Tag: The Conversation

Westpac And ASIC Go Back To Court On HEM

From The Conversation

Very rarely does a judge tear up a multimillion-dollar penalty signed up to by both the regulator and the alleged perpetrator.

Yet that’s what Federal Court judge Nye Perram did on Tuesday, throwing out a A$35 million settlement between Westpac and the the Australian Securities and Investments Commission over its alleged failure to properly assess whether borrowers could meet their repayments before signing them up to mortgages.

Agreed settlements are common

In commercial litigation, as in most litigation, there is an emphasis on trying to settle matters early before they are heard in court.

In criminal law matters the prosecutions encourage early guilty pleas in exchange for lower penalties.

The Australian Securities and Investments Commission (ASIC) has been increasingly resorting to early settlements as a means of achieving cheaper and quicker outcomes.

The quick win for ASIC is an enforceable undertaking and a media release. The quick win for the other party is avoiding a drawn-out court case and being able to get on with its business.

Courts usually rubber-stamp them

Where the alleged breach of the law is serious, necessitating a large penalty, a judge has to formally approve the settlement, in a hearing until now regarded as something of a rubber-stamping exercise.

As the Hayne Royal Commission into the Misconduct in Financial Services has pointed out, the downside of such quick settlements can be that the facts aren’t established in court and the law isn’t tested.

Where they are established and the law is tested, as Justice Yates did earlier this year in Australian Transaction Reports and Analysis Centre versus Commonwealth Bank of Australia very big penalties can be handed down – A$700 million for more than 50,000 breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act.

Along with it were landmark judgments that establish the scope of the law and tell firms what to avoid in the future.

This time the court said no

On Thursday Justice Perram in the Federal Court sought the right to do the same.

He rejected the joint application for settlement between ASIC and Westpac Banking Corporation for a penalty of A$35 million.

The problem, as he pointed out was that it was not clear from the agreed facts what actual contraventions of the National Consumer Credit Protection Act 2009 Westpac had been accused of.

He asked ASIC and the Westpac to redraft the agreed settlement and return to court by 27 November 2018.

To establish the law and what happened

The case matters because the Financial Services Royal Commission has been examining the use of computer programs to determine the ability of borrowers to repay loans.

It is possible that many Westpac loans were approved to customers who would have been found to be unable to meet the repayments had their individual circumstances been examined, and it is possible that is in breach of the law.

But without a clear judgment or a clear statement of facts for the court to examine, or a clear judgment from the court, it is impossible to tell.

That’s why Justice Perram said no, to establish what the law requires and what Westpac did.

Author: Michael Adams Professor of Corporate Law & Governance, School of Law, Western Sydney University

Why The Consumer Price Index Is Flawed

From The Conversation.

Officially, Australia’s rate of inflation is 1.9%.

It’s the lowest it has been on a sustained basis since the 1950s and early 1960s.

But try to tell that to anyone and they will laugh at you, or worse.

The Bureau of Statistics is careful to say that the consumer price index isn’t a measure of living costs.

It creates that slightly differently, producing a collection of less-reported indexes that were updated this week.

On these measures, over the past year living costs have climbed 2% for households headed by an employee, 2.2% for households headed by Australians on most types of benefits, 2.3% for households headed by age pensioners, and also 2.3% for households headed by self-funded retirees.

The main difference between the consumer price index and the living cost indexes is that “living costs” include interest paid on mortgages whereas “consumer prices” do not.

Regardless, most of us would be pretty certain that even on these measures, what’s reported is too low.

We’re irrational

In part, this is because we are not rational. As Nobel Laureate Richard Thaler has pointed out, we often engage in “mental accounting”.

In general this means we notice losses more than gains. In this context, it means we focus more on the things that have gone up in price than on those that have gone down or remained unchanged.

Also, our mental basket of goods is generally not the same as the basket of goods the bureau measures, even though it should be.

It’s not our basket

Four times a year in multiple locations throughout each capital city the bureau attempts to collect information about the prices of the thousands of goods (and some services) that make the “basket” it thinks represent they typical household’s purchases.

