The State's Budget woes - Is there another way?

(Published Friday 18th November, 2011. The Mercury)

Pressure is mounting on the government.  Demands to maintain expenditures are strident, even though revenues have fallen significantly over recent times, and the attacks have been relentless whenever reductions in expenditure are announced.

Over the last few years expenditures have increased in line with increasing revenues, setting up additional public service functions and staff.  However, the downturn in the economy has changed the picture. 

The main culprit is declining revenues from the GST. Consumer confidence is down, and consumers are spending less, or buying goods offshore.  Such goods do not attract GST.

Furthermore, the formula on which GST reimbursements to the States are based is under review, with the threat being that such a review will not go in Tasmania’s favour.

The Government has responded by cutting hard into its expenditures, saying the budget must remain in surplus and that it will not contemplate going into net debt.  Net debt is a situation where it needs to borrow to pay its bills.

Cuts in education and health have elicited visceral attacks on the government, an uproar from a range of affected interests, and howls of protest from its own employees.

Protest meetings and street marches have become the order of the day – Ministers are lampooned and Cabinet is fractured, with the Green Ministers claiming that the budget decisions were not their responsibility. Not an edifying sight on their part.

So much pain all round. - Has it all been worth it?  And is it necessary?

First up, going into net debt means borrowing money to pay the bills.  Many have argued that this is not a good policy and have called on the example of the household budget to explain their position.  We cut the cloth to suit the circumstance.

However, the question “Should we go into debt at all?” is one that needs to be asked, and analysed. 

If no action is taken to rein in expenditure, then maintaining the status quo is not a clever option.  Expenditure outstrips receipts.  Borrowing money to pay employees and to spend on other recurrent expenditures will lead to the nightmare scenario of borrowing money to pay the interest on moneys already borrowed. A bad situation simply gets worse.

If money is borrowed to assist in a transition which leads to less future expenditure then this is not a bad option at all, because of future savings that can be made.  However the Government does not appear to have considered this alternative, which means less pain for those affected and buys time to bring in appropriate transitional arrangements.

In fact, this is a much more sensible option because it would enable the government to be more strategic in determining where to make the cuts, rather than the “across-the-board slash-and-burn” approach presently being employed.

In previous articles I have mentioned that a review of departmental management is long overdue, and that the focus of government programs should be on outcomes, rather than processes. Whether it involves planning issues, the management of our hospitals, or running our power utilities, taxpayers should be concerned to ensure their dollars are being used effectively.

However, the present arrangements bypass this step.  Government says to its Heads of Department – expenditure needs to be cut.  The manager elects to cut services.  Cutting services is the easy option for a manager to take.  The odium falls on the government for forcing reductions in expenditure.  But the real issue remains: it is not the services being cut, but whether the management of those services is being done effectively.  In other words, is management doing its job properly?  I don’t see this question being asked at all.

Furthermore, money that is spent on capital works, and in particular on works that assist the economy to generate wealth, should not be considered inappropriate expenditures, as the revenues raised from the increased economic activity will cover the expenditures outlaid.  In fact not making that investment now will lead to a lesser economy later.

And spending money on timely maintenance of existing infrastructure such as roads will ensure that greater amounts of money are not required later to fix even bigger problems of dilapidated assets.

So, in summary, going into debt is not necessarily a bad thing, as long as it can be shown that there is a return on that investment.

Given this situation, it is interesting to note that every other State in the Commonwealth has brought down budgets that have moved them, or have expectations of moving them, into a position of net debt.  A recent report from the ANZ, entitled “Australian Public Sector Chartbook” provides a snapshot of each State’s circumstance.  Essentially, net debt in every State except Tasmania is forecast to be in the vicinity of 3 to 5% of GSP.  Victoria in fact is forecast to be above 6%.  Tasmania stands alone in following an ideological commitment to “no net debt”.

And yet expenditure patterns are not that divergent. Employee-related expenditure in all States is around 45% of all expenditures, and what is called “Other Operational Expenditure” is around 25%.  Tasmania’s pattern of spending is similar to other States.

However, as Ruth Forrest MP has pointed out (Mercury 16 November), we have dipped our fingers in the cookie jar, and there is very little in the way of cash reserves left to play with.  The wild swings in the GST revenues make it imperative for a small economy like Tasmania to cut a new deal with the Commonwealth, to even out these swings and roundabouts.  Suggested cuts in the GST revenue should be balanced out by such an arrangement.  Such a deal is an imperative and the State should waste no time in putting its case together.

And that case should include a commitment to reform in the public sector.  It is essential, no question.  However, maybe it’s time the government revisited its approach to keeping the budget in surplus.  Surpluses of themselves should not be the goal.  Effective management should be.  With street marches, stopwork meetings and the general collapse of morale in the public service, and legitimate concerns being expressed within the broader community, government could do itself a real favour by loosening the purse strings a little and buying itself time to become more strategic in its reform agenda.

Surrealism in Tasmania's Forestry Debate

(Published Tuesday 15 November, 2011. The Mercury)

One hundred days has passed since the signing of the Intergovernmental Agreement (IGA) by the Commonwealth and State governments.  Question: Has the IGA stood up to its promise to end the conflict in our forests?  Consider the following matters.

Under the IGA, the two governments agreed to remove UP TO 572,000 hectares of native forest, purported to be high conservation value forest, from active forest management. This is subject to two separate and independent verification reports.

