Monday, 8 August 2016

Basslink woes continue

Plan A from the rulebook for side stepping questions at parliamentary hearings is to cite confidentially. The reason why it’s confidential is also confidential. This is a corollary to Plan A.

Plan B is to use the sub judice rule where a matter might be the subject of legal action. Plan B also has corollaries. Canvassing legal options, even a litigant’s thought bubble are covered by Plan B.

Plan A has been used at current parliamentary public accounts committee hearing into the State’s electricity companies following the Basslink outage.

The government has now invoked Plan B and asked the committee to call a halt to proceedings “to enable arrangements to be put in place to protect the state's interests in the context of contractual matters related to the BassLink failure.”

What are these contractual matters?

Basslink’s parent company, Keppel is listed on the Singapore Stock Exchange. Its latest half yearly report dated 18th July has more to say about the Basslink failure than Hydro and the government  are prepared to tell.

The report says:

Based on current circumstances and subject to further professional advice and investigation, Basslink believes that the outage is a force majeure event. The cable has since returned to service on 13 June 2016 and Basslink has been in discussions with Hydro Tasmania and the lenders on matters arising from the outage. The insurer has confirmed that the physical loss and damage to the cable as well as time element loss (such as business interruption loss) arising from the incident are insurable (subject to the relevant terms of the insurance policy) and Basslink is working with the insurer on Basslink’s claims under the insurance policy.”

Basslink believes the outage is a force majeure event. In other words, an act of God. It has insurance cover for such an eventuality.

Hydro on the other hand does not. The estimated cost to Hydro is between $140 and $180 million.

Hydro’s risk assessment analysis apparently showed outages longer than 60 days were highly unlikely. This period was nominated in the original specifications and confirmed in the Basslink Operations Agreement signed by the Tasmanian government. The 2012 Expert Panel report into Tasmania’s electricity industry disclosed however there were no financial penalties relating to non performance.

If an outage wasn’t expected to last 60 days, the cost to cover longer outages would arguably have been minimal.

Even now Hydro is unable to tell the parliamentary hearing the cost of such insurance or whether it plans to take cover in the future.

If a force majeure event occurs the contractual obligations of the parties are temporarily suspended whilst things are fixed. Penalties may not apply unless the relevant legal contracts specifically address the matter.

Given Basslink had insurance in place to cover a force majeure event they would be keen to ensure this was the case. Finding the source of the fault proved difficult and more cable was removed than the replacement length originally earmarked. An extra length necessitated three joins. This left a length of discarded cable which Hydro would like to have tested but Basslink won’t bring to the surface. Exhibit A which may prove cable failure was other than an act of God is still on the seabed about 100 kms north of Georgetown.

Legal action between Hydro and Basslink is not new. An earlier dispute about the cable required former Chief Justice Murray Gleeson’s mediation skills. Hydro made a couple of references to the dispute buried deep in annual returns but when asked about the amount finally awarded to Hydro, CEO Steve Davy resorted to Plan A by telling the June hearings it was commercial in confidence.

Not so in Singapore. Keppel revealed publicly the amount was $6 million.

There was a time when Hydro’s annual costs of Basslink were provided in annual returns. No longer. It is now commercial in confidence. The annual financial statements record an estimate of the overall Basslink liability and the amount expected to be paid in the ensuing 12 months. But the amount actually paid is commercial in confidence.

Not so for Keppel. It discloses what it receives from Hydro but the amount is in Singapore dollars and the financial year end dates are different so it’s a little hard to line up with Hydro’s accounts.

The Basslink fee contains an interest rate component. If rates go up then so does the fee, and vice versa.  Hydro decided to swap this component with Macquarie Bank and not risk the fee rising with rising interest rates. Macquarie Bank agreed to pay Hydro the amount of the fee resulting from higher interest rates while Hydro agreed to pay Macquarie the amount of the fee saved should the fee fall with falling rates. To date this misadventure has cost Hydro about $200 million. The exact figure is commercial in confidence, as is whether or not the swap arrangement with Macquarie still applies when the fee is waived.  According to Hydro’s last financials, based on current low interest rates, the swap arrangement is expected to cost another $340 million.

