Wednesday, 10 December 2014

Gas Politics in the States December 2014

Gas and the Efficient Structure of the Australian Economy
Deakin Policy Forum with APPEA
Wed Dec 10th at PwC Southbank
Many thanks for the invitation to be here today from Deakin University, my respected friend Prof Michael Porter and David Byers of APPEA.
I am only here today because I was invited by then Victorian Premier Ted Baillieu to chair the Victorian Gas Market Taskforce. But I am glad I took on the task and I remain interested because the future of this industry is very important and I like the challenge of what seems to be an impossible task, especially in Victoria and probably NSW.
Despite the noise generated by the greens movement and their allies, the gas industry is safe, great for reducing emissions, plays a useful role for wind power and can offer jobs and investment to lift living standards.  The challenge for the industry is a political one; not as tough a challenge as selling the GST but difficult all the same.
Needless to say the resource States of WA and Queensland have clear views on the industry and Australia is fortunate in what they have achieved already with more coming especially in Queensland.
SA is a resource State and it has a pro-resources Minister for Energy who is also SA Treasurer. SA’s economy has been under pressure for many years and as time rolls on, the State becomes more desperate for economic opportunities. Under these circumstances, it is surprising that the Liberal party has joined with the Greens in the SA Upper House to convene an inquiry into the gas industry. It’s not as if the gas industry or fracturing or other aspects of the industry are new in anyway. It’s not as if the science of the industry is not well known. And let’s face it; the Greens would only be involved in this inquiry to further their opposition to any fossil fuels. One of the first lessons I learnt from Queensland is that if you want a gas industry then governments have to make it clear that they support the industry. Why a Liberal party wants to join with the greens contrary to the interests of SA is hard to believe. And why the Liberals would countenance the loss of jobs and investment desperately needed in SA is also hard to believe. It’s a case of giving the greens an inch and they will take a mile. There is no way that the greens will accept the science on coal seam gas and I hope the Liberals have the political stomach to stand up against the greens and publicly provide bipartisan support for the industry with the SA Labor government.
The situation in Victoria is even more barren; Victorian parties have a bipartisan policy of opposing the gas industry.  The new Labor government will do nothing to support the gas industry and I expect that they will keep the moratoriums first put in place by Minister Michael O’Brien MP then made even worse by Minister Russell North with the encouragement of Peter Ryan MP in the dying days of the Napthine government.  Victoria stands totally opposed to any exploration on-shore; this blanket opposition must be one of the world’s most anti-resources policy ever seen in Australia and probably internationally. It is an embarrassment to rational policy making. In the recent election the Coalition’s junior partner, the Nationals have lost the seat of Shepparton, and nearly lost the Gippsland seat of Morwell. The Nationals leader Peter Ryan has resigned and we do not yet know if the Nationals will remain in bed with the greens under new Leader Peter Walsh as was the case with Ryan. Likewise, former Premier Denis Napthine has stood aside for a new Liberal leader in Matthew Guy. Napthine has announced he will stay in the parliament and presumably will continue to oppose gas jobs and investment in Victoria. Why the Nationals are so tied to the Greens at the expense of farming communities that could do with significant revenue from gas and the chance to make their farms immune to drought, is a mystery. In the recent Victorian election, in Gippsland East the Nats had a primary vote of 60.7%, in Gippsland South Peter Ryan got 57.69% and 66% (TPP) and in Narracan the Liberal vote was 55.7% and 61.8 (TPP). The Greens vote in these three seats was between 9.48% and 7.69%. The Nationals are losing support as demonstrated in Shepparton. Now is certainly the time for the gas industry to press the Coalition to reconsider their policy. The Coalition claims to support the manufacturing sector and yet manufacturing is under costs pressures and an on-shore gas industry could be a huge a fillip to Victoria if only the Coalition could grasp the opportunity next time it is back in government.
As for NSW, it faces the biggest immediate risks of days without gas and a long term prospect of gas prices higher than needed to be. The odd thing is that “Uncapped CSG reserves in NSW could partially ease medium term east coast gas pressures if current planning impediments are addressed urgently” (Energy White Paper – Issues Paper December 2013).
Twelve months later, little has been done to protect NSW from likely gas shortages although at least the new Premier, Mike Baird, has said he wants to access NSW gas reserves ( Baird: “Do we want coal seam gas? Absolutely we do”)(Daily Telegraph 8 Nov 2014). As at today, my fingers are crossed that Premier Baird will stick to his commitment after the forthcoming election.
But before getting excited at the prospects of NSW finally taking on Alan Jones and the greens, I think I will wait until after the forthcoming election and then see if the Premier matches his public statements.
In the meantime, on the 13th November 2014, the Baird government announced its Gas Plan for the regulation of the coal seam gas industry. The report implements the recommendations of the report by Prof Mary O’Kane.
I do not have a final view on the plan but there are a number of matters which need further discussion.
The plan to hand over regulation of coal seam gas to the NSW EPA seems at odds with a desire to support the industry. The EPA has a clear environmental mandate. But it has no mandate to do anything to support the industry. It has no resources for the tasks of managing the industry and it seems odd to bypass the expertise within the NSW mining department.  At first glance, it seems the government has decided to wipe its hands of the industry altogether and flick pass all responsibility to the EPA which is statutorily independent of government. Even if the government says it supports the industry the EPA could effectively close gas projects at a whim. It could soon develop a recipe to blanket the industry with more and more regulation and interminable delays.  Abandoning the industry makes no sense and to my knowledge handing the industry to the EPA has not been tried anywhere else in Australia.
In my report for the Victorian government, the first recommendation was that the Government must make it clear that it supports the industry. When they refused to accept that recommendation, I knew that the prospect of a Victorian on-shore industry was finished. I don’t see why any company willing to assist NSW with its gas shortage would want to proceed to secure the necessary approvals to get gas to Sydney when the government is not prepared to back the private enterprise effort to supply gas. No support from the government means no gas for Sydney.
I do not agree that NSW should be buying gas from WA.  Firstly, because I don’t think that NSW should be rewarded by the Commonwealth for the failure of NSW to access the significant resources within NSW, particularly in the Pillaga scrubs in northern NSW.  Secondly, gas from places as far away as WA will be much more expensive simply by virtue of the need to build a pipe and the cost of transporting the gas.
Other proposals make me wonder what the NSW is really intending. One recommendation says that the gas companies have to demonstrate how projects will benefit NSW consumers. That is sort of ok but the Government’s constant failures to confront  Alan Jones and others has been a big part of the problem and whilst business has a role to play, the Plan makes no mention of government’s responsibility to engage in public debate and provide the reasons for government support.
My third big concern is the plan to extinguish petroleum exploration licences. And petroleum titles and applications will be reduced to cover 15% of the State – a reduction from 75%. This looks like a ploy to temper green campaigns at the expense of less competition and less prospects of securing new resources. In the immediate future I would surmise that in practice the only gas companies left will be AGL with their project in Gloucester and Santos at Pilliga. Lessening competition is not healthy and should not be the policy position of a free enterprise government.
There is another scenario. If I was running a gas business and constantly being blocked by the EPA then maybe shareholders might ask “why are we risking our capital when we could make more with less risk elsewhere?” And then my hypothetical gas company might take the rational decision to shut down its project and wait for a government that really wants to promote gas. In that scenario, the NSW government would be stranded with businesses going broke, workers losing their jobs and the companies holding the upper hand.
Compare the NSW approach to what happens in the US; it is enough to make you wonder what sort of free enterprise values determines the policy of the NSW government. It certainly suggests that NSW needs to think a lot more carefully about its plans and provide a lot more detail to allow the gas industry the opportunity to decide whether they should be involved in NSW at all.

Tuesday, 9 December 2014

Tony Abbott needs to stop tinkering and show us a grand economic plan to save Australia

The Prime Minister Tony Abbott and the Treasurer Joe Hockey missed the opportunity in last week's statement on the National Accounts to spell out the need for more cuts.

And the weekend announcement to change the paid parental leave (PPL) is just tinkering: instead the government should drop the PPL, drop the company tax increase that goes with it and stop making claims such as saying the economy will be better next year.

The truth is that commodity prices are falling, unemployment and youth unemployment are going in the wrong direction, the latest GDP figures are not good and many families are feeling the pinch of falling living standards.

I doubt Abbott will ever see a budget surplus in his time as PM. It is not his fault that Labor in government went on a spending spree and commodity prices have tanked. But it is his job to manage the politics and put the economy back onto a sustainable course. Needless to say, the opposition are enthusiastic spoilers but the buck stops with the PM.

First and foremost, the Australian public voted for Tony Abbott to clean up Labor's economic mess. And if he does not give it his best shot then he will be putting his political future at risk. It is as simple as that and if his May 2015 budget is not right then the government is asking for trouble.

Abbott's election commitments to stop the boats and abolish the carbon and mining taxes were all good policies but they were never enough to build an economic platform for future political success, which can only ever be underpinned by a strong economy. As of today, the proposed white papers on tax, federal state relations and the Productivity Commission report on labour market reform could produce a way ahead but it's hard to see the government being bold enough on any of these issues.

Abbott does not have many options. He could claim he has done better than Labor and, given the reality of the most difficult Senate since 1975, now all he can do is soldier on; a recipe for slow political death. Another approach might be to accept Labor's claim that there is no problem: a recipe for a Labor win in 2016. The third option is to go harder and make fiscal reform his No. 1  priority and, if necessary, put the government's future on the line.

The third option is preferable because it is in the country's best interest. We cannot go on living beyond our means. The other two options will leave Australia weaker, poorer and vulnerable to recession; not a record any PM wants on his CV.

He should start by going much stronger on explaining the collapse in commodity prices and the risks of higher unemployment and falling family incomes if we don't get a grip on the budget.

Abbott should not be telling people that all is going to be rosy; many people are saving because they don't believe politicians anyway. Nor should the government in the upcoming mid-year economic and fiscal outlook (MYEFO) announce some Keynesian spending. The best way to boost confidence is to demonstrate that the government knows what needs to be done and it will pursue its objectives without flinching.