The first report involved the immediate setting aside of 430,000 ha of native forest into informal reserves.   Under the IGA, this is an interim matter only, and is designed to ensure immediate cessation of forest works in 41 coupes UNLESS it can be proven necessary to continue harvesting in these coupes to satisfy existing contractual commitments.  This report was delivered to the government in early October, but has not yet been released.  It should be!  It concludes that FT must have continuing access to at least 25 of these coupes, to ensure that its contractual commitments for sawlog and peeler log supply to domestic timber businesses can be met.

The second report is required by 31 December, and will detail the boundaries of high conservation value forest UP TO 572,000 ha.  This independent committee (chaired by Jonathan West) has been appointed, but it already seems unlikely that this committee will report on time.  This begs the question of what will happen to the timetable set out in the IGA.   Concern has also been raised regarding the impartiality of appointments to the process followed by the committee.

Every talking head chants the mantra of “high conservation value”.  Yet this phrase is meaningless.  Like beauty, it is in the eye of the beholder, and like beauty, it is equally ephemeral. It is without definition, and yet it is held up to be the definitive determinant for the setting up of the boundaries of UP TO 572,000 ha.

Forestry Tasmania has advised both governments that, if such an area is set aside, then it will not be able to meet its continuing, legally contracted supply commitments.  Governments seem incapable of absorbing and responding to this fact.

Gunns announced last year it was getting out of native forest for commercial reasons.  The government has since paid an amount of $23 million to Gunns AND wiped off their $24M debt to FT, whilst paying $11.5 million to FT as compensation.  I am surprised the Federal Minister did not seek has own legal advice regarding these payments..   Compensation should only be paid if the company was adversely affected by a government decision.  This was patently not the case, and in fact there remains an argument that Gunns should have been sued by FT for breach of its take-or-pay contracts.  If Government has that sort of money to throw around, then perhaps they should have considered allocating it to health and human services, where the need is truly great.

A $700 million dollar per year sector of a vital industry is being forced out of business by government, which will then pay an amount of $7 million per year to manage the extra reserves for a period of five years - a pale shadow of the industry’s worth - plus an amount of $120 million over fifteen years for Regional Development projects.  Is this money sufficient recompense? I doubt it!

Under the IGA, $45m has now been released for contractors to exit the industry.  An intriguing scenario to be sure, for Labor governments to be closing workplaces and putting people out of work! 

Money is being paid in compensation before agreement has been reached on the areas to be reserved.  What if no Agreement is reached?  The Legislative Council has already indicated it will oppose details contained within the IGA, including the payment to Gunns and the creation of further reserves.  So it is likely that the agreement will not be ratified anyway. A political imbroglio for sure! 

Is this compensation package a true reflection of the value of the industry to the economy?   A recent paper by Steven Davis of the University of Chicago and Till von Wachter of Columbia University estimates that being laid off costs a typical male worker 11% of his future earnings, in present-value dollars. During a recession, when longer spells of unemployment lead to more loss of human capital, that rises to 19% (as cited in The Economist 29/10/11).
Do the sums! As an example, take 3,500 forestry workers, for half of their 40 year working life, at a wage of $50,000 pa.  The loss of earnings alone is enormous.  

Many people, including the Premier and Prime Minister, have chanted the mantra that changed market conditions have caused the industry to falter.  This is simply not true.  The market is still buying wood product, the sawmillers are selling all they can produce, veneer products continue to find markets, and the overseas markets are still buying product, including woodchips, from Australia.  It is true that Gunns management had difficulties in the offshore market for woodchips, but Gunns is not the industry, and I suspect the market difficulties were more a Gunns issue, as that of industry.

And there are buyers for Gunns’ sawmills.  If the market is as bad as some would have us believe, then what has possessed these people to buy into the business?

Plantations have been mooted as being the answer to the industry’s woes.  If so, what was the question, because all parties know that neither the softwood plantation resource nor the present eucalypt plantation resource can substitute for high value sawn timber from native forests.

And then there is the Triabunna mill site.  Let us not delude ourselves over this matter.  The new owners of the Triabunna mill site did not purchase that site to continue operating a chipmill. After all, the owners boasted at the time of the purchase they were going to close the mill in order to start a tourism venture.

The company has stated it will only allow a certain type of wood to be processed at the site.  So it is obvious the company is playing games.  My bet is that not another woodchip will cross that wharf, and that a new wharf facility will need to be built.  More capital outlay, and an unnecessary one, but industry and government should not be held to ransom by the conditions imposed by the new owners.

The IGA is the culmination of the roundtable process, which was meant to bring all interested parties together, to resolve the forest conflict.  Yet many interest groups have complained that their interests were not represented at the table, and have disowned the process.  Forest conflict continues unabated.

 To emphasise the point, Peg Putt has just returned from a trip to Japan where she has endeavoured to destroy the reputation and the market for Ta Ann, the subject of which was endorsed within the IGA.

To summarise, the IGA has not delivered what it promised.  So many of our fellow Tasmanians have been put out of work.  Our economy has suffered.  Fact continues to play second fiddle to a mantra of emotion and eco-vanity.  The signatories to the IGA have been duped by interests that have been constant in their opposition to the industry.    Such a result is unforgivable, and an indictment on those responsible.

The IGA is perilously close to collapse, no question about it.  So perhaps it is now pertinent to ask “What then?”

The Cost of Power - Part 2 (Published 03.11.2011. The Mercury)

http://www.themercury.com.au/article/2011/11/03/273875_opinion.html
Part 2 The Tasmanian Experience

Part 1 examined the development of the NEM (National Energy Market) from a national perspective.