The basket is divided into about 100 subgroups; things such as bread, milk, eggs, fruit, men’s footwear, women’s footwear, men’s clothes, women’s clothes, restaurant meals, electricity and so on.

Because it can’t price everything, it zeros in on a few representative items within each category.

For meat and fish the ABS includes beef sausages (1kg) and pink salmon (210g can). For processed fruit and vegetables it includes sliced pineapple (450g can) and frozen peas (500g pkt).

If you buy something different, the exact changes in the prices you pay won’t be fed into either the consumer price index or your living cost index, but the indexes are likely to move in line with your living costs in any case.

Things get left out

Many things are missing from the index, among them recreational drugs, gambling and prostitution.

Being bean counters, rather than priests, the bureau says it excludes these sorts of items on practical rather than moral grounds.

Gambling is excluded as it is difficult to establish the service or utility that households derive from gambling, and thus to determine an appropriate price measure. Recreational drugs and prostitution are both excluded as it is very difficult and indeed dangerous to obtain estimates of prices and expenditures, or to measure quality change.

Other things are excluded because their prices are deemed to be too volatile. The price of bank deposits and loans was removed from the main index a few years back.

And goods keep getting better

Where our views about prices are most likely to differ from the bureau’s is where goods get better.

The bureau factors quality improvements into the measures prices it reports. If, for instance, your next mobile phone costs as much as your last one but includes extra features such as more memory or an improved camera, the ABS will report that it has fallen in price.

This sort of adjustment for quality makes sense when adjusting down the price of a can of baked beans because it has been replaced by one slightly bigger, but is a grey area when it comes to improved features.

If the speed of the chip on your next laptop doubles, does that really mean the laptop is twice as good as the old one and should be said to have halved in price? Or should its price be recorded as having fallen by a lesser amount, or not at all seeing as the price hasn’t changed and it remains a standard laptop?

Often older models with lesser features are often no longer available. It’s impossible to buy a cheaper replacement.

The CPI is infrequent

The Reserve Bank is worried about the frequency of the index. It comes out only once a quarter, and up to a month after the quarter has finished.

Every developed country other than Australia and New Zealand releases its index monthly.

Given that the bank considers changing interest rates once every month, and given that the consumer price index is one of the two key measures it uses to guide its decisions (the other is the unemployment rate), a quarterly index leaves it somewhat in the dark and (when things are changing fast) potentially dangerously misled.

The bureau responds that it is prepared to release its index monthly, if it is paid to do it.

The ABS is persuaded there would be a significant benefit from more timely and responsive economic management if a CPI of equivalent quality to the current quarterly index were available monthly. Additional funding will be required to meet the costs involved in compiling a monthly index.

It’s just what we need – bureaucratic blackmail.

But it’s improving

On the positive side, new technologies have allowed more accurate price collection to make the index more precise. A key innovation is the rise of so-called “scanner data”, tracking expenditures at checkouts based on the prices people actually pay.

Scanner data has been used since 2014 and is now responsible for about one quarter of the prices reported. Field officers compile much of the rest using hand-held devices to type in prices they read off supermarket shelves.

The move to scanner data was spearheaded by the work of my UNSW School of Economics colleague Professor Kevin Fox.

There is a prospect of it becoming more widespread as more and more purchases are made with debit and credit cards and with point-of-sale software on devices such as tablets at coffee shops.

And important

Whether or not we like what it says, the consumer price index is important and lies behind much of what we do.

A whole range of government payments and duties are indexed to it – these change when the consumer price index changes. Benefits such as Newstart and family payments are indexed as are excise duties such as those on petrol and beer.

Even the private sector relies on the consumer price index to adjust payments under contracts such as rental agreements or construction charges.

Collecting it is an enormous and painstaking exercise.

Governments of both stripes would do well to remember that when next they think of cutting the bureau’s budget.