A fillip would be to use the MYEFO to finally dump spending commitments already announced by Abbott. He should scrap the $20 billion medical fund, the PPL and slash the $50 billion infrastructure spending, which is a state responsibility anyway.

He then needs a strategy based on good policy and an economic plan. He needs a plan that will put him a long way ahead of Bill Shorten. He needs to set the pace.  Abbott could mirror the policy contest at the tail end of the recession "we had to have" in 1991-93. Fightback unveiled such a comprehensive economic plan that then PM Paul Keating was forced to counter it with matching income tax cuts but no GST.

After the election, Keating's claim was revealed as a broken promise because the tax cuts could not be afforded. The saga was a huge blow to Keating's credibility and helped pave the way for Howard's win in 1996. The lesson for Abbott is that the Coalition's internal fortitude eventually played a key role in winning the battle of ideas even though we lost one election along the way.

Abbott has had a year of achievement in many endeavours but with the exception of the three trade deals, his economic management has been bogged down by an irresponsible Senate. To meet the challenges facing Australia today he needs a bigger plan, a clearer message and a willingness to take a punt based on the public interest.

Tuesday, 2 December 2014

Victorian election

Months ago, it was obvious that not only the Victorian Coalition government was heading to defeat but also, three federal seats could easily be lost in the next federal election. After Saturday's defeat, the federal coalition could be facing the loss of even more seats and the prospect of a one-term government.

State MPs are entitled to be unhappy with Prime Minister Tony Abbott. Earlier in the year, Abbott delayed decisions until the Senate rerun. But when it came to looking after the Victorian Liberals  before a state election he didn't cut them any slack. He pushed ahead with an increase of fuel tax and cuts to the ABC, having promised pre-election there would be none, when obviously he could have held back for a few days until after Saturday's vote. Less obvious but I think it's important to note, despite the quality of Victorian federal ministers like Andrew Robb and Greg Hunt, Victorians are well aware that at the federal level their MPs do not have the clout they had in the past.

Despite the fact that some voters will link federal and state issues, forget about blaming Tony Abbott. Certainly he was no help, but the Victorians under Denis Napthine were more than capable of losing government all on their own. The Liberals should have been miles ahead of a Socialist Left Opposition Leader. Daniel Andrews' big policies were to have a public holiday for the Friday before the AFL Grand Final and building 50 level train crossings to improve traffic congestion. On top of that he is committed to abandoning the plan to fix Melbourne's traffic congestion, tearing up the contract, raising serious concerns about sovereign risk and giving free rein to his friends in the CFMEU [Construction, Forestry, Mining and Engineering Union]. If you can't beat a manifesto as bad as that in a first term, then don't expect much sympathy.

The core problem with the Victorian Liberals is that they don't know what they stand for. It was so bad at one stage that Labor announced the sale of the Melbourne port and Premier Denis Napthine opposed it. He should have pinched Labor's policy and got on with road infrastructure like the East West Link. Sadly we have seen the slow transformation of the Victorian Liberals from being the jewel in the federal Liberal's crown, to a party with little political commitment other than status quo delivery of services.

Yes, they did a reasonable job in fixing the budget and the East West is a good project but I reckon that fixing the roads is bread and butter for state governments.

Fundamental aspects of the way the Liberal Party works in Victoria needs to be re-examined. For example, the party effectively abused its own rules that require the use of plebiscites to allow local people to decide who is preselected. If the party can't attract members, it will end up as a clique of political insiders.

Basic policy differences between the federal liberals and the state party are quite obvious. If ever there were an example of what was wrong, it was how the party dealt with John Roskam who was a candidate for former Premier Ted Baillieu's seat of Hawthorn. Roskam has probably been one of the strongest advocates of Liberal values in Victoria. In his preselection he was attacked for supporting Section 18C of the Racial Discrimination Act and freedom of speech.  He was described as an extremist because he said that the minimum wage was too high. And then he was attacked because in supporting the federal government, he did not support Napthine giving $24 million to SPC Ardmona. To me, that said it all.

Another problem was the Liberals gave too much to the National Party. Nat Leader Peter Ryan's handling of the police portfolio was one of the government's early headaches. The Liberals should never have agreed to having a business welfare fund let alone give it to the Nats to manage. Now the Nats have probably lost the seat of Shepparton and party status. Instead of supporting gas exploration and the potential of jobs and investment in eastern Victoria, the Nats abandoned the interests of local people to appease inner Melbourne greenies.

Communication was very average from Victorian Libs. The standard approach to difficult issues under Ted Baillieu and Dennis Napthine was to instruct ministers to say nothing and hope issues would fade.  So instead of pushing for a Royal Commission into the billions of dollars lost in the state's  desalination plant the government did nothing.

The bottom line is that if voters can't see much difference between the political parties then no one should be surprised when they chop and change the government. This was the big underlying cause of the Victorian government's loss. The challenge now for federal Liberals as well as the two key players in the state parliament, Matthew Guy and Michael O'Brien, is to work together to fix the glaring problems now fully exposed in the 2014 election.