In Tasmania, three utilities were created from the disaggregation of the old Hydro Electric Corporation (HEC).  Hydro Tasmania was to be responsible for power generation, Transend for high voltages transmission, and Aurora for distribution (poles and wires) and retail sales. An arbitrary distribution concerning the allocation of the old HEC debt landed Hydro with over $1000m, and Aurora around $350m.  Transend was debt-free.

The later addition of the Basslink cable has connected us with the mainland and enabled full participation in the NEM.

Hydro generates most of its power from water, and unlike thermal generators, can adapt to rapid changes in demand in quick order.  As long as the water is there, Hydro can be a significant player in the NEM.  Even through the drought, when water storages were low, Hydro was still able to provide power into the grid and pay its loan guarantee fee to the State.

Hydro derives its income from NEM market sales, arbitrage over Basslink, and its consulting business, Entura.  It also has a successful and growing retail business on the mainland called Momentum, servicing a niche market for clean energy.

For some years, especially during the drought years, the interest payments on the debt allocation significantly constrained Hydro’s operations, including essential maintenance of its generating assets.  In 2008, the government shifted some $220m of debt over to Transend, enabling Hydro to operate more efficiently.  The advent of the “carbon” tax will be of competitive advantage to Hydro, essentially by making its coal-fired competitors less competitive.  A great opportunity for its Momentum business.  

First and foremost, Hydro is a business.  It competes in a national market, and the price it charges for its power is determined by the market, and a regulatory oversight ensures it provides power at market prices.  It provides major customers with bulk power under 24/7 take-or-pay contracts, and, although disbelieved by some, is charging commercial prices for that power. 

To me, Hydro has been an outstanding success story.  It has managed our water resource well, it has developed a successful wind-farm business, it has adapted to changing circumstances, it has become a successful trader in a national market, its business model of being a renewable energy business has provided it with competitive advantage, and its consulting arm is recognised throughout the world bringing renown to Tasmania. And it provides substantial dividends to the State.  

Transend had the good fortune of starting its life debt-free.  As a monopoly business it is tightly regulated, and its opportunities to value-add are limited.    Transend’s revenue is derived from a revenue reset mechanism, whereby the price charged relates to the value of the assets under management.  The higher the asset value, the more it is paid.  In other words, it is in Transend’s interests to have high-value assets, as distinct from appropriate assets.  It has in the past followed an extraordinary risk-averse strategy, with little evidence of business rigour. Compare the increase in its charge rate (71%) against the CPI (21%) since 2003.  And staff numbers from 50 to over 300.  Maybe the reset mechanism needs a reset.

Government should also seriously consider transferring the poles and wires business from Aurora to Transend.  Bringing the regulated monopoly power delivery businesses together is a natural fit and could deliver synergies and cost savings resulting in cheaper power prices.

A new Chairman and CEO must deliver more commercial rigour to Transend’s operations.  In fact, Government must insist on it.

Aurora is responsible for the distribution and retail sales of power.  It buys power on the open (wholesale) market, which has significant price fluctuations, but needs to sell power at fixed prices.  It must therefore embark on a sound risk management profile in order to remain viable.  At the same time, it is at the cutting edge of our concern about power prices.  However, demands for concessional rates are in fact community service obligations that should be paid for by government.  In other words, Aurora should be allowed to run as a commercial business and pay a dividend to the State, which then determines how that money should be spent.

Government gifted Aurora an onerous legacy in the Tamar Valley Power Station.  A new gas-fired station, it was half-built when its owners went broke.  The government  purchased it, paying far too much for a distressed asset, then handed it to Aurora to complete the build.  To its credit, the task was completed on time and on budget.  However the station was an expensive construct, and the debt still needs to be serviced.  Furthermore, Aurora then “negotiated” an onerous take-or-pay gas supply contract, which has made the station an absurdly expensive operation to run.

More concerning is the approach the company has taken to its computerization program. It is common knowledge that there was a $50 m overrun implementing new billing software.  A disaster, true blue.  The reasons given were “we underestimated the task”.  Maybe we have overestimated the skill of its senior management. And no further action has been taken – where is the accountability? 

The Aurora business model is in need of some review.  By its actions, it is obvious that Aurora is still searching for its niche.  Is it a “poles and wires” business, a retailer, a generator, and to what extent should it be a national trader? All important questions.

Some folk remain critical of these entities – if a government business makes money it is at our expense, if they are losing money we have to subsidise them, again at our expense. Whichever way we look at it we lose.  In my view, this is not the correct approach.

Throughout this article I have endeavoured to paint a picture that these utilities need to be run as businesses.  The NEM has caused our utilities to be businesses.  They may be owned by government, but they are commercial entities operating in a competitive national market, and need to be given the freedom to do so.  Performance is a matter for their Boards.  That is where the focus of their boards and management must lie.  Questions about performance are really questions about their governance. 

There is a regulatory oversight to ensure they operate in a fair and proper manner, but at the end of the day their task is to return a profit and pay a dividend to the State. The role of government should be limited to its relationship with the Boards.  And no more.  It is then up to the government to determine how that dividend should be spent. 

Hopefully the review will come to the same conclusions.