Hydro’s insurance against rising interest rates have therefore cost $540 million and its failure to insure against an extended Basslink outage another $140 to $180 million.

The very person at the table when these fateful matters were first considered is now advising the government on energy security. Geoff Willis it yet to follow Justice Brian Martin recent example in the case of the NT royal commission into juvenile detention and exclude himself on real or even perceived conflict of interest grounds.

The inquiry which promised so much is in danger of degenerating into a pathetic embarrassment. Mr Bacon is solely interested in finding a paper trail to the Minister’s office. The two Liberals members are acting like Praetorian guards protecting their masters and blaming their predecessors rather than bothering to address their minds as to how it all works, what went wrong and where do we go from here.

Combined with a ready willingness to withhold information where possible, the only result will be a more disillusioned public once again let down by the political process.

Thursday, 21 July 2016

Superannuation fairness

THE age of entitlement will not end if baby boomers, in or approaching retirement, keep hijacking public policy debate.

With average superannuation balances at retirement scarcely more than $100,000 mainly funded by employer contributions, topping up with surplus private savings is but a dream for most Australians.

Being prevented from transferring more than $500,000 in surplus savings into superannuation is of little concern. Yet it almost caused the downfall of the Turnbull Government so we are told.

The purpose of super is to provide funds for members’ retirement. It is not intended to be part of an estate plan for a family dynasty.

The tax system is biased in favour of older, wealthier people. Not only are withdrawals from superannuation funds tax-free beyond the age of 60, earnings on superannuation in the pension stage, which can occur even while still working, are tax free. Once aged 65 a higher tax-free threshold applies, which means the wealthy can receive extra unearned income on a tax-free basis in addition to their superannuation spoils.

Meanwhile other taxpayers paying tax on income from toiling are subsidising this rort. Couples can earn $60,000 apart from their tax-free superannuation and still be spared the need to contribute to tax coffers. At a rate of return of 4 per cent per annum that’s $1.5 million. Adding this to the May budget proposal to limit tax-free pension balances to $1.6 million or $3.2 million per couple gives a tax sheltered nest egg per couple of $5 million.

How much do these guys want? Obviously more than $1.5 million outside superannuation is unacceptable. It is true that once tax starts being paid for incomes above the seniors’ privileged threshold it is paid at a rate of over 40c in the $1, so wouldn’t it be nice to be able to transfer a bit more into a tax-free superannuation environment.

Under the age of 65 ordinary income thresholds apply and transferring surplus savings into superannuation funds saves tax, especially if a pension can be triggered and the earnings become tax-free.

High net worth individuals run multiple pension streams, segregated from each other. Even though pension payments are tax-free beyond 60 years of age, tax may be payable if a stream is commuted and paid to non-dependants upon death. Each stream is different.

In other words the adult kids might have to pay a bit of tax, unless the pension streams can be structured correctly. That is done by withdrawing amounts funded by employer and other deductible contributions and replacing them with brand spanking new non-concessional contributions which Mr Turnbull is trying to limit. Draw out the amounts that might end up being taxable in the kids’ hands and replace them with contributions that will solve that problem. The tried and true withdrawal and recontribution strategy is perfectly legal, but a rort nonetheless.

It may be that the alleged backlash against the proposed superannuation change is being used as a rod to beat Mr Turnbull. Assuming that it is not, there may be an argument the changes violate the principle of retrospectivity. Usually that means outlawing something that has already occurred, not scaling back previously allowables on a prospective basis.

Politicians are always lambasting opponents from their high horses while ignoring their own inconsistencies. When Mr Shorten mounted his shetland pony to berate the Government about proposing retrospective changes he forgot his own policy to put a cap on the amount of tax-free earnings of pension balances also involves changing the rules midstream. But what changes are not? Perhaps all changes should be grandfathered so they only apply prospectively? Two sets of taxpayers for each and every piece of legislation? That’s the retrospectivity argument in a nutshell.

