Here's a novel idea: Australia needs more competition, not less

Business has many tired ideas for reforming the economy and improving productivity, most of which boil down to: cut my tax and give me more power to keep my wage bill low. But a veteran econocrat has proposed a new and frightening reform: make our businesses compete harder for our custom, thus making it harder for them to raise their prices.

Treasurer Josh Frydenberg has asked the Productivity Commission to undertake a five-yearly review of our (dismal) productivity performance. And this week Rod Sims, who’s departing after 11 years heading the Australian Competition and Consumer Commission, offered a few helpful hints in a speech to the National Press Club.

Sims says “the Australian economy suffers from high levels of market concentration [markets dominated by a few big firms] to the detriment of consumers, small business and productivity”.

He argues that the pandemic-related supply shortages and logistics problems we’re facing are worsened by market concentration in so many areas and by our infrastructure bottlenecks.

“We need to address this through competition law, to prevent anti-competitive abuses of market power, and through general infrastructure reform,” he says. He’s referring mainly to road, rail, air and sea transport facilities, and also to utilities – electricity, gas and water.

Australia’s infrastructure is generally high cost, he says, compared with other countries. “Why do we keep privatising assets and claiming success when huge amounts are paid for the asset?”

My answer: when state Treasuries are run by bankers rather than econocrats, that’s what they think they’re supposed to be doing.

Sims says that often, “these huge prices are the result of closing off competition, or because a monopoly was deliberately sold without any regulation of the prices that can be set for users who have no alternative but to use the monopoly asset”.

“Such behaviour can dramatically affect existing users and could be considered a continuing tax on the community,” he says.

Governments need to sign up to a checklist before infrastructure assets are sold to avoid provisions which restrict competition and to ensure there is appropriate regulation where monopoly or significant market power will exist after the sale to private interests, he says.

“Let’s acknowledge this issue and fix it so that Australia can avoid even higher priced infrastructure in future.”

Another infrastructure challenge is ensuring the regulatory arrangements for the National Broadband Network are appropriate.

“After [the federal government] spending $50 billion on the NBN, the objective must not be a commercial return on the [$50 billion] sunk investment. It must be making the best use of this great asset.

“The prices that allow the NBN to get a commercial return on all its outlays, and the prices that make best use of this expensive asset, are very likely quite different,” he says.

We all saw the benefit of having the NBN completed in time for the pandemic lockdowns. That’s just a taste of the benefits if we get the NBN’s pricing right. Prices must allow the NBN to keep investing as needed, but must also see optimum use made of the network.

That is, the goal should be maximising the network’s benefit to the whole economy, not creating a new business that can exploit the pricing power that usually goes with a monopoly network, then selling it off to the highest bidder (or continuing to own it while overcharging customers).

Another area where we’re not getting enough competition, are paying prices that are too high (often in ways that aren’t visible) and are crimping productivity improvement is “digital platforms”.

Sims says we have an internet dominated by a few gatekeeper companies: Google has 95 per cent of searching activity, Facebook dominates social media, and Google and Apple dominate the app market, particularly on mobile devices.

“I am proud that the ACCC is at the forefront of world efforts to identify the harms from digital platforms and potential solutions to them,” he says.

While it’s true that these giants innovated their way to success - bringing many benefits to ordinary internet users – it’s equally true they also acquired a huge array of companies that could have been competitors, which has extended their reach and cemented their power.

They also engage in many activities, from “product bundling” (where to get the ones you want, you have to pay for stuff you don’t want) to “self-preferencing” (where they put their own products at the top of a list, and rival firms’ products at the bottom). Over time, this has lessened competition in various important digital markets.

The digital giants also have access to, and control, a massive amount of data, which has seen harms ranging from that seen with Cambridge Analytica, to profiling people so as to maximise sales by exploiting consumers’ vulnerabilities.

Then there’s the many examples of inadequate competition in banking. Sims quotes just three. First, the price of the most important financial product, a home mortgage, is unknowable without huge effort and cost, which benefits banks and harms borrowers.

The still-being-rolled-out “consumer data right” (that is, it’s your data so you should be able to have it forwarded to a rival business) should help this a lot. And Sims wants consumers to be continually informed by a “prompt” of what typical borrowers are paying, so they know when to start shopping around.

Second, to reduce “debanking” – where banks find excuses to refuse to move money that has been arranged through the new “fintechs” and money remitters – the government should set up a scheme these digital non-banks can use to prove their controls are adequate to detect money laundering.