The Cost of Power - Part 1 (Published 02.11.2011. The Mercury)

http://www.themercury.com.au/article/2011/11/02/273675_opinion.html
Power prices continue to rise, and the public are demanding a better deal.  An act of political appeasement with the Greens has led to an inquiry to review the operations of Tasmania’s three power utilities.  It has now taken over 12 months, it is forecast to cost taxpayers over $3 million dollars, it has distracted the utilities from their main game, and its report is now well overdue.  Has it been worth it?

It all began with the National Competition Policy, established in the late 90’s.

By 1998, all state–owned electricity utilities were broken up (disaggregated) into separate generation, transmission and distribution/retail companies. In each of the mainland states a number of generation and retail companies were created.  The purpose of this national policy was to create competition and therefore lower prices.  States complied, because they would be penalized (by reduced payments from the Commonwealth) if they did not conform to this new policy.  A separate management company (NEMMCo) was then created to oversight the behavior of these companies in a newly-created National Energy Market, or NEM.  Has this policy worked?

Victoria embraced this policy with gusto.  It broke up the old SECV into a number of different entities, promptly sold them and made a killing.  The buyers thought they would also make a killing but soon found out it was not to be, and after many changes of hands, the present owners of these assets are managing them as best they can.

The same could not be said for New South Wales and Queensland, where the entities created from the breakup of the old utilities remained in public ownership.  Unfortunately for them, the long-awaited efficiency improvements and price reductions did not occur.

The NEM plan involved generators bidding blocks of power at particular prices into a ‘market’, and for retailers to buy the lowest-priced bids in the market.  The theory being that the generators would bid in as low as possible, in order to sell their power in the market, and thus provide retailers with low-priced power, which they could then provide to their customers, again in a competitive environment.

Practice does not always follow theory, and for some years, both generators and retailers struggled to come to terms with this new market-based reality.  Lack of proper risk management structures in the trading environment have caused grief to a number of players, especially when the market has been volatile, such as hot days, generators (gen-sets) going down etc.  Practice eventually began to conform to the theory, but hiccups have continued to occur.

Private companies that were operating at that time found they could generate power in one State and sell it in another, and so they began to buy up strategic assets.   This was not foreseen by the planners at that time. In fact no sooner had disaggregation occurred than a de facto re-aggregation (vertical integration) began to take place with generators buying retailers to become ‘gen-tailers’ and sell directly to customers.  This mitigated risk.  A single generator was at risk from a collapsing or rapidly varying bid price, and the retailer from a varying market price for purchase, yet having to provide a fixed price to the customer. Having a foot in both camps mitigates these risks.

The breakup of the public assets began to look like a transfer of those assets to private hands, using the mechanism of a national electricity market to do so.  By default, public policy appeared to suggest a transfer of public involvement from power operations to power regulation through NEMMCo. 

 Most mainland generators are coal-fired power stations, and their interest is to run their gen-sets at a constant rate and thus to provide a constant amount of power into the grid - in other words to provide base-load power.  Hydro stations, whilst also being good base-loaders, are better equipped to turn their gen-sets on and off with fluctuating demand, and thus better equipped to provide peak-load power.

Wind and solar, small beer in the grand scheme of things, can provide neither, due to the vagaries of the weather, and whatever benefits are provided by being “renewable” is both prohibitively costly and inefficient as there is always back-up required.  So thermal gen-sets have to be operating anyway.  However, in conjunction with hydro, these renewable energy sources can provide power into the grid as and when, with hydro acting as a backup battery, a sensible synergy.  Well sensible if we ignore the massive cost burden new renewable forms of generation create; a little discussed fact being that wind power is 3-4 times as expensive as power from a coal-fired power station and this alone will dramatically increase power bills if Australia reaches its target of 20% of its power from renewable means by 2020.

 The new federal government initiative of putting a “price on carbon” - in reality carbon dioxide the gas -  emissions, will now impose an additional tax regime on coal-fired generators.  Many coal-fired generators are now considering getting out of the generation business altogether, and a number have responded to the Federal Government calls for Expressions of Interest to do so.

The Federal Government hopes that “cleaner” energy sources, such as gas, will replace coal-fired generation, but the policy remains unclear, and a sudden departure of existing generators from the scene could cause problems in reliability and capacity to supply. For example, Hazelwood, a brown coal generator targeted for closure, produces some 20% of Victoria’s power.

So, public money will now be spent to assist those leaving, more public money will be spent encouraging new entrants (note that gas is at least 50% more expensive than coal), and yet further funds will be spent to subsidise inefficient forms of energy production.  At the same time the power supply system has become less reliable and less secure.  One is left to wonder whether the public has benefited at all from the policy of disaggregation trumpeted as the new era of competition only 15 years ago.

Tomorrow Part 2 - The Tasmanian Experience

On The Waterfront (published Friday 21 October, 2011. The Mercury)

The changing of the guard in the leadership of our local councils presents a golden opportunity to determine a new policy for development, and particularly around our waterfront precincts.  The recent demise of the Sullivans Cove Waterfront Authority (a good thing) and the return of its planning and development control responsibilities to the Hobart City Council now allows that Council to determine a more integrated approach to development in the area.

Not that many years ago, Sullivans Cove was the province of warehouses, industrial enterprises (jam factories and foundries) and sleezy pubs – a true old-fashioned port environment.  However, port conditions and requirements have changed, and the advent of container shipping has caused the port activity to change from warehouses and storage sheds to open platforms.  Over the last 40 years the old port has been transformed into a precinct of cultural endeavour (art, theatre and music) and social interaction.  And this has revitalized the area and been a boon for the city.

It is a good example of things not staying the same, change happens.