Author: Richard Holden Professor of Economics and PLuS Alliance Fellow, UNSW

Renters Beware: how the pension and super could leave you behind

How we fund retirement in an ageing century ought to worry all of us, via The Conversation.

But one group of us should be much more worried than the rest.

In a new set of research briefs published by the Centre of Excellence of Population Ageing Research, we report that most people do well out of our retirement income system and that the living standard of retirees has improved over the past decade.

In international comparisons, our system ranks highly, for good reason.

Most retirees do well

About 60% of older Australians can afford a lifestyle better than that deemed to be “modest” by widely used standards.

Households headed by baby boomers reaching retirement age between 2006 and 2016 did so with incomes 45% higher than those who retired a decade earlier.

Typical boomer households aged in their late 60s earn almost as much as they did when they were still working – only 20% less, that is, with about 80% of their working income maintained.

And their needs are lower. Lower spending in retirement is common because older households need to pay less for transport, less for working clothes, and have more time to cook.

Many continue to save while in retirement.

And they tend to spend less over time, rather than more over time as benchmarks publicised by the superannuation industry assume.

When we included the value of living rent-free for the 80% or more of retirees who own their own home (about A$10,000 per year on average), we found older Australians live in no more poverty than working age Australians.

But not renters

The living standards of those who rent in retirement are very different. Only about 15% of older renters can afford a lifestyle better than “modest”.

Single renters are particularly badly off.

Among all older people only about 10% fall below the poverty line set at half the median income.

Among older Australians who rent, 40% fall below.

Among older Australians who rent alone, it’s more than 60%.

If that relative poverty measure seems too abstract, an absolute dollar figure might help.

Alarming research aired on the ABC in September found that, on average, aged care homes were spending $6.08 per day on food per resident.

Our research finds that among pensioners who rent alone, one quarter spend even less than that per day.

And it’s getting worse

The pension has always favoured home owners.

On the one hand it is insufficient for renters and on the other it doesn’t cut pension payments to the owners of very valuable homes, because the value of any home – no matter how big – is excluded from the pension means test.

Rental assistance, introduced to complement the pension in the 1980s, was meant to alleviate this, and to some extent it does.

But it climbs only in line with the consumer price index every six months, which usually fails to keep pace with rents.

Sydney rents have doubled over the past two decades. The consumer price index has climbed 68%.

As a result, rental assistance is less effective in reducing financial stress than it was when it was introduced, and is set to become even less effective if rents continue to climb more quickly than the price index.

And more of us look set to rent

Households headed by Australians aged 35 to 44 are now 10 percentage points less likely to own their own home than were households headed by people of the same age a generation earlier.

They might be merely postponing buying homes until they are older as more of what would have been their income is sequestered into super and they enter the workforce and retire later.

If so, they might end up owning and paying off homes by retirement at the same rate as boomer households did before them.

If not, more and more of them could end up in poverty in retirement.

Author: Rafal Chomik Senior Research Fellow, ARC Centre of Excellence in Population Ageing Research (CEPAR), UNSW

We need regulators to act in the public interest

From The Conversation.

“Did you think to yourself that taking money to which there was no entitlement raised a question of the criminal law?” Commissioner Kenneth Hayne asked Nicole Smith, who resigned as chair of NAB’s superannuation trustee, NULIS, a little more than a month before she fronted the banking royal commission.

“I didn’t,” Smith replied.

Smith’s evidence related to NAB skimming A$87 million from superannuation accounts by charging 220,000 members “service fees” for which no service was provided. As head of the board of the superannuation trustee, it was Smith’s job to act solely in the best interests of the members. Instead she acted in the best interests of NAB.

Her admissions and the evidence from the royal commission that more than $A1 billion has been taken from superannuation accounts for no service show we need better supervision of the trustees who oversee more than A$2.7 trillion in superannuation assets.

As senior counsel assisting the commission Michael Hodge put it:

Trustees are surrounded by temptation, to preference the interests of their sponsoring organisations, to act in the interests of other parts of their corporate group, to choose profit over the interests of members, and to establish structures that consign to others the responsibility for the fund and thereby relieve the trustee of visibility of anything that might be troubling.