Instead of limiting the quantum of tax-free pension earnings as suggested by the ALP, the Liberals propose limiting the level of tax-free pension balances, administratively a superior method to achieve a similar result.

The ALP’s disingenuous claims of retrospectively gave oxygen to a campaign which may thwart changes that will restore a little more equity to superannuation policy.

For too long the system has been skewed in favour of the wealthy. The system could have been so much fairer and simpler if recommendations in the Henry report had been adopted. These included a flat 7.5 per cent tax on fund earnings from accumulation right through the pension stage and a contribution tax at the contributor’s marginal tax rate less 15 per cent meaning low-income taxpayers would pay nil contributions tax, more equitable than at present. Overall tax revenue from superannuation and fund balances at retirement would be higher. Currently, high-income earners are estimated to pay no tax on two-thirds of lifetime fund earnings. That’s a big subsidy. A rate of 7.5 per cent is hardly a weighty impost. Or should aged-based rorting continue to take precedence?

Superannuation failing the fairness test is not the only problem. The system is good at attracting funds. Compulsion helps. It is a form of national savings. While savings is an admirable sign of prudence at the individual level, collectively it means less is spent on current consumption. Lack of demand can restrict an economy. The paradox of collective thrift is a well known phenomenon made even worse by the fact in the case of superannuation, the screen jockeys responsible for the custodianship of $2 trillion of the nation’s savings do not invest in nation building, but instead buy and sell existing assets among themselves hoping to make a capital gain so they can clip 1 per cent to 2 per cent from the ticket to overindulge themselves even further.

It was assumed the trusty old market would solve the problem of the large pool of savings created by the superannuation. Unfortunately, it has done so by providing sustenance to the speculative economy at the expenses of jobs growth and the real economy.

The whinges of the wealthy and the wannabes are a crass example of self interest at a time when fairness, more revenue and a system that integrates with the real economy are long overdue.
(Published in The Mercury 21st July 2016)

Saturday, 4 June 2016

Australia's real lifters and leaners

Economist Philip Soos argues our current system is a racket designed to generate free banquets for the rentier class. Spend a few minutes and read the compelling analysis. It’s a crackerjack article. First posted in  Independent Australia.

WHEN THE infamous duo of Abbott and Hockey came to power in 2013, they embarked upon a polarising rhetoric of “lifters” versus “leaners” separating Australians into one of two camps.

The split was a simple one: those who earn and engage in productive activity, indicated by making a revenue or wage and hence paying income tax, in contrast to those who pay no net income tax, mostly social welfare recipients.

In Australia, the Duncan Storrar episode once again brought attention to this rhetoric. It expanded into a moral uproar with those who believe the poor should be provided more assistance, and those who think such people are a useless economic deadweight on society.

Earned versus unearned wealth and income

There is only one small problem.

The notion that the rich have earned all their wealth and income is completely false. Not only is it false, it is obviously false when one considers the issues at hand. Although the mass media and intellectuals often assert the rich must have become so by cause of effort, the available economic theory and documentary evidence, readily available, demonstrates otherwise.

Overwhelmingly, the pathway to riches is not through earned wealth and income but that which is unearned. The 18th century physiocrats and the later classical economists from Adam Smith to John Stuart Mill to Karl Marx, ultimately finding its peak expression in Henry George, argued for a clear difference between earned and unearned wealth and income. The term economic rent was used to identify this distinction. Those who make their living off economic rent are called rentiers.

Monday, 30 May 2016

Doubts about jobs and growth

Greg Jericho posted a good article HERE covering the growing doubts about the policies that are being foisted upon us. The following is a shortened version  without the charts.