Hotels have contributed to the transformation, with 6 new hotels and hotel refurbishments adding to the character of the place.  Of interest is that the transformation has also involved significant residential development, which has brought with it a clash between the desire of residents for quiet and the demands of the public for a lively social surround.

Residents need to recognise that the attraction of the place is because of the activity, not despite it, and if that does not suit, then the option is to find accommodation elsewhere.

The transformation has not involved or embraced much in the way of a bold new architecture.  And this is a shame.  The old sandstone warehouses of Salamanca Place and Hunter Street provide an obvious backdrop to a new design culture.  Yet we baulk whenever anything new is proposed.  The Princes Wharf No1 Shed, a great venue for displays and exhibitions, has been replaced by - a shed.  Now a venue for displays, exhibitions and the Taste, I think it could have been bolder in design, and there are now significant issues arising regarding its operation, such as the heating system and ridiculous signage restrictions for the forecourt.

The Parliament Square project has been caught up in planning objections, with significant planning restrictions imposed. The Brooke Street pier redevelopment was canned, the Montpelier redevelopment remains at Ground Zero and the hope that the Macquarie wharf area could be developed anew has fallen into a hole.

Many port precincts have been transformed by a bold, new and innovative architecture that has caused a change in the way people think about the place.  The Opera House in Sydney, the Guggenheim in Bilbao, the Royal Library (the Black Diamond) and the Opera House in Copenhagen and the Regium Museum and Multifunction Centre in Southern Italy are obvious stunning examples, and there is an opportunity for Hobart to be equally adventurous and bold.  All it requires is a vision. But it does require vision, and to date such a vision has been limited.

So let’s hope the new leadership at the Council will provide leadership in this area, and provide a bold new vision for the precinct.  Playing safe has been a hallmark of the past, but playing safe provides little in the way of inspiration.

Hobart is not alone in having fantastic waterfront precincts.  The Eastern Shore is fortunate in having its Bellerive and Lindisfarne environments, and the Clarence Council needs to provide a vision that enables greater public access and activity.  Already Bellerive has become a venue for a range of festivals and gatherings, and this is to be encouraged.

Glenorchy has begun the long march towards making its waterfront a more interesting place to be with the Montrose Bay sculpture park and of course there is the private MONA development.

And Kingborough is pregnant with promise for its waterfront areas of Kingston Beach and Blackmans Bay

The conversation does not need to be limited to Hobart, as around the State, opportunities to transform waterfront precincts abound.  For example, the dock area in Launceston, once derelict and decrepit, has become a magnet for social recreation.

Waterfront is a drawcard, and provides a fantastic opportunity for creating interesting and new environments for public recreation and social activity.

I hope the Councils will recognise this opportunity and take on board the fact that the public are keen to see our waterfronts developed for public access and used as a venue for public activity.

There has been much talk of local government amalgamation, which is all about a more effective delivery of services and amenity.  Councils are naturally cautious when this topic is raised, but raised it must be.  Maybe a starting point for giving this matter due consideration would be for Councils to come together to discuss ways in which they can co-ordinate waterfront developments that would enable the various communities to enjoy the extraordinary waterfront precincts that greater Hobart has to offer.

The State Government can provide a role in starting such a discussion.  This could then lead to a discussion on reforming the present planning and development control laws, which are presently such a restriction to a dynamic and growing city.

Lets make no mistake, change will occur, whether we like it or not.  Like the transformation of Sullivans Cove, the greater Hobart region will continue to grow - it is whether we embrace that change or fight it.  For me, I embrace it.

Health Funding Crisis

Published in The Mercury

The call has been made.  Health system in crisis!  Health budget out of control! Government resorting to desperate measures!  Hospital beds to close!  Elective surgery to be cut!  Staff to be laid off!  Health is a monty to get a headline, especially if it contains bad news.  There is nothing quite as emotive as health.

But do the headlines tell the full story?

Health, excluding Human Services (ie housing, child services and disability services), can be considered as 3 separate elements, being preventative and public health, intensive health (ie hospitals) and finally chronic, palliative care and rehabilitative health. 

The last is a nightmare of complex funding arrangements and responsibilities between the Commonwealth and the State, and is in urgent need of reform.  A matter for another day.

However, it is the first two that are getting the attention at the moment.

At $1.8 billion, the overall health budget presently consumes around 40% of the State’s budget.  And is growing at a rate of some 7% pa (or 65% over the last 6 years) in comparison with the State budget of 3.5% pa (or 35% over the same period).  Such a growth rate is obviously unsustainable and if allowed to continue, would consume the entire State budget within 10 to 15 years.

So steps must be taken to bring the health budget under control, unpalatable as they might be, and the Government has determined to find savings of $100 million.

First and foremost we need to distinguish between the administration of health and the delivery of  health services, principally through the hospitals.

The numbers in the health bureaucracy have been relatively stable for the last 5 years at around 600 persons (EFT’s).  So arguments concerning a burgeoning bureaucracy do not correlate with the statistics, and action has already been taken to reduce the numbers.

Which leaves the hospitals.  Over the last few years, hospital budgets have exploded and hospital staff numbers have increased by over 30%.  A serious issue for Government. 

With a population of around 500,000, the same size as Geelong, Tasmania boasts 3 public hospitals, and 4 if we include the Mersey General.  Each hospital has its own administration and each is attempting to provide a full range of services.  As admirable as this may be, is this realistic?  As a community we need to recognise that health is not a bottomless pit in which to pay more and more tax-payers dollars, and the limited financial resources available need to be effectively managed to maximize adequate patient care.