The entrenched practice of retail super funds using superannuation trust funds as profit-making enterprises undermines the integrity of the whole superannuation sector. Focused regulatory action and oversight are imperative to protect it.

Super duties

Super trustees are subject to a range of stringent duties.

There are “equitable” duties, which arise from trustees being fiduciaries – responsible for acting in the best interests of the owners of the assets they manage. As fiduciaries, super trustees must avoid conflicts of interest and account for any profit they make.

As trustees specifically, they must act in the best interests of the beneficiaries and exercise powers conferred to them as trustees (trust powers) with real and genuine consideration.

All trustees are legally obliged to act in the best interests of the people whose money they are entrusted with. Superannuation trustees have an even greater obligation, because of the social importance of superannuation. The High Court has ruled that public expectations mean superannuation trustees have “more intense” obligations than other private trusts.

This is underlined by the “statutory” duties of the Superannuation Industry (Supervision) Act 1993. It states directors of corporate superannuation trusts must perform their duties in the best interests of their beneficiaries, superannuation fund members.

The act also establishes supervision and oversight of super trustees by the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Commissioner of Taxation.

Irregular regulation

Yet clearly this oversight has been failing. The evidence from the royal commission is that many super trustees having been ignoring their duties. They have gone along with rubber-stamping unjustifiable fees purely because their parent institutions wanted the money.

In 2017 the prudential regulator was given the power to directly disqualify directors of superannuation trustee corporations. It already had the power to do so by applying to the Federal Court. Over the past decade, however, it has sought just one disqualification.

The regulator’s deputy chair, Helen Rowell, has argued this is due to APRA trying to protect the public interest, avoiding the risk of a run on a fund. But its inaction has arguably emboldened super trustees to ignore their duties because of the low risk of being penalised.

Previous reform proposals

The royal commission may result in criminal charges against banks and financial institutions. One outcome that must come is stronger oversight of super trustees.

Federal parliament already has before it amendments to the Superannuation Industry (Supervision) Act that include requiring individual super trustees to make annual written assessments about whether fees serve the interests of members. However, the bill has reportedly been shelved.

It is therefore critical the royal commission recommend strong action, including reforms proposed by previous inquiries into the financial services sector.

These include the Financial System Inquiry, which recommended in 2015 that super funds must have a majority of independent directors on their trustee boards. It also proposed new civil and criminal penalties for directors failing to act in the best interests of fund members.

Additional reforms might include:

  • establishing a specific conduct regulator for corporate superannuation trustees
  • making it mandatory for ASIC to prosecute superannuation trustees and related entities (such as banks) for duty breaches, with much higher penalties
  • stronger oversight over responsibilities that corporate trustees outsource to third parties
  • mandatory reporting of corporate fee structures, with regular review to determine if these are justified.

The trust remains the most appropriate legal mechanism to manage savings accumulated over a long time. Much stronger behavioural controls and civil penalties are necessary to ensure super trustees act honestly and in good faith for the benefit of the beneficiaries. That they are, in short, trustworthy.

Author: Samantha Hepburn Director of the Centre for Energy and Natural Resources Law, Deakin Law School, Deakin University

An open letter on rental housing reform

From The Conversation.

Following a review of the New South Wales Residential Tenancies Act 2010 in 2016 and extended consultations, the NSW government has introduced a number of reforms to parliament. Debate is expected to occur this week. However, without reform to current eviction proceedings, many housing advocates have expressed concern that these generally good proposals will have little effect. Today, 45 housing researchers from a range of disciplines have signed the following open letter.

We are academics who research and teach about housing. We come from a range of disciplines – for example law, economics, social sciences, planning – and many of us have worked variously with housing providers, tenants’ groups and government agencies on housing issues. We have in common commitment to the principle that everyone should have a secure, affordable home of decent standard, whether they own or rent.