As developed economies such as Australia’s struggle to encourage growth, even the disciples of austerity are admitting that they might have it wrong. For Malcolm Turnbull the election is all about jobs and growth and a belief that a company tax cut and reducing government spending is the way to achieve both. But in light of the failures of such standard economic thinking after the GFC to provide economic growth, new research is finding that policies that fail to consider other aspects such as inequality are actually undermining long-term economic performance.

Prior to the GFC, the pervading view was that neo-liberal polices of lower regulation, more competition, budget surpluses, increased trade and lower taxes had delivered the economic sweet spot.

And then the world with low regulation, budget surpluses, open markets and low taxes was blown to hell.

And yet the same thinking continues. The Liberal party pledges to cut company tax (to encourage foreign investment), crackdown on welfare spending (to reduce the budget deficit) and encourage more open markets (mostly through the talisman of free-trade agreements).

And certainly such openness has led to benefits – cheaper products that lift overall standard of living and improved the efficiency of local producers. But the neo-liberal strain of economic thought is one that would have us believe the GFC didn’t happen (ALP inherited a surplus, and then the blew it), that pursuing austerity or more open markets has no downside and that the benefits should just be taken as a given.

It’s the same thinking that underpins the Treasury’s justification for the company tax cut: it will eventually improve productivity via increased foreign investment and thus real wages will go up (despite it having virtually no impact on employment growth).

Productivity is a wonderful thing – increasing it improves all economic outlooks. The problem is over the past decade productivity growth has been falling and no one is really sure why.

It’s a bit of a worry (OK, a great worry) that no one is really sure that they are able to accurately measure what is basically the foundation of most economic “reform”.

Perhaps it is little wonder then that in light of the hits to economies from the GFC and the subsequent continued adherence by governments to pre-GFC thinking that the neo-liberal path is being more and more questioned – whether it be by supporters of Bernie Sanders in the USA , or more surprisingly by economists at the neo-liberal heartland of the International Monetary Fund.

An article in the IMF’s latest issue of is journal Finance and Development notes that “instead of delivering growth, some neoliberal policies have increased inequality” and jeopardised “durable” growth.

The authors note that there actually scant proof that the standard policies of encouraging foreign investment and reducing deficits and debt levels has improved economic growth.

They found that it’s tough to actually establish “the benefits in terms of increased growth” from these polices but that the costs from “increased inequality are prominent”. Even worse for those who desire economic growth above all else, they found that the “increased inequality in turn hurts the level and sustainability of growth.”

The authors note that their study of economies found that “austerity policies not only generate substantial welfare costs due to supply-side channels, they also hurt demand—and thus worsen employment and unemployment”.

As I have noted (repeatedly) lack of demand is a massive issue for our economy. Right now Malcolm Turnbull would have you believe that it is an absolute given that more foreign investment and lower taxation and government spending will deliver economic growth. The reality is such belief is based on a model that struggles to deliver proof that is actually works and which crucially ignores factors such as inequality that can actually undermine their goal of economic growth.

Nearly a decade on from the GFC it perhaps it time to acknowledge the neo-liberal model might have a few cracks in it.

Saturday, 28 May 2016

Back on track?

(As published in The Mercury 28th May 2016)

Treasurer Peter Gutwein says we’re back on track.

So how come spending will exceed revenue for each of the next three years?

The claimed surplus of $77 million for 2016/17, an accounting figure derived after a few book entries, obscures the fact that the government will spend $134 million more than it will receive.

The next two years thereafter will see similar excesses. In each of those two years revenue will be less than for 2016/17. A few years ago we had a minor dip in one year but it’s been a long time since the dip stretched over three years.

The Treasurer was determined to deliver a surplus as promised, whether by hook or crook. Revenue was brought forward, additional capital grants from the Feds were negotiated and a transfer from TTLine was arranged. All are one off items that don’t indicate a sustainable position as implied by the ‘back on track’ reference.

Tuesday, 24 May 2016

Jobs and growth within our means

It’s not long since Prime Minister Turnbull promised an end to three word slogans and the start of a mature conversation with voters.

Alas we are still waiting.

