none of which is objective or detailed.

Many charities do not even provide the basic data for the public to make informed decisions about charitable giving.  For example, it was recently reported a survey of 112 Victorian charities found that 57 per cent did not disclose the cost of fund-raising including administration and marketing costs.

The controversy over the Bali Appeal has for once asked people to question where the money goes when they give to good causes?  It is a question that people should be asking more often.

Into the Fast Lane

The Australian automotive industry needs to pick up its game on industrial relations if it is to survive and justify continued taxpayer support.

The car industry has come a long way over the last twenty years.  It not only produces a world class product but has carved out a niche for itself in the tough world car industry.

There is no scope, however, for resting on it laurels.  The external environment is harsh.  The car industry world-wide has over-capacity in the vicinity of 25 per cent.  The Australian dollar has appreciated by around 30 per cent against the US dollar over the last eighteen months, with many pundits forecasting further appreciation over the next year.

The Government has also announced reductions, albeit slight, in the level of assistance to the industry.  Despite these reductions, the industry remains heavily subsidised at about $2,800 per locally produced car.  There is therefore no scope for additional support from Government.  Indeed there is strong need for the industry to justify its current level of taxpayer support.

This harsh climate means that the local industry must pick-up its game, particularly on the industrial relations front, if it is going to continue to thrive and even survive.

Over the last decade the industry has moved from industry-wide system to one based on enterprise bargaining agreements or EBA's.  The shift was designed to help erode the "them vs us mentality" that historically plagued the industry as well as to give workers an incentive to accept and gain from productivity improvements and to provide management with a greater capacity to manage and compete.

My recent study of the car industry found that the shift to EBAs is not working adequately.  The study, which examined 47 EBAs amongst the four large vehicle manufacturer and 43 components manufacturers, found that only four agreements allowed for increased capacity to manage.  Twenty three, or just less than half of the EBA's examined, yielded significant reductions in the managerial capacity.  Crucially, Toyota and Holden, two of the large manufactures, had respectively, the most and the third most restrictive EBAs.

One of the key needs of the industry is flexibility to respond quickly and efficiently to change in demand and workforce requirements.  Yet some 80 per cent of the EBAs studied restricted or eliminated the capacity of firms to use other than full-time collectively organised permanent employees.  These included prohibitions on the use of casuals, labour hire, contractors or individual agreements.

Consultative committee structures, which significantly reduced the decision-making capacity of management, were found in fully one-third of agreements.  These cover crucial decision-making processes including changes to production requirements, rostering, and occupational health and safety.  Some of the biggest names in the industry including Ford, Holden, Mitsubishi, Bridgestone and Toyota had particularly restrictive committee processes.

The clear conclusion of the study was that the move to enterprise bargaining in the car industry was, in general, reducing rather than as enhancing the capacity of the industry to compete.  This auger poorly, not only for the future of the industry, but for the billions of dollars invested annually in the industry by Australian taxpayers.

ADVERTISEMENT

To Join Interest with Duty

An Address delivered at a Dialogue,
Harnessing the Self-Interest of the Private Sector to Serve Public Ends
10 July 2003

1. "TO JOIN INTEREST WITH DUTY"

Around the same time as the Pitt administration in England decided that it would deal with its prison overcrowding by sending large numbers of convicts to Botany Bay, the political philosopher Jeremy Bentham came up with an alternative solution.

Bentham proposed that a prison be constructed in London using the very latest technology.  It would be commissioned by central government and managed by a private contractor.  The father of Utilitarianism named his imagined prison "Panopticon" and he recommended that Jeremy Bentham himself be appointed as its operator.

At the end of the eighteenth century, contracting (or "farming" as it was then known) was under increasing attack from those who argued that a strong centralised state would be fairer and more efficient.  Indeed, the Utilitarians themselves were arch-centralisers.

But as a classical political economist, Bentham argued that well-written and well-enforced contracts could be used to align the self-interest of the private sector with the public interest -- "to join interest with duty, and that by the strongest cement that can be found."

Two hundred years later, contracting has made a strong return.  Public private partnerships are now being actively pursued in much of the English-speaking world and in a number of countries in Europe and Asia as well.

And once again, among those who are ideologically opposed to private provision and among those concerned with ensuring high quality public services, the question is being asked:  Are private companies capable of having a public service ethos?

There are serious difficulties with using case studies, but since so much of this debate is conducted at an anecdotal level, I begin by responding with three recent examples.  I then list what I take to be some of the underlying concerns with the involvement of profit-making firms in the delivery of public services.

Although public private partnerships are a relatively recent innovation, there is a rich history of privately provided public services and I provide a brief account of some "public service companies", suggesting that we are not without precedents in this course of inquiry.  I conclude by asking what reasons private firms might have for seeking to do public good.

2. CAN PRIVATE COMPANIES HAVE A PUBLIC SERVICE ETHOS?

September 11:  Following the deaths of 343 firemen and 21 police officers in the World Trade Center on September 11, there was an upsurge in public sentiment.  Firemen became firefighters, Norman Rockwell figurines of firefighters appeared in shops across America, and three New York firefighters were photographed raising an American flag at Ground Zero in an image that echoed the 1945 flag-raising on Iwo Jima.

A week after 9/11, the general secretary of the First Division Association (a public service union in the UK) drew upon this courage and self-sacrifice in the debate over public private partnerships:

The public service ethos is hard to define, but easy to spot.  In the USA in the aftermath of the terrorist attacks, it was emergency workers that the country turned to, not just for their practical help, but for their selfless and tireless courage which was an inspiration for all.

True.  But what of the eight paramedics who also died in the World Trade Center that day?  Three of them were volunteers who happened to be nearby.  Three were from charitable hospitals or medical centres.  Two were from private, for-profit ambulance services that were among the first on the scene.

In fact, at 9.00 am -- fourteen minutes after AA Flight 11 hit the first tower and three minutes before UA Flight 175 hit the second tower -- 17 voluntary and private units and 19 municipal units were on their way to the scene.  Two hours later 55 municipal units and 42 voluntary and private units had been deployed.

There is no evidence that the private sector was lacking a public service ethos on 9/11.  (The larger number of fatalities among firefighters was a function of their role as first-responders and does not reflect a greater sense of public service than police officers or paramedics.)

SARS -- More recently, Hong Kong hospitals have been at the forefront of the battle with SARS, with 282 deaths in that country at the latest count.  Of the 1,746 people who were infected, 385 (or more than one in five) were hospital workers.

Serco has nearly 500 support staff working in four Hong Kong hospitals, who were positioned at the front line of the fight against SARS, moving patients, cleaning wards and converting normal wards into isolation units.

Subsequent interviews with our staff reveal that they were scared, particularly in the early days when information about the disease was limited and hospital instructions were confused.  But with only one exception, our staff put on their N95 masks and went about their duties.

There is no sign that these brave people were lacking a public service ethos just because they were employed by a private sector company.

Bentham's "sincere mourner":  Being a good utilitarian, Jeremy Bentham proposed that he should be penalised for non-performance in the management of "Panopticon", including a £100 fine for each death in custody (a huge sum in those days):

Make my contractor's allowance large enough, and you need not doubt of his fondness of these his adopted children:  of whom whosoever may chance while under his wing to depart this vale of tears, will be sure to leave one sincere mourner at least.

I have always thought this to be a clever line, but in the past month whilst undertaking detailed research on privately managed prisons in the UK, I have come across a real-world example of Bentham's "sincere mourner".

In one of the PFI prisons which has suffered significant financial penalties as a result of underperformance, the leading financier, a major British bank, has appointed monitors to prepare quarterly reports on operational performance.  The consultants report to the bank's corporate finance division about self-harm and suicide intervention, anti-bullying strategies and the purposeful activity regime.

The corporate finance division of a City bank is worrying about self-harm and anti-bullying strategies in prisons.  Who is going to tell me that the profit motive cannot be harnessed to serve the public interest?

3. TRUST IN PUBLIC SERVICES

So what are the concerns with private sector involvement in the delivery of public services?  By and large, the problem is not efficiency or effectiveness but public trust.  This is an extraordinarily complicated subject and not one that can be explored fully here, so let me simplify it massively by reducing it to three issues:

3.1 PEOPLE VERSUS SYSTEMS

The first of these arises from the natural tendency of human beings to recognise and identify with other human beings.  People are inclined to trust other people in preference to institutions or systems.  And they are more inclined to trust people who work with people (doctors and nurses) than people who work with systems (managers and bureaucrats).

As a result, individual public service workers are usually more trusted than the institutions for which they work -- in the UK, doctors are trusted much more than the National Health System, judges and police officers more than the criminal justice system.  And in the age-old struggle between front-line professionals and their line managers, the public tends to side with the professionals.

This preference for people over systems is probably very old, but over the past fifty years, right throughout the Western world, there has been a marked deterioration of trust in large-scale institutions and (in some countries) an increase in trust for other people.

This is not to say that systems don't matter.  To the contrary, in a modern society they are extraordinarily important and the vast majority of the service improvements over the past few decades have come from systemic reform rather than from hiring more people and training them better.

But it is not difficult to see how you could construct a campaign around this dichotomy.  In the United Kingdom, when public sector unions have been attacking private provision using the public service ethos, they do not speak out on behalf of public sector managers and back office workers.  They speak of teachers, nurses and firefighters -- front-line professionals engaged in delivering core public services.

And when they attack the private management companies, they make no mention of paramedics risking their lives at the World Trade Center or hospital workers coping with SARS.  They speak of big business and well-paid company executives -- back office workers who are mostly engaged in the reform of systems.

3.2 PERFORMANCE VERSUS MOTIVES

The public generally believes that the private sector is more efficient than the public sector.  By and large, they don't need to be convinced that -- where performance can be measured -- the private sector delivers better outcomes than government, particularly when it is exposed to competition.

But in many public services, judgements about performance are difficult for ordinary folk to make, since outcomes are complex, contingent or inherently conflictual.  How do we know whether our fire services are delivering value for money when an event like 9/11 only comes along once in a lifetime?

In these circumstances, the public tends to rely more on the motives of people and organisations rather than measured performance.  Monsanto may be highly effective in developing genetically-modified foods, but since it is virtually impossible for me to understand the long-term consequences, I am inclined to place much greater reliance upon their motives.  So I ask myself:  if Monsanto had to choose between corporate profits and the environmental impacts of genetically-modified soy beans, would they be on my side?

3.3 PUBLIC ACCOUNTABILITY

There is also a very close association between accountability and trust.  At the most basic level, the public sector is seen as being more transparent and more open to external scrutiny.  But government is also subject to a complex system of checks and balances which relies upon the self-interest of competing people and institutions to prevent abuses of power and to force issues into the open.

Public services are also thought to be more accountable because they simplify an otherwise complex world and, in some cases, provide us with agents to negotiate with the system on our behalf.  And finally, public services are seen as part of a wider democratic system which increases the likelihood that service providers will reflect the values of the diverse range of citizen/users.

We do understand that public service professionals are also motivated by self-interest.  In the UK, they have just had protracted disputes involving firefighters and hospital consultants where the naked self-interest of these two groups has been evident to all.  But we are also satisfied that longstanding accountability arrangements and a professional service ethos will generally keep the self-interest of these people in check.

It may be true that competition and contracting result in greater transparency and more effective checks and balances, but these accountability mechanisms have not been tested often enough for the public to be convinced that that is so.

4. THE PUBLIC SERVICE COMPANIES

And yet 24 year-old paramedics sacrifice their lives at the World Trade Center, and Hong Kong hospital workers quietly go about their jobs in the middle of a SARS epidemic.  Clearly some private sector companies (and their employees) are capable of having a public service ethos.  But anecdotes are not enough.

Nor is it enough for the opponents of private provision to rely on a handful

of examples where private sector companies have failed to pursue the public interest.  I could easily counter with my own examples where self-interest has triumphed over public interest within the public sector.  (You might recall that I am the person who created the NSW Independent Commission Against Corruption.)

The real question is whether it is possible to create conditions under which private sector providers will pursue the public good in the normal course of business.  Public private partnerships are such a recent phenomenon that one might conclude there are not enough case studies to undertake such an inquiry.  But there is a long history of what might be called "public service companies" throughout the Western world (and the English-speaking world in particular) from which lessons might be learned.  Time does not permit me to do more than mention some of these in passing:

Settlement companies:  Joint stock corporations were widely used in governing the British Empire, starting with the East India Company which from 1834 until 1858 had no business other that of public administration.  Many of the early settlements in North America -- Virginia, Plymouth, Massachusetts, Connecticut and Hudson's Bay -- were corporate colonies, while others were proprietary in nature.  And at the close of the nineteenth century, southern Africa, east Africa, the Niger and parts of Borneo were at different times administered by joint stock corporations under parliamentary supervision.  Within the United States, joint stock corporations were often used for the settlement and governance of new communities and in the governance of the larger wagon trains.

Company towns:  These experiences contributed to a rich British and North American tradition of proprietary towns and suburbs -- well-to-do urban communities (Leicester Square in London and Gramercy Park in New York), nineteenth century company towns (Bournville and Saltair in England and Pullman in North America), and the garden cities of early twentieth century England (Letchworth and Welwyn).  Since World War Two, we have seen a spectacular growth in the number of private communities (gated and ungated), particularly in the United States (with Reston, Virginia having a population of more than 60,000).

Infrastructure companies:  Throughout Britain and in parts of Europe and North America, private firms played the leading role in the development of urban gas and water, street lighting and lighthouses, roads and bridges, canals and waterways, railways and tramways, telegraphs and telephones.

In both Britain and the United States, it was soon evident that the vast majority of turnpikes would not return a profit and yet local business leaders continued to invest.  One nineteenth-century American judge said of the turnpike corporations that "though the ownership is private, the use is public".

The first public railway in the world -- privately owned but public in the sense of taking passengers for a fee -- was the Stockton and Darlington Railway in northern England.  The motto of the Stockton and Darlington was "periculum privatum, utilitas publica" ("at private risk for public service").

Public services:  It is harder to summarise the diverse range of public services that have been delivered by profit-making enterprises over the years or by non-profit organisations established by groups of profit-making firms.  But one can mention naval defence, policing patrols and criminal detection, fire-fighting and ambulance services, prison management, tax collection, road management and municipal services.

I would not want to defend all of these public service companies as representing best practice.  (Nor, for that matter, would I wish to defend all of the institutions used in governing nineteenth century England and Australia.)  We must study each of these examples in its historical and cultural context and seek to learn the lessons for today.

Few of us would now seek to defend British Imperialism  and yet in the middle of the nineteenth century, the East India Company was widely regarded as setting new benchmarks in public administration.  The term "civil service" is taken from the East India Company as are a number of the fundamental principles of the Northcote-Trevelyan model of public administration, such as merit selection.

5. WHY DO PRIVATE COMPANIES DO PUBLIC GOOD?

So what are the circumstances under which private companies will do public good?  Well, as it turns out, the notion that self-interest can be made to serve the public interest is not such an unfamiliar concept after all.

This was Adam Smith's great insight -- that when markets work well, self-interested individuals will serve the good of the wider community without ever intending to do so.  Of course, there are market failures but even among the most cynical, there is recognition that society as a whole profited from the self-interest of entrepreneurs such as Thomas Edison and John McAdam.

We are also familiar with this concept in government.  After all, the checks and balances of the Westminster system do not depend on a wide dissemination of the higher virtues, but merely on the self-interest of competing ministries, competing political parties and, in federal systems, competing governments.  Out of this contest and challenge comes greater transparency and a greater responsiveness to the rich variety of interests in society.

So what are the conditions under which the self-interest of the private sector can be harnessed to serve the public good?

A. MARKETS

• When the public interest largely coincides with the interests of the consumer or service user

  When the interests of the consumer or service user are dominant, then the wider public interest can be largely addressed through taxation and regulation.  The public does worry about the profit-motive even in market transactions, but in the UK, research has consistently shown that some private organisations (such as Halifax Building Society and Marks & Spencer) command higher levels of public trust than many governmental agencies.  One only needs to recall the response of Johnson & Johnson and the Australian biscuit-maker, Arnotts, to product adulteration crises, to appreciate the impact that corporate brand and reputation can have in aligning shareholder interest and consumer interest.

• When there is large-scale risk or investment in technological innovation

  There has also been much less concern about private sector involvement in the delivery of public services when bold technological innovations are being made and where these public service companies are prepared to accept high levels of risk.

  That is the reason why the private sector has played such an important role in the development of new infrastructure.  Today, we are inclined to take reliable street lighting and urban water supplies for granted, but in seventeenth century London, these were frontiers of technological innovation.

  I well remember the first private toll bridge that I encountered in modern Britain -- a bridge over the River Wye (in eastern Wales) that was owned and operated by the same family from the late eighteenth century through until the 1970s.  One might conclude that that was a fairly safe investment, until one realises that the first two bridges the family built were swept away by floods.

  Much the same was true of the settlement companies of the British Empire -- in the early years, the risk of failure was immense, so high that governments were unprepared to commit the taxpayer's resources (and their own political capital).

B. COMMUNITIES

• When the "public" consists of a small enough community to capture the benefits of investment indirectly

  In some cases, the "public" in question is a relatively small community and investors are able to capture sufficient returns through local economic growth.  This is the reason why local landowners, merchants and manufacturers were prepared to invest in turnpikes and railways, and urban gas and water supplies, particularly in the early years.

  It is also the reason why ship-owners invested in lighthouses, insurance companies set up their own fire brigades, and the West India merchants established their own police force.

• When free-riders can be excluded and costs can be recovered for public goods

  It has often been argued that local public services must be financed out of general taxation because of the problem of free-riding.  And yet there is a rich history of company towns and private neighbourhoods where remoteness (as in the case of mining towns), the capacity to exclude (as in gated communities) or the imposition of rental charges by a residual property owner have enabled communities to overcome these this problem.

  It is debatable whether the Business Improvement Districts of North America are a form of sub-local government or a kind of private self-governance financed by a surcharge on property taxes.  This illustrates the difficulty that we often encounter with public service companies -- the general public has difficulty knowing whether they are public or private.

C. CONTRACT

• When self interest happens to coincide with the public interest

  In some cases, the self-interest of a public service company just happens to coincide with the wider public interest.

  One of the best explanations as to why the management companies have had such a major positive impact on the "decency agenda" in UK prisons, is that it was in their commercial interest.  As it turns out, it is less expensive to treat prisoners decently.

  Let me give one simple example -- in the privately managed prisons, prisoners are given the keys to their own cell.  This increased the prisoners' sense of self-worth -- their privacy and security -- but it also brought down costs since officers did not have to spend as much time locking and unlocking cells.

  This alignment of public duty and private interest is perhaps serendipitous, but it has been such a significant factor in the introduction of the "decency agenda" in HM Prison Service and for that reason, that I do not believe that it should be ignored.

• When performance incentives work

  Performance incentives are what Jeremy Bentham was talking about when he wrote of joining interest with duty.  Through a well-written and well-managed contract, government can align the public interest very closely with my private interest.  The reason why the corporate finance division of a City bank is acutely interested in the welfare of prisoners hundreds of miles away is that there are serious financial consequences if their clients fail to measure up.

  I am aware of what the economic literature says about the difficulty of writing effective performance regimes for complex services.  But in my view, it is time that Oliver Williamson got out of his office and caught up with what has actually been happening with public private partnerships in the UK over the past decade or more.

• When there is commercial value in having a reputation for public service

  A company's stock market valuation consists of the sum of its book value and its goodwill (or reputation).  Public service companies tend to have little by way of tangible assets, so that to a very large extent, the value of the company is determined by its reputation.  If it were to compromise that reputation, the company would fail to win new contracts or renew existing ones and the capital markets would quickly discount the value of its shares.

  Reputation is particularly important in public sector markets, where there are often repeat plays with the same customer.  Game theory tells us that it is in those circumstances that players will be most inclined to take a long-term view.

  Governments need to pay greater attention to the incentivising effects of corporate reputation and how that can be used to improve the quality of public services.

• When employees are motivated by a professional ethos

  One of the mistakes that critics often make is to assume that front-line workers engaged by the private sector are strongly motivated in their day-to-day activities by concerns about profit and loss.

  A couple of years ago, the Institute for Public Policy Research (a centre-left think-tank in the UK), conducted qualitative research with a number of front-line workers in public and private hospitals, in an attempt to get a better understanding of the public service ethos.

  Nurses employed in private hospitals were deeply offended at the suggestion that they behaved differently because they were not working for the NHS -- "You nurse exactly the same in the private sector";  "To me the patients were patients, that's it.  You nurse them all the same";  "It doesn't matter where we work now -- a nurse is a nurse.  You're a caring professional."

  It is this sense of public service and professionalism that motivates the nurse in a private hospital (or in a privately-managed public hospital).  Quality private sector managers understand this and seek to harness that ethos to deliver better services.

  The self-sacrifice of private paramedics at the World Trade Center and the dedication of our hospital workers in Hong Kong during the SARS epidemic come from this same sense of professionalism.

6. CONCLUSION

One of the many reasons why governments have turned to the private sector over the centuries is "plausible deniability" -- government can take the credit, but if anything goes wrong then the private sector can wear the blame.  One can think of it as a form of political risk transfer.

This is certainly one of the reasons why British governments, from Elizabethan times down to the early nineteenth century, relied on privateers to supplement the Royal Navy in times of war.  It explains, in part, why the Crown relied on chartered companies to undertake overseas trade and settlement until the late nineteenth century.

Socially responsible public service companies are tired of being used by governments in this way.  In particular, they are tired of participating in lowest price tenders, where the second half of the cost reductions can only come through cutting terms and conditions.  They are sick and tired of being forced into competitions of this kind through government procurement processes and then being criticised by government for not having a public service ethos.

There is little doubt that profit-making firms are capable of having a public service ethos.  And there appear to be a number of conditions under which the self-interest of the private sector can be harnessed to serve the public interest.

But in order to capture these benefits, governments must step away from a narrow procurement agenda and look to the much more interesting challenge of building a diverse ecology of socially-responsible public service providers.  In the UK, the Blair government has signalled that it is ready to take up this challenge.