Tonight, following up on Rabbit traps, broken promises and efficiency with a dash of history, I don't want to comment on the question of whether or not Education Minister Pyne's approach to education funding represents a breach of Mr Abbott's election promises. That will be much debated. I want to make a different point.
You can understand why some states are so upset. Think, for the moment, of the problem faced by state treasuries. Heavily dependent on Commonwealth funding, they have shifted spending to accommodate the demands of the Gonski funding arrangements. Commonwealth policy Instability plus excessive prescription has been a problem for quite some time. Now their entire forward estimates are thrown into disarray. It's not a problem for states who have not signed up, they actually get more cash. It is a problem for the others.
The critical issue now is whether Mr Pyne's still to be announced proposals will be so much better as to justify the switch and any pain associated with it. I don't know. maybe they will. That's where we have to wait and see. I, for one, will be looking to future announcements to help me understand this point. It's the actual policy details that are now the main game.
18 comments:
Federal Government responsibilities according to Andrew Robb website:
• Medicare
• Immigration and Customs
• Employment and Workplace Relations
• Australia Post
• Family Support and Pensions
• Centrelink
• Funding to the States and Territories
• Taxation - Income Tax, GST and Company Taxes
• Control of Television and Radio
• Imports and Exports
• Air Safety
• Passports
• Defence
• Broadband
- no mention of foreign affairs, or infrastructure, including transport?
Anyway, leaving that aside, how are we going since the change of government?
Medicare, Australia Post – possible sales, along with pretty much anything without a pulse – contrast/offset by a) potential reinjection of the government into the affairs of Qantas, and b) recent Graincorp protectionist decision.
Immigration and Customs – stopped counting the boats; infuriated Indonesia despite their polite telegraphing.
Employment and Workplace Relations – still bubbles along as unfinished business
Family Support, Pensions, Centrelink – the PPL scheme might fit here; an abortion of a policy with no visible means of financial support thus far.
Taxation and States Funding – the budget deficit is an ‘emergency’ – for the next 10 years; the national debt is an ‘emergency’ – raise the debt limit; education funding – tear up Gonski agreement; a ‘review’ to provide options for GST, income tax, superannuation, retirement age – not one of which will be either palatable or instituted.
TV Radio, Broadband – NBN Co now in disarray; possible ownership changes to provide more concentrated ownership.
There remain four items on Robb’s list, plus Foreign Affairs and infrastructure, and I sincerely hope that the farce of our relations with Indonesia, China, Timor Leste can be offset by more thoughtful handling of some of those other areas.
Unrelated: concerning the privatisation of state-owned (that is, national or State owned) businesses: name one in the past 40 years which resulted in lower end-user costs, or higher employment, or greater efficiency – because I can’t.
kvd
Wow, did the last lot ever poison the well!
And, oh...as to to lower end user costs, how about electricity charges in Victoria, cheaper air fares, greater choice and lower cost telephony, more efficient banking (led by CBA).. and so on!
DG
A little messy, kvd, indeed. DG, while I actually support privatization in principle, it's not clear to my mind just what the benefits have been because of the range of variables, Take the CBA. How did privatization here actually assist more efficient banking? I think the outcomes would have been much the same anyway.
And, oh...as to to lower end user costs, how about electricity charges in Victoria, cheaper air fares, greater choice and lower cost telephony, more efficient banking (led by CBA).. and so on!
- lower end user costs for electricity in Victoria:
Commission chairman Ron Ben-David said the report found Victoria's electricity prices had increased by between 60 and 70 per cent across the state over the past five years and at a similar pace to NSW. This was despite Victorian retailers not undertaking the same heavy investment in network infrastructure as their NSW counterparts.
from SMH May 2013 here:
http://www.smh.com.au/business/power-puzzle-less-investment-but-higher-prices-20130524-2k5ej.html#ixzz2mLrnLUL0
- cheaper air fares:
Certainly appears that way, for those of us who like to holiday overseas, and ignore the effect of a higher $Aus. But also please note that the number of regional airports has fallen from 278 in 1984 to 148 in 2010. Not seeing much end-user benefit there.
- greater choice and lower cost telephony:
As I understand it, there are only three 'telephony companies' in Australia - Optus, Vodaphone and Telstra. The rest of the providers - Virgin, etc. - are bottom feeders, buying excess capacity from the majors, and onselling this to consumers. 'Choice' is illusory; try using Vodaphone, or one of its remoras in the valley where I reside.