There have been calls for hospitals to become a Commonwealth responsibility, and this call seems to be supported by the present State Government.  I regard such a call as being politically inept.  If funding and thus control is to move from the State to the Commonwealth, then all decisions pertaining to hospitals will also move to the Commonwealth, and the State will lose control over one of its core functions.  As the Federal minister said when denying this request “The States are best placed to understand local needs”.  So true.

 And it misses the fundamental point that the health budget will still need to be brought under control, and tough decisions will still need to be made.  I believe we have a vested interest in controlling our own destiny rather than have a distant bureaucracy in Canberra do it for us.

But the State must get its house in order.  Negotiating a better deal overall with Canberra is part of the story.

The real issue is not who provides and controls the funds but ensuring an effective system of management.  Do we really need three separate managements to run our hospitals?  And stories of duplication and waste abound.  Hospital IT systems cannot speak with each other, even within hospitals, and it is obvious that specialists are gaming the system because there are few productivity measures and controls in place.

The Government has been forced to the starting line in directing its approach to health care expenditures, and has made decisions which to date have been limited to trimming the bureaucracy and non-essential surgery.  These decisions do not affect emergency and essential care.  However, it has yet to articulate a longer term strategy other than the spinning-the-wheels approach of balancing the budget.  And this is its problem.  There is no vision.

Without an overall strategy regarding its spending priorities, other than balancing the books, the government leaves itself open to attack from all quarters. On what basis was the quantum of cuts (some $100 million) determined?  What is the overall policy relating to health care?  What direction will be taken to provide a more effective and care-orientated hospital system?  What priorities were considered more essential to keep than elective surgery?  The list goes on.

Left to the hospitals to decide priorities, then of course they will choose the most sensitive areas to cut, then stare their Minister down.  It is certainly a technique that has worked to their advantage in the past and has caused massive blowouts of past budgets.  

Yet statistics are not the whole story.

Cutting elective surgery may be a short-term fix, but with longer-term consequences, both in terms of the health status and suffering of the patients, and the extra cost of treatment later on.

And a Government being seen to walk away from people in need, in misery, and in pain is an appalling look, and the Government stands condemned for the insensitivity shown in this present circumstance.

Superimposed on the decision to cut back elective surgery is the leverage effect of an additional Commonwealth payment of $141 million.  Although there are serious caveats to this funding, it is not smart financially - and dumb politically - to simply walk away from such offers.  The signals given by such an approach are diabolical.

I have argued long and often that Tasmania needs to encourage wealth-generating activity. Not just income generating (eg Commonwealth payments) but wealth-generating.  In order to spend it we first need to earn it.  If we walk away from our wealth-generating industries, such as forestry, mining and manufacturing, then the inevitable consequence will be less money to fund the services we expect to be provided, such as hospitals.

It may be an inconvenient truth, but a truth it is, nonetheless.  We deny it at our peril.

The Forest cauldron continues to boil! (Published August 26, 2011. The Mercury)

There have been many twists and turns in the forestry debate over many years.  Without retracing a blow by blow description of events, the interminable and never-ending conflicts over forestry boil down to two different value sets.  One is to conserve native forest for reasons of nature conservation, the other is to manage forests for their wood value, thus employing people and generating wealth.

Much has been said, but three recent developments are pertinent, and involve four different groups of players.  The players are the industry and forest workers, the conservation groups, government and Forestry Tasmania.

During the middle of 2010 Premier Bartlett set up a round table to resolve all forest conflict.  A somewhat naïve ambition considering the two opposing value sets and the long and tortured history.  A shuffle occurred within industry and within the conservation groups to see who would be sitting at the table.  Spokespersons for both sides spruiked their basis for representation, but the truth is many parties were disenfranchised at that point.  The government made available officers from FT to assist the discussions by providing factual information to each of the parties.  However, they had no seat at the table, and neither did the government.

The first development was the drafting of a document called the “Statement of Principles” (SoP).  This document was drafted by the two groups after a period of time - 6 months of talks were foundering – when pressure was applied by both sides to get something agreed.  It would be fair to say that the sceptre of the Gunns pulp mill loomed large at this time, with the threat that parties would withdraw from the process if the draft was not agreed to.  Under some duress, the draft document was agreed to, and is a dog’s breakfast of a document .

However, this then sent the government to Canberra to seek funding for the “next round”.  Canberra, although unimpressed with the Statement of Principles, came to the party – sort of – and provided Bill Kelty as a facilitator for the next round of discussions, which was to determine specifically the areas of forest under debate and still maintain wood supply.  Kelty eventually came up with a document that was supported by the parties and which was put before the two governments, who then signed a Heads of Agreement document (the HoA).

During the process FT’s management approach and data were independently scrutinized and their data and calculations were found to be sound.

The HoA covered two salient points.  For the NGO’s it meant a phased withdrawal from all native forest harvesting, an immediate reservation of 430,000 ha of State Forest, and a final reservation of 570,000 ha.  For industry, it meant ongoing security of resource supply for sawlogs (150,000 m3),peeler logs for Ta Ann (265,000 m3), and specialty timbers (12,500 m3).

For FT, it meant a further and significant withdrawal of hectarage from the forest estate under its supply management.  The problem was obvious to all.  Supply could not be guaranteed if the land in question was no longer able to be harvested.  And contracts were already in place for this level of supply.