Too often, however, our rental housing sector fails to deliver on this principle. There are numerous reasons for this; one of them is the legal insecurity of tenants under current New South Wales residential tenancy laws. In particular, the provision for landlords to give termination notices, with no grounds, at the end of a fixed-term tenancy or during a continuing tenancy is contrary to genuine security.

“No grounds” termination notices give cover for bad reasons for seeking termination, such as retaliation and discrimination. The prospect that a “no grounds” termination notice may be given hangs over all tenancies, discouraging tenants from raising concerns with agents and landlords and undermining the legal rights otherwise provided for by their leases and the legislation.

The deficiencies of our current laws are becoming worse, as more households rent, and rent for longer into their lives. About 32% of NSW households rent and this proportion is growing. Over the five years to 2016, 63% of the net growth in the number of NSW households was households in rental housing. And 42% of NSW renter households include children.

Our deficient current laws are also increasingly out of step with tenancy laws in comparable jurisdictions. Many European countries, as well as most of the Canadian provinces and the largest US cities, do not provide for “no grounds” terminations by landlords.

Last year, Scotland reformed its tenancy laws to remove provisions for “no grounds” terminations and replace them with prescribed reasonable grounds for termination. In Australia, Tasmania has for some years not allowed “no grounds” terminations of continuing tenancies. This month, the Victorian Parliament amended its residential tenancies legislation to remove provision for “no grounds” termination notices for continuing tenancies and for fixed-term tenancies, except at the end of the first fixed term.

We call on the NSW state government to improve security for renters, by legislating to end no-grounds termination by landlords and providing instead for a prescribed set of reasonable grounds for terminations.

These reasonable grounds would include grounds already in the legislation, such as rent arrears and other breaches by the tenant, and sale of the premises, as well as new grounds, such as where the landlord needs the premises for their own housing, and where the premises are to be renovated, demolished or changed to a non-residential use.

The prescribed reasonable grounds should have different notice periods, reflecting their different degrees of urgency and priority. Proceedings on notices should go, as they currently do, to the NSW Civil and Administrative Tribunal, and the tribunal should determine whether the ground exists and whether termination is justified in all the circumstances.

This reform would make all tenants feel more secure, without unduly restricting landlords in reasonable uses of their properties. The only inconvenience would be to the retaliators, the discriminators and those who cannot cope with even a modest level of accountability. If the reform prompted these landlords to leave the sector, they would sell to a new home owner or to a more professionally minded landlord – either of which is to the good.

There is more to be done across a range of policy areas to improve the functioning of all aspects of our housing system. We need more accessible home ownership, a differently structured and more professional market rental sector and a revitalised social housing sector. These changes require a comprehensive housing policy, coordinated across areas and levels of government and carried out over a long term.

But, in tenancy law, the single most important reform is ending “no grounds” termination by landlords. And the parliament could do it now.

When falling home ownership and ageing baby boomers collide

From The Conversation.

Until now, the majority of older people in Australia have achieved the goal of owning their own home outright. Hence, policymakers have typically shown little concern about the size and budget costs of rental housing assistance programs for seniors. However, two major societal shifts are set to propel such programs into the spotlight as a prominent government subsidy for older Australians.

The first trend is population ageing. We anticipate that baby boomers will place growing pressure on housing assistance programs as they age.

This is simply because of their larger numbers compared to earlier generations. Applying ABS population projections to data from the 2011 Household, Income and Labour Dynamics in Australia (HILDA) Survey, we project the population of Australians aged 55 years and over will increase from 5.1 million to 7.9 million between 2011 and 2031 – a 55% increase.

A second shift – falling rates of home ownership – could further increase the demands on the housing system. The HILDA Survey reveals rates of home ownership have fallen from 72% in 2001 to 66% in 2016.

This decline is in part due to younger Australians finding it more difficult to become owner-occupiers. It is also due to growing numbers of Australians dropping out of home ownership.

Estimates from the ABS Surveys of Income and Housing show that from 1982 to 2013 the home ownership rate fell 7.3 percentage points among the 45-54 age group. It fell by 5.1 percentage points for the 55-64 age group.