Third, now the digital giants are getting into the now largely cashless world, outfits such as Apple Pay must be stopped from preventing other providers of digital wallets making use of its “near field technology”.

Funny how it’s never occurred to the Business Council and other business lobby groups wringing their hands over weak productivity that an obvious solution to the problem is to make firms compete harder for their profits.

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How spin doctors have taken control of budget papers

What if I told you the true expected budget balance for next financial year wasn't the much trumpeted surplus of $1.5 billion but a carefully buried deficit of $8.7 billion?

I'd be justified in making such a statement because that deficit figure is officially known as the "headline cash balance" and, as a journalist, I'm in the headline business.

I'd also be justified in drawing it to your attention because the government in its budget papers has made no effort to convince us the headline figure is of no macro-economic significance - rather, we should focus solely on the "underlying cash balance" of a $1.5 billion surplus.

Indeed, I'm not sure the headline figure is of no macro significance. Why not? Because I happen to know - no thanks to the government - that the difference between the two figures includes, among various things, the government's spending on the rollout of the national broadband network.

That's of no macro-economic significance? That has no effect on economic activity? Don't think so, chaps.

I'd really like to be able to tell you just what the transactions are that explain the difference between the headline and the underlying balances. But if there's a table anywhere in the voluminous budget papers spelling that out, I can't find it.

I'm sure if the econocrats had their way there'd be such a table, but the preference of the politicians and their private-office spin doctors is to conceal rather than explain. And even just the figure for the ironically titled headline balance has been carefully hidden to ensure it doesn't hit the headlines.

It didn't rate a mention in the Treasurer's budget speech; in the multicoloured Budget Overview document it was included as a "memo item" (that is, they don't tell you how it was arrived at) on page 36.

In the budget papers proper, it went unmentioned in budget statement 1 (also known as the budget overview) and got a single mention on page 9 of budget statement 3.

The hiding of the headline deficit is just one example of the way the budget papers are becoming less informative rather than more, and the way the government's spin doctors are turning them into an exercise in media management rather than transparency and accountability.

The budget speech used to be a thorough and trustworthy exposition of the new measures announced in the budget; these days it's a made-for-television rave about the budget's good points.

I suspect one reason the budget papers have become less rather than more user-friendly over the years is the spin doctors' desire to drive journalists away from the budget papers proper to the multicoloured Budget Overview, known to econocrats as "the glossy".

It's glossy by name and gloss by nature, putting the best gloss possible on the budget and focusing on whatever messages the government is trying to peddle.

It offers a seemingly useful list of the "major savings" announced in the budget, but you can't be sure all the "saves" you'd like to know about are listed. The single line for "other" savings accounts for almost a quarter of the total.

But that's honest compared with the list of "major initiatives" announced in the budget, otherwise known as "spends". It's a table without totals, meaning it doesn't even have a line for "other" spending. If it did, other would account for almost a third of the total.

Spin doctors work on the assumption journalists are both dumb and lazy, meaning they'll focus on whatever news you give them and not think to go looking for the things you conceal. They also assume journalists who benefit from background briefings and selective leaks won't be game to complain publicly about the way they're led around by the nose.

Journalists turn a blind eye to the rank hypocrisy of the Treasurer and Finance Minister piously refusing to comment on what may or may not be in the budget, while the Prime Minister's press office leaks much of its content to selected journalists, then quietly confirms the story's accuracy to those journos who missed the exclusive.

Unfortunately, there are head office-based journos who aren't part of the club and so feel no such inhibition. There are also, believe it or not, economists and even the odd private citizen who read the budget papers in the hope of enlightenment. They're getting the bum's rush.

This year AAP has accused the government of leaking budget information to selected media for broadcast during the budget lock-up. How's that for duplicity.

Budget paper No 1's coverage of revenue items is pretty thorough, but its statement on expenses leaves much to be desired. It's been stripped of its former graphs showing how spending categories have grown over the years and its tables showing the figures for major spending categories over many years. This paper used to have an index to help you follow a query through, but that was dropped long ago.

You have to delve as far as budget paper No 2 for reliable explanations of particular budget measures, but this information is listed by department rather than program or function, and little effort is made to help users find what they're looking for.

Federal bureaucrats are convinced they're superior to state bureaucrats in all respects, but the states' budget papers are generally superior to the feds' in their transparency, rigour and comprehensiveness. Federal budget papers are particularly inadequate on information about non-financial corporations, such as the NBN Co Ltd.

So tight is the spin doctors' hold on the federal budget process that some nameless operative in the "media liaison" section of the "communications unit" within Treasury's "ministerial and communications division" summarily declined, without explanation, a newspaper's request for budget tables to be supplied in spreadsheet format.