A draft document was then circulated to the parties prior to government sign-off.  Three days later, the two governments signed an Inter Governmental Agreement (the IGA) to enable the two governments to provide further support.   However the IGA contained different provisions to that in the draft.  No longer was there a security of supply, in fact compensation was going to be offered instead.  Industry smelt a betrayal, and it was found that the governments were influenced by a submission from Jonathan West, an economist, who was then entrusted with an ongoing boundary verification process.  Professor West believes that the IGA will deliver an outcome where supply can be met and that protests will stop.  This is a minority view of one.  It is not a view held by FT, the industry nor it would appear some conservation groups who have vowed to continue with protest action.   

Last weekend people protesting against the IGA held protest meetings in Hobart and Smithton where it was made clear by Liberal MP’s, local mayors, forest workers, the AWU and others in the industry, traditionally supporters of the government, that the IGA was unacceptable.

Government has committed itself to the IGA, even though FT has advised it will be in breach of its contractual commitments.  An invidious position for FT’s Board and management.

FT is a GBE, and operates under two separate acts of parliament, being the Forestry Act and the Government Business Enterprises Act.  Under each of these Acts, FT has a responsibility to perform its functions in accordance with sound commercial practice.  This includes managing forests in a sustainable manner and not breaching contractual commitments.

Clause 12C of the Forestry Act deals with Ministerial Directions and Clause 65 of the Government Business Enterprises Act deals with a Ministerial Direction to perform community service obligations.  

The decision to support the IGA will require some form of Ministerial Direction.  If the government instructs the Board to do something that the Board cannot do, then the Board can object in writing to the government, and if there remains a standoff, the government must then lay before both houses of parliament its instruction and the board’s objection.

Where it then goes is anyone’s guess.  From here, how does parliament resolve the matter?  The Legislative Council has already held an inquiry and recommended against any further reservation of forest or transition out of native forest, so no legislation will pass.  The government could consider sacking the Board.  But what does that achieve?  And where will the Commonwealth, another signatory to the IGA and the major provider of funds, stand in all of this?  More twists and turns to come.

We live in interesting times.

Council Amalgamation (Published 28 September, 2011. The Mercury)

Local Government amalgamation is back on the agenda after a hiatus of some 15 years, this time sponsored by the Southern Tasmanian Councils Authority appointing an Advisory panel (STCA), and with active lobbying from the Property Council.  Back in 1993, after years of often acrimonious debate, the number of Councils was reduced from 49 to 29.  A more recent move to rekindle the debate was aborted in 1997.

The Property Council has been arguing for some time that rate rises are too steep, that systems diverge widely, and that the various planning schemes are inconsistent and in many cases out-of-date.  They provide as evidence of their case a report from Deloitte Access Economicss, which considered specifically the Tasmanian circumstance.

The Advisory Panel has recently released 4 options for consideration.  In brief, they are: Option 1 - no change, maybe some shared services.  Option 2 – One large regional Council.  Option 3 – A greater urban Hobart surrounded by smaller rural councils.  Option 4 – as per option 3, but with a separate Eastern Shore Council.  Although these have been put forward for discussion purposes only, are these the only options?  I think not.

If, as seems likely, amalgamation is the answer, then first let us consider what specifically is the question.  How to improve service delivery?  How to reduce rates?  How to provide a consistent approach to planning issues?  How to provide improved amenity?  As you can see, there is more than one question.  And this can lead to what are the  issues that should be priorities when considering the role of Councils.  For the purposes of this piece, I will simply accept that the argument is about doing exiting activities better, rather than doing different things.

As stated in the STCA paper entitled “Participation and Place”, Tasmanians have a strong sense of place.  Tasmania is very regional and rural in its nature, with some distance separating its major centres.  This sense of place has been enshrined in the very local nature of local government, which has developed an identity forged by history, a history that has involved significant isolation.  To therefore suggest a coalescion of local government groups inevitably comes across this barrier of losing identity.

At the same time, modern communications and transport links make the historic barriers redundant, and the greater sophistication in service and amenity delivery demands economic efficiencies which - it is suggested - amalgamation brings.

In considering the opportunities, we need to consider some salient points:        

Point         Communities regard themselves within a geographic framework.

Point        Local government is by its nature local, and is based around the sense of community.  It is not regional.

Point         Some services, once very local, are now best delivered at a regional level.

Point        Amalgamations can be a political minefield – whoever makes the decision will not receive unanimous support.

Point        Bigger does not necessarily mean better.  It can mean worse.  Small can be beautiful, but does require a critical mass.

The suggestion from the Panel that political power should be a consideration is passing strange.  Power is a tool in the toolbox which can be used to advantage, but badly used can do enormous damage.  I would have thought that service delivery was of paramount importance and political authority a secondary consideration.

There are four natural geographical environments around Hobart where rural and regional coalescions could occur:

                Derwent and Central Highlands

                Brighton and Southern Midlands

                Sorell, Tasman and possibly Glamorgan/Spring Bay

                Kingborough and Huon

The question then is whether to amalgamate the three cities of Hobart, Glenorchy and Clarence, or the alternative proposition of a western entity - Hobart and Glenorchy – and an eastern entity – Clarence.  This then is the essential matter raised by the Panel in its Options 3 and 4.

Whereas I am attracted to the idea of an efficient urban Council, the attraction is based on the ability to provide a more consistent approach to planning and an improved delivery of services.  However, this may not automatically be the case, and in fact, could lead to a more pronounced and difficult bureaucracy for the urban area, and to leave behind the rural areas.