Many were hoping the PM would pinpoint the problems as he sees them and explain why his policies offer a solution. He’s now using a three word slogan, jobs and growth, to promote a solution to the problem he didn’t bother to explain.

We all know the symptoms of the problem, too many borrowed funds devoted to buying and selling existing houses instead of investing in the real economy, private debt sky high, real wage increases slowing down, oodles of unused supply capacity both capital and labour. Unused capacity and unmet demand. Nobody’s buying.

What to do? Cut penalty rates? That may increase the supply of lattes but where will the extra demand come from? From other industries? But won’t all industries suffer if wages share of the national pie falls? What if cafĂ© owners reduce their high private debt instead of employing more staff? The economy will be worse off. The paradox of thrift may strike again. Cutting wages may have some effects at the margin but the case is not overwhelming. Government austerity suffers from the same drawbacks. The comprehensive rejection of the 2014 Federal budget shows the general sentiment in the community. People struggle to understand the underlying assumptions of proposals when politicians present them.

How about more jobs and growth by cutting company taxes as the PM is now promoting? If there’s unused supply wouldn’t a better solution be to find a way to introduce Mr Supply to an eligible Ms Demand? How will cutting company taxes promote jobs and growth if nobody’s buying? What comes first, the cart or the horse?

The jobs and growth plan is just another name for a two hundred year old economic theory known as Say’s law that economists used to explain how the economy works……… supply creates its own demand. The Great Depression revealed that an economy was a liitle more complicated than Say’s Law assumes. But it has never disappeared completely. Thatcher and Reagan revived it. Recently it’s been variously described as supply side economics or trickledown economics. It fades from view from time to time, and then reappears after its failings are forgotten. The jobs and growth plan is the latest reincarnation.

Even if new supply creates its own new demand, what about those who became underemployed or unemployed because of low demand before new supply created new demand? What do we do about them? Give them new skills? Apply a supply side solution to expanding VET courses and job placement agencies? Has it worked? Build bigger universities? The suppliers are building their own businesses funded almost entirely by governments but will the supply of a more skilled workforce be enough? It’s as if all the problems are on the supply side. Fix that and you’ll fix the economy? If that’s what the PM believes he should say so. After all he’s supposed to be the Great Communicator.

Underpinning the jobs and growth plan is the constant chant of the need to live within our means. It’s this falsehood, that there is a finite supply of funds the Federal government can lay its hand on that is condemning the economy to a sub-optimum future.  Sure a household may have to live within its means. It needs money to survive, income or maybe even loan funds. Any politician who says the country is like a household and has to live within its means, doesn’t understand banking at the macro level.

Sunday, 22 May 2016

Budget tricks

Treasurer Gutwein has found something new in his budget bag of tricks.

Establishing a fund to receive amounts from TTLine to enable replacement of the two Spirit vessels in 10 years time as announced with much fanfare is just an accounting ruse.

TTLine has been planning to replace the ferries for years and has been setting funds aside.

Borrowings on Spirits 1 and 2 were finally paid off in the 2010/11 year. Prior to then,TTLine was paying $25 million a year off the debt owed to Tascorp and it was a bit of a struggle.

Since then the cash surpluses have been allowed to build up in TTLine as it was exempted from paying any returns to the Government.  Since 2010/11 cash at bank has increased from $16 million to $90 million in 2014/15. The increase in the latter year was only $9 million as the refurbishment of the two Spirit vessels commenced in Feb 2015.

The government now plans to transfer cash reserves from TTLine to a special Fund run by the Department of Finance.


Can’t the Board of TTLine be trusted to look after such a large amount of cash?

The answer is the payment of two special dividends of $40 million in each of 2016/17 and 2017/18 by TTLine is recorded as income by the government and will boost the bottom line by $80 million, a bottom line sadly suffering from Hydro’s Basslink woes.

When the replacement vessels are eventually purchased the accumulated funds will be transferred back to TTLine, but as an equity contribution which won’t affect the bottom line in the year of transfer.

It’s just an accounting trick.