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Creating jobs not the be-all and end-all

I reckon I've had only about half a dozen job interviews in my life and only one - with the Financial Review - where I wasn't offered a job. When I was leaving school in Newcastle in the mid-1960s a local chartered accountant needed a youngster to be a junior audit clerk. He approached the school careers adviser, who recommended me.

I was pleased to take the job, but left after two years to go full-time at uni. Nearing the end of my course but not being worldly wise, I left it too long before lining up a job for the next year. The interviews were over.

Not to worry. I caught the train to Sydney and went to the office of the Institute of Chartered Accountants, which gave me a list of the big city accounting firms. In what was left of the day I managed to visit four of them, walking in off the street to ask for a job.

I retired to my sister's house to consider the four offers, choosing the one that offered slightly higher pay: $4000 a year.

The point of the story is not that I was a great catch, but that in those days finding a job was never hard. In the 30 years of the golden age following World War II, the Australian economy was almost continuously at "full employment", defined as an unemployment rate well under 2 per cent.

Occasionally economists would worry that the economy had hit "over-full employment", meaning job vacancies far outnumbered job seekers, a quite inflationary situation.

But the golden age ended in the mid-1970s with the first OPEC oil shock (just after I'd landed a job at the Herald) and the advent of "stagflation", which plunged Australia and the developed world into a protracted period of economic dysfunction, with high inflation and high unemployment.

It took until the early 1990s to get inflation back under control and until the mid-noughties to get back to full employment, which by then economists were defining as unemployment of about 4.75 per cent.

(Why so high? Perhaps because these days more unemployment is "structural" - people with skills who aren't the ones in demand, or people with needed skills who don't live in the cities where they're needed. In any event, the economists who manage our economy are convinced that if unemployment falls much below 4.75 per cent, shortages of skilled labour will become widespread, employers will start bidding up wages, then pass their higher cost on in higher prices, causing inflation to take off.)

The point is that we went for about 30 years with high unemployment, a period in which the economy was seen to be "demand-constrained" - the demand for labour was insufficient to take up the available supply of labour.

So we had a period of three decades in which to engrave on our minds the assumption that there is always a shortage of jobs; that every new job is an extra job and every extra job - no matter how menial or poorly paid - is a good thing.

It followed that any new project that could be claimed to involve the creation of jobs (which all of them can) was obviously a good thing, worthy of government approval and maybe some sort of concession.

Now, however, with the economic downturn over and the resources boom resuming, it won't be long before the present unemployment rate of 5.4 per cent falls a lot further and labour shortages become widespread.

And adding to this will be the effect of population ageing. The first baby boomers turn 65 this year and, though many will delay their full retirement by continuing to work a few days a week, by the end of the decade most of them will have left the workforce. But there won't be all that many young people joining the workforce.

Population ageing means you have plenty of people consuming - and thus adding to the demand for labour - but a lower proportion of people wanting to work and thus contribute to the supply of labour.

In other words, we're returning to a '60s-style economy in which the demand for labour exceeds the supply, and all our now deeply ingrained thinking about a perpetual shortage of jobs is no longer correct and needs to be abandoned.

When, for all practical purposes, pretty much everyone who wants a job already has one, it is no longer true that a project that will create 200 jobs will increase total employment by 200. Rather, the workers who fill those jobs will have to be attracted from their existing jobs, and it may well be necessary to bid up wages to attract them.

Certainly, it no longer follows that saying a new project will create jobs means governments should applaud it and subsidise it. Nor does it follow that saying a particular industry will have to shed many jobs because it has struck difficulties of some sort obviously obliges governments to step in with subsidies to protect those jobs. Most of the workers involved shouldn't have much trouble picking up jobs elsewhere.

Senator Stephen Conroy recently listed among the national broadband network's many virtues the claim that it would "stimulate the economy". But when the economy is at full employment, the last thing governments should be doing is adding stimulus.

Conroy had no idea he was mounting a good argument against the government spending so much to build a gold-plated broadband network at this time. It will take economists and economics teachers many years of explanation and education to break the public's mindset that creating new jobs is an unmitigated virtue.

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We're all paying a high price for hiding our debt

IT DOESN'T seem to have occurred to Julia Gillard that her resolve to make this the "decade of infrastructure" - with a gold-plated national broadband network as its centrepiece - doesn't fit with her core promise to return the budget to surplus in 2012-13 and eliminate government debt ASAP.