There is an alternative, which I believe was first proposed by Marti Zucco.

Each of the coalesced regional entities would have a natural hub – New Norfolk, Brighton, Sorell and Kingston.  Each of these could serve not just as a central focus for its region, but as a satellite for a larger entity, based around the 3 city centres of Hobart, Glenorchy and Clarence.

The eventual structure would become three major entities, geographically based, each with its satellite environment, and each with approximately equal numbers.

The advantages of such an approach would be a reduction in the number of Councils from 12 to 3, but retaining a geographic integrity.  Each would have a similar critical mass of ratepayers (around 80,000) that could ensure a sounder financial base.  And each would be under a competitive tension to perform their functions effectively by acting as a benchmark for others.  A mistake by one would not then affect the entire southern community

               

There would then be an opportunity for “The Big THREE” to make further savings via pooling planning facilities and back office functions.

Not the only option I am sure, but one that does deliver to the various needs so far expressed.

A Right Royal Cock-up (Published September 10, 2011. The Mercury)

The Government has got itself into a right pickle over the latest forestry deal, and all of its own making.  In fact it would be laughable if there were not so many livelihoods at stake and taxpayers’ dollars at risk.

To understand the present situation, let us go back to last year, when Gunns made its unilateral decision to walk away from native forest harvesting and processing.  At that time it had a number of sawmills and other plant in Tasmania, as well as operations in Western Australia and Victoria.  CEO Greg L’Estrange made the announcement at a forest conference in Victoria last year, soon after Premier Bartlett announced his ill-fated “ROUND TABLE” to end forest conflict for good.

The decision by the company to exit native forests came as a complete surprise to its workforce, to forest contractors dependent on the company for their livelihood, to Forestry Tasmania, with which it had take-or-pay contracts, and to the general citizenry of Tasmania, including its parliamentarians.

L’Estrange gave as his reason “market forces”, and that the demand for his company’s products from native forests had fallen dramatically.  In particular he cited a collapse in the overseas woodchip market as a key driver for his company’s decision.  However, it was also in his company’s interest to exit native forest activity because he could then paint his company in a new light, totally plantation compliant, and thereby more attractive to offshore investors, which had become nervous as a result of an unremitting campaign of sabotage by the Wilderness Society and other conservation groups.

However L‘Estrange has gone much further than representing the narrow interests of his own company.  He has made the point that the entire industry in Tasmania should exit native forests as a matter of some urgency and has taken steps to encourage such a result.  The sale of the woodchip plant at Triabunna, in which conditions were placed on the new owners, is a prime example of this fact.  A most curious deal, considering the price, the buyers and the conditions of sale, where the plant could only be re-opened on the company’s say-so, and subject to “structural change” in the industry.

To me it is of interest that other woodchip suppliers throughout Australia have not been confronted with the same “market conditions” as Gunns, that they have been able to continue to sell their product offshore, and that the market remains strong for other native forest products.  Sawmillers are not complaining about the market.  So to say that market forces have caused a change in the industry is not really true.  The Premier should ensure she is fully briefed on the state of the market for all forest products before buying such a line.

At the time L’Estrange made his announcement to exit native forests, his company held a number of take-or-pay wood supply agreements with Forestry Tasmania.  His decision had nothing to do with any change in government policy  – it was a company decision pure and simple.

Such a decision was reinforced in April this year by a letter from the Gunns Board “handing back” their contracts.  To voluntarily exit the industry suggests walking away from pre-existing commitments, and as such, I suspect there is a good argument for Forestry Tasmania to be seeking recompense from the company for breaching these contractual commitments, and also to extinguish the wood supply agreements with the company.

We now come to the matter of the government signing the Intergovernmental Agreement (IGA) under which compensation monies would be made available by the Commonwealth to pay out forest contactors and sawmillers who wish to voluntarily leave the industry.  Note however that Gunns made its decision long before this time, and as such I suspect should not really be entitled to any compensation.

The company argues it has “residual rights”, but the paramount position is that it had already made its decision to leave.  Such “residual rights”, being an obligation to negotiate in good faith regarding any renewal, but with no obligation to reach any agreement, should be small indeed.  Especially considering it has an outstanding debt to FT of around $25 million.

I, like many others in the community, are now intrigued that the company has its hand out for compensation and that it has to date rejected a government offer to assist it, seeking more.  Intriguing also is the support from the Greens for such a payment to be made, and a question remains in my mind if this is in fact a quid pro quo for the Triabunna deal.  And even more amazing is the seeming approach of the government suggesting it might be prepared to pay an even higher figure than that which has already been offered, and rejected.

And while all this is happening, the forest protests continue.  What peace in our forests?

I can only conclude an extraordinary exhibition of arrogance from this company.  It has been arrogant in its dealings with the local community, with its workforce, with the forest industry generally, with its principal supplier Forestry Tasmania and with the Tasmanian parliament, which has gone the extra mile to encourage the success of its Tamar Valley pulpmill project.

To destroy an entire industry, to ruin the livelihoods of so many people, to place so many rural communities in jeopardy and then seek compensation for doing so, quite takes my breath away.

The Federal Government has promised compensation to forest contractors to exit the industry.  This is a fair cop as Gunns has essentially halved the industry by its unilateral decision.  However, the State Government is being led by the nose.  It should walk away from this deal in its entirety, and revert back to the Regional Forest Agreement, from which this debacle first commenced.