- more efficient banking:
Making huge profits off the back of an absolute government guarentee in a heavily controlled market is not my definition of 'efficiency'.
kvd
I saw some of the material on Vic electricity prices, kvd. Regional airports another story, partly linked to over-regulation.
Electricity distribution network revenues per customer since 2001 in Victoria have been substantially below other states. Privatisation has been a boon to Victorian consumers (see Report by Energy Users Association of Australia, 2011). As to the banks, there is no moral turpitude in making large profits. I would rather have a profitable banking industry than one that were unprofitable. There is plenty of contemporary evidence of the misery caused by distressed banks. The return on the assets of Australian banks is actually rather pathetic even if their cash profits seem large. The bank deposit guarantee was of course a mistake – but that is another story.
DG
Good morning, DG. You have sparked my curiosity on electricity. I think that there have been reports this year that present a somewhat different picture. One difficulty is comparing like with like; little customer vs big customer. A second difficulty is one I mentioned before, disentangling effects in a case where privatisation is only one variable.
Hi DG
Please understand that it is possible to observe the inefficiency of our banking system (as you yourself just did by noting what you termed 'pathetic ROI') without suggesting that large profits are a sign of 'moral turpitude'. Those are your words, not my inference.
I make no criticism of our strong banking system - I totally support it. But I think I agree with Jim that the privatisation of the CBA is neither here nor there as a case for proving that privatisation is a 'good thing'.
This discussion started with my query about privatisation leading to lower end user costs, or higher employment (I meant within the industry), or increased efficiency. Banking and electricity changes were your examples; neither seem very supportive of the proposition.
kvd
Just (for the last time) on the electricity industry, I could not quickly get to the report DG noted, but I did find another titled "Australia's rising electricity prices and declining productivity" - see here: http://www.euaa.com.au/wp-content/uploads/2011/02/110516-overview-of-the-report-BM.pdf
I have not read it as yet, but the first couple of paras state:
The index of electricity prices has remained within a band of plus or minus 5% of the Consumer Price Index (CPI) for the 22 years between 1986 and 2008. But since then the index
of electricity prices has increased around 40% relative to CPI.
- followed by:
This price increase is explained mainly by rising network costs. These rising costs also largely explain declining productivity of the utility sector, which is the worst performing sector of all 12 industry sectors according to the Australian Bureau of Statistics.
As I said, yet to read, but I have a feeling it doesn't present a story within which the words 'efficiency' and 'lower costs' might appear :)
kvd
Kvd,'high' ROA is neither a necessary nor sufficient condition for efficiency.
DG
'high' ROA is neither a necessary nor sufficient condition for efficiency.
What? My initial reaction to the above is that a higher ROA outcome is a probable indicator of relative efficiency between competitors. How that translates to viewing it as some sort of precursor to efficiency loses me.
Anyway, with a bit of time on my hands, I've been browsing round the Victorian electricity experience - and I'm coming to the sad conclusion that the whole artificial edifice of privatisation was and remains a giant fraud against the initial owners - the Victorian public.
I'm just amazed that you might think of it as any sort of 'poster boy' for privatisation - so perhaps I'm misunderstanding your point? (Something I do quite regularly, unfortunately ;)
kvd
ROI is a bit of a messy concept because because of the variables involved, kvd, including time, market conditions such as extent of competition and firm vs industry. A high ROI at a point says very little of itself.
ROA!
DG
DG, I am genuinely interested in your pursuit of 'ROA'? Looking back I see you mentioned that 'The return on the assets of Australian banks is actually rather pathetic' - which I mistakenly replied to as 'ROI'.
Then in another comment I see I went to your term ROA, but Jim replied as to ROI. Result: confusion all round - most probably of my doing. Apologies.
Now, while Jim might wish to move on, I would be very interested in your continuing reference to this measure in the above discussion. I confess I am now lost as to your point.
kvd
Interesting confusion, kvd. However, that raises another methodological point.
ROA is usually defined, I think, as net income over total assets. That's still a leveraged concept because interest costs are deducted. If my interpretation is correct, ROA can shift quite widely with shifts in interest rates. If so, to get a base economic measure, you need to add interest back in.