Indeed, the two policies laugh at each other. Both Gillard and Kevin Rudd succumbed to Costelloism - a brand of fiscal populism holding that all government debt is bad - as did various state Labor governments.

The upside of this abhorrence of budget deficits and obsession with the elimination of debt is it left the Rudd government perfectly placed when it needed to spend big to counter the impact of the global financial crisis.

The downside is it led to more than a decade of inadequate spending on infrastructure. Labor made much of the neglect of infrastructure while in opposition and this explains its resolve to give it a high priority. But Labor has also embraced the very mentality that caused the problem.

As Dr Nicholas Gruen, of Lateral Economics, has written in a report for Western Sydney councils, the obsession with debt may have got rid of the budget deficit, but it exchanged it for an infrastructure deficit. In truth, only some government debt is bad. It's not bad when it arises from deficits incurred during recessions. And it isn't bad when it arises from capital spending - provided those capital works are worthwhile. It is bad when it arises from the failure of governments to ensure their recurrent spending is covered by revenue during normal years.

I'm a great believer in the (Peter Costello-introduced) "medium-term fiscal strategy": to "maintain budget balance, on average, over the course of the economic cycle".

You'd never know it from the way Costello and his successors carry on, but that strategy is carefully worded to permit the budget's "automatic stabilisers" to push the budget into deficit during major downturns and also permit governments to use the budget to stimulate the economy during recessions.

So the addition of the words "on average over the cycle" makes the strategy - shock, horror - a Keynesian formulation. (Clearly, it was crafted by someone a lot wiser than Costello.) But the words "on average" make it a strictly symmetrical Keynesianism: once the recession passes you have to get the budget back to surplus and keep it there until the next recession.

There's just one weakness in this enlightened strategy: its failure to distinguish between capital and recurrent spending - that is, its failure to permit the federal government to borrow to fund infrastructure.

If Labor had a deeper understanding of economics and genuine belief in it, rather than a mere desire to portray itself as a "fiscal conservative", it would have had the courage to add that qualification to the strategy.

So how does Gillard expect to square the circle of tackling the infrastructure backlog without being able to borrow? I bet I know. She intends to use "public-private partnerships" to get the borrowing done by the private sector. Hey presto! Problem solved.

But hey presto is right. This is just creative accounting. The government initiates the need to borrow - and, directly or indirectly, guarantees the borrowing - but gets the debt put on someone else's balance sheet.

Unfortunately, the drawbacks of PPPs - which so far have been used mainly by state governments for all manner of infrastructure assets, from highways and railway stations to hospitals and desalination plants - are much greater than this.

As Gruen explains, these assets have been built at a higher cost to the public than would have been the case had they been built the way they used to be, as government-owned assets funded by borrowing.

The first cause of increased cost is the "artifice" needed to get private investors interested. They have to be reassured that some future action by the government - say, the building of a competing road or hospital - won't leave their asset stranded.

So the government has to tie its hands, promising not to do certain things and cutting off options for the future that may have been in the public's interest. And we've all seen how governments shore up private toll roads by "traffic calming" (making it harder for motorists to avoid the toll road).

But the bigger reason PPPs are so much more expensive is that government - being the government and thus having the power to raise taxes to cover its debts - can borrow a lot more cheaply than private businesses can. This is true even after you allow for the risks involved in specific infrastructure projects.

To illustrate the extra costs involved in PPPs, Gruen calculates that, had the NSW government chosen to fund the toll roads that now encircle Sydney, the state would have acquired ownership of a stream of revenue with a net present value of about $12.8 billion, at the cost of increasing its borrowings by $7 billion.

In other words, by taking on a little more risk, the state would have increased its net worth by about $5.8 billion. After allowing for that extra risk, its net worth would still be $4.6 billion higher.

By today, more than 60 per cent of the original borrowing would have been paid off, leaving a net cash flow to the budget of $380 million a year, after allowing for the interest payments on the extra debt and even after providing for further repayments of principal. And get this: in the unlikely event of the government's taking on of the extra debt prompting the ratings agencies to downgrade the state's AAA credit rating - which would increase the interest rates it had to pay on its borrowings - the budget would still be ahead on the deal.

Bottom line: the public is paying dearly for the efforts of governments to hide the debt they're responsible for.

Although we're not paying as much public debt interest as we would have been, we're paying inflated tolls on roads (as Gruen's calculations show). We're also paying heavy repayments on our mortgages partly because of governments' failure to release sufficient land and their loading of up-front infrastructure charges on the land they do release.