These trends are likely to continue.

A growing divide among older Australians

To analyse the implications of these shifts, we forecast the changing profile of Australians aged 55 and over by housing tenure. We apply demographic projections to the 2011 HILDA Survey and describe tenure profiles based on hypothetical declines of 5 and 15 percentage points in home ownership rates by 2031, as well as a stagnant stock of public housing.

Our findings point to a growing divide among older Australians. For older Australians, home ownership will increasingly become the preserve of higher-income married couples (see table 1). Older people on lower incomes – especially women and those affected by marital breakdown or bereavement – will rent.

The divide is especially stark if the home ownership rate falls by 15 percentage points. In this scenario, 27.4% of people aged 55 and over will be private renters by 2031.

Budget impacts of housing assistance

Older Australians’ demand for housing assistance could spike as a result of population ageing and falling home ownership rates.

Even demographic change on its own would lift real government spending on housing assistance for Australians aged 55 and over by 64% by 2031 (see table 2).

If home ownership rates also decline by 5 percentage points, then real government spending is projected to blow out to three times its 2011 level.

A steep fall in the home ownership rate of 15 percentage points would send real government spending on housing assistance soaring to around six times the 2011 level. That would increase real spending on housing assistance for older Australians from a tiny 0.043% of real GDP in 2011 to 0.16% of forecast real GDP in 2031.

The implications of demographic change coupled with falling home ownership rates are obvious for the housing sector:

  • the private rental tenure is set to expand
  • demand for housing assistance will grow
  • spending on housing assistance programs will increase the strain on government budgets.

Challenges beyond housing policy

There are also important ramifications for retirement incomes policy. The age pension system assumes most Australians will retire as outright home owners with no mortgage payments to meet. They can therefore get by on low age pensions. But growing numbers of older renters struggling to meet rental payments will call into question the adequacy of our age pension benefits.

There is an alternative scenario. By 2031, the superannuation system will have matured. Growing numbers of older renters – especially those with steady employment records – could accumulate big enough balances in defined contribution schemes to become home buyers in later life.

Dipping into superannuation savings to finance a home purchase is attractive on various fronts:

  1. it offers the prospect of secure and affordable housing in old age
  2. it helps with access to the age pension as owner-occupied housing assets are exempt from the age pension assets test and are not deemed to generate an income return under the income test
  3. under aged care assets test rules, the equity stored in what was an aged care client’s family home is either exempt from the assets test (if a spouse or dependent children is still living in the home), or subject to a cap ($165,271.20 as at March 20 2018), and is not assessed for age care deeming purposes.

On the other hand, superannuation balances are an assessable asset under age pension and aged care assets test provisions, as well as for age pension and aged care deeming purposes.

Should growing numbers of Australians approach retirement as renters these anomalies offer them potentially powerful motives to substitute assets away from superannuation and into owner-occupied housing in later life. But, in doing so, they could undermine a key objective of Australia’s superannuation guarantee – that of promoting financial independence and reducing reliance on public pensions in old age.

Authors: Rachel Ong ViforJ Professor of Economics, School of Economics, Finance and Property, Curtin University; Gavin Wood Emeritus Professor of Housing and Housing Studies, RMIT University; Melek Cigdem-Bayram Research Fellow, RMIT University

Fees for no service: how ASIC is trying to make corporate misconduct hurt

From The Conversation.

On September 6, 2018, the Australian Securities and Investments Commission launched proceedings against two arms of the National Australia Bank alleging a widespread and long standing practice of charging fees for no service.

An intriguing aspect of the action is that the claim acknowledges that the two firms have already agreed to pay back around A$87 million to the affected customers. So ASIC isn’t seeking compensation.

Instead, it wants declarations that the NAB subsidiaries breached the law and engaged in “misleading or deceptive” conduct under the ASIC Act and “false or misleading” conduct under the Corporations Act.

More than compensation

It is seeking penalties in respect of those breaches.

Declarations and penalties are important because they can inflict reputational damage.