Kvd, without getting too bogged down...my original point was that I’m enthusiastic about privatisation. Markets impose disciplines that are are associated with efficiency gains. I believe these are manifest in the likes of the CBA for all sorts of reasons (e.g. more efficient use of branch floor space, labour shedding, higher capital / labour ratios, better customer focus—in years gone by you couldn’t get a housing loan from a trading bank unless you had a track record of banking with them for donkeys years, etc). All this has gone hand-in-hand with opening our financial markets to international competition and the removal of numerous regulatory distortions. Although bank cash profits and the dividends they have paid have soared (and this has redounded to the advantage of everyone with superannuation and other investors), when one considers the size of a company such as the CBA (as measured by its asset base) its profits are by no means extortionate (although returns to equity are different story). So I don’t share your disenchantment about ‘selling off’ public assets. In most cases government should never in the first place have been there.
DG
Thanks DG. I suppose the difficulty I have with a blanket “privatisations are good” outlook is as much philosophical as economic. The main problem I have yet to resolve for myself is just where you draw the financial boundary of the effect of any such privatisation. The CBA is your case, but it is muddied by the fact that it was not the sole participant in the marketplace at the time of privatisation – and so it is difficult to look at what was, and what now is, and state definitively that the act of privatising the bank was the sole driver for any perceived ‘good’ outcome.
You say that “markets impose disciplines that are associated with efficiency”. However, it is also true that ‘efficiency’ is mostly code for a reduction in either employment or service – and I wonder about the ‘benefit’ to the end user, and the wider community, in that. Sticking with the CBA for a moment, I read somewhere that in the decade after privatisation, staffing was reduced by some 15,000 and about 600 branches were closed. And further, when Colonial was taken over in 2000, some 250 of its branches were also closed. Now, while this is all good for the shareholders and the bottom line, how does this sit with the wider benefit to the community as a whole?
You also mentioned the electricity market, and that probably is a ‘purer’ example of privatisation given that, until privatisation, all the participants were basically public utilities. In that industry, again, all I can see is ‘efficiency’ as code for job-shedding and reduced attention to longer term priorities (asset renewals and the like) for the sake of increased returns in the short term. And this is an industry whose ‘product’ is not differentiable between the many artificially created ‘competitors’: it is not as if the electricity coming out the socket at my house is somehow faster, better, or more powerful than that provided to your home; it is not as if the end consumer can be somehow convinced to use more electricity.
The problem is that while the various commercial players can trumpet the fact of increased profits, they are really only obeying the golden rule of ‘privatise the profits; socialise the losses’. Why should I salute a result that places profit into the hands of the few, at a society cost (in some cases quite direct, such as) of unemployment benefits? Who picks up the tab for these ‘costs’ which in most cases are a direct result of some private industry or another failing to be held to account for the true total cost of its efforts to produce a product a little more cheaply, with a little less quality, and with no eye for the future beyond the next quarterly report to the stock market?
And finally you say that “in most cases government should never in the first place have been there”. I would politely dispute that in the case of banking, electricity, telecoms and airlines. These are all industries that have been greatly benefited by public investment in their formative stages; and we, the end-users, have greatly benefited by that participation.
kvd
The other thing I meant to say about ‘capitalism’ per se is that it sometimes seems as if it operates most successfully as a sort of ‘whirlpool’ in our lives. By that I mean it seems as if in the pursuit of efficiency and higher return, it sets up an overwhelming concentration of services in the hands of a few, drawing all resources towards the centre by some sort of irresistible gravitational pull.
Forty years ago there were four corner stores all within walking distance of my home which carried a limited range of household necessities and made the odd sandwich. These days you drive to a supermarket – and yes, the range is greater, and the prices cheaper - but convenience?
Also, there were I think 9 petrol stations servicing my town. Now there are three – two of which are the ‘4 cents off’ variety attached to the major supermarkets. In the nearby Highlands I think there are now four garages where a while back there were closer to fifteen. All very efficient; all very convenient – if you take a back street to avoid the traffic congestion around the queues waiting to fill up, and don’t mind queuing yourself.
As a died in the wool small business capitalist, the older I get, the less convinced I have become that ‘market forces’ have provided me with a convenient and satisfactory lifestyle. And I actually don’t begrudge paying more than $1 for 2 litres of milk, given that my neighbour has a viable farm, and his kids have a future.
kvd
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