And we're paying with our time as we wait at peak hour in traffic that has slowed to a crawl or crowd into late trains and buses. All thanks to the demonising of government debt.

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NBN plan has the signs of a historic stuff-up

I am starting to get a really bad feeling about Labor's plan for a national broadband network. The more it resists subjecting the plan to scrutiny, the more you suspect it has something to hide.

I fear Julia Gillard is digging herself in deeper on a characteristically grandiose scheme her swaggering predecessor announced without thought to its daunting implications, when she should be looking for ways to scale the project down without too much loss of face.

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The obvious way to start that process would have been to accede to calls for the Productivity Commission to conduct a cost-benefit analysis. The determination of governments to keep their schemes away from the commission is always prima facie evidence they know the scheme's dodgy.

But as each day passes the issue is becoming more politicised, with too much of the government's ego riding on pretending the plan is without blemish. Part of the problem is the role the plan played in winning the support of the country independents.

The independents and Greens are doing the government no favours in using their votes to allow the plan to escape scrutiny. Are they, too, afraid it wouldn't withstand scrutiny?

This is not to support the inane demands from the opposition and the media for the government to release its ''business case'' immediately rather than in a week or two's time. Mere impatience is no virtue in the eternal quest for good policy.

But by the same token, the government's implication that we can't delay the broadband rollout by pausing to check whether it's a good idea, or is being done as cost effectively as possible, is insupportable. If it's a flawed idea, better to know now rather than after the money's spent.

It's no doubt true the Liberals are being quite hypocritical in demanding the release of a government report when the Howard government refused to release so many reports, and in demanding a cost-benefit analysis when John Howard never bothered with them.

But such objections make sense only to those more interested in party-political point scoring than achieving good policy.

The case for a thorough cost-benefit analysis needs no stronger argument than that, at $43 billion, this is the most expensive piece of infrastructure this country has seen.

It's true the plan has a lot of attractions. Top of the list is the structural separation of Telstra's network from its retail business so its retail competitors get fair access to the network. This is something the Howard government should have seen to before it privatised Telstra.

I accept that, if city people are going to continue cross-subsidising the bush - as they will; it's clearly the electorate's ''revealed preference'' - there's no more sensible way to do it than ensuring the bush has access to high-quality telecommunications, thereby doing what we can to reduce the tyranny of distance.

I don't have an in-principle objection to a network with natural-monopoly characteristics being owned publicly rather than privately, provided governments don't use their powers to shore up or abuse that monopoly in a way any private owner would and should be prevented doing.

And I admire the government's consciousness of the need for us to be ready to adopt and exploit the opportunities for benefit that future technological advance will make possible.

The Productivity Commission could be required to ensure its cost-benefit analysis ranged far more widely than a mere commercial evaluation, taking account of present and potential ''social'' benefits (''positive externalities'') and acknowledging those whose value it can't quantify.

But there are three aspects of the plan that worry me. They're things economists are trained to see but to which non-economists are often oblivious.

The first is the mentality that says we've got a lot of messy and inadequate telecom arrangements at present, so let's scrap 'em all and start afresh. Copper wire to the home - make Telstra turn it off. Telstra and Optus's existing rival optical fibre-coaxial cables to many capital-city homes - close 'em down.

This Ruddish approach would be fine if resources were infinite, or if getting a brand spanking new broadband network was the Australian public's only desire.

But resources are finite, both sides of politics have sworn to eliminate all government debt and we have an infrastructure backlog as long as your arm. In two words: opportunity cost.

Second is the idea of building a gold-plated broadband network up to eight times faster than any present application needs, so we're ready for anything that may come along some time in the future.

If you think that shows vision and foresight, you're innocent of ''the time value of money''. Every dollar you spend now rather than later comes at an extra cost: the interest you have to pay between now and when you start using the idle capacity.

True, it's false economy to build something today without allowing for reasonable growth in your use of the item. But there comes a point where allowing for more growth than you're likely to see in ages becomes a waste of money.

Private businesses that do this - such as home owners who overcapitalise their properties - do their dough. Government businesses survive either by overcharging their customers or falling back on the taxpayer.

The final worry is the way that - notwithstanding the break-up of Telstra - the plan involves deliberately reducing competition from other networks in the telecommunications market. Why's that a good idea?

And why would the government plan to do it? Because it knows its network will be hugely over-engineered and the only way of charging consumers the high prices needed to recoup that excess cost is to turn broadband into a monopoly.

If Gillard had any sense of self-preservation she'd be using the Productivity Commission to get herself off a nasty hook.

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