This can send a powerful message to the rest of corporate Australia about the need to observe and respect the law, something that appears to have been missing in the financial sector to date.

Also, the greater the penalties imposed, the less financially attractive the behaviour becomes to other corporations, who, after all, are chiefly motivated by profit.

Penalties are typically low

However, to date it is arguable that the level of penalties sought by ASIC and imposed by the courts have been too low to act as an effective deterrent.

ASIC’s latest claim is a significant step forward.

It is seeking penalties that are likely to hurt, and as a result more likely to make a difference to corporate behaviour.

Its Concise Statement of Claim points to the purpose of its legislation which is to protect consumers and promote fair and efficient market economies.

In essence, it is asking the Federal Court to make orders directed at changing corporate practices that undermine that purpose.

Its challenge will be to persuade the court to take seriously the need for deterrence and for punitive penalties in addition to compensation.

Interestingly, it isn’t alleging that the NAB subsidiaries made misrepresentations dishonestly, knowingly or recklessly. Its focus is on “misleading” rather than “deceptive” conduct.

Dishonesty is hard to prove

This is likely to be because personal dishonesty is notoriously difficult to prove against corporations, whose human agents (employees, managers and the like) are often engaged in independent activities and are not be able to “connect the dots” about broader corporate dishonesty.

It might be time for the law to move away from questions of personal dishonesty and instead look at the objective nature of corporate behaviour. Longstanding practices and systems that are designed to and are inherently likely to mislead fall below the standards Australians expect, whether or not any of the individuals involved act dishonestly.

The case against the subsidiaries of NAB might provide the perfect opportunity for ASIC and the courts to take an important step in the right direction.

Author: Elise Bant Professor of Law, University of Melbourne

If the NBN and Snowy Hydro 2.0 were value for money, would we know?

From The Conversation.

When Malcolm Turnbull wrote to his electorate last week outlining his achievements he listed economic growth, jobs, same-sex marriage and a number of really big construction projects including the Western Sydney airport, Melbourne to Brisbane inland rail, and Snowy Hydro 2.0.

Some people will like those and other big projects, some will not. But, combined, they are going to cost more than $75 billion over the next ten years, so it is worth asking as a separate (threshold) question whether they are likely to be value for money.

For some of them, such as the National Broadband Network or the Gonski education reforms, its worth asking whether we might get better value if we spent even more. Turnbull’s downsizing of Labor’s original NBN plan made it cheaper, but not necessarily better.

For goods provided for a social purpose, value for money is about more than profit. But social returns often get left out of the equations because they are harder to measure. In a paper to be launched on Monday night as part of the University of NSW Grand Challenge on Inequality, we put forward a mechanism for considering both together.

How it’s done in the private sector

In the private sector any significant investment decision requires a summation of future costs and benefits discounted (cut) by a few per cent each year to accord with the reality that future costs and benefits matter less to us than immediate payoffs or costs.

If the project makes sense when the discount rate is set at or above the firm’s cost of capital (or hurdle rate of return) it is worth agreeing to. If its benefits are so far into the future that they only make sense with a very low discount rate it is said to be not worth proceeding with.

There is no reason why we can’t do the same for public sector projects as well, although assessing the benefits is complicated.

This is where the revolution in empirical economics and social science over the last two decades comes in.

How to measure what’s hard to measure

Consider a proposal to lengthen the school day by two hours. The costs are relatively easy to calculate: some more teacher time, slightly larger utility bills. Maybe some more pencils.

The benefits are more complex. Does a longer school day lead to better educational outcomes? What does that lead to late in life? How can we tell?

Modern social science has a well-refined method for answering these questions – the randomised controlled trial. Take 50 randomly selected schools and lengthen their school day, then compare the outcomes on standardised tests to a group of control schools. This reveals the true, causal impact of a longer school day on test scores.

Test scores are obviously not an end in themselves, but these can then be mapped all the way through into high school and post-secondary outcomes, and then into labour market and later life outcomes. This would naturally involve understanding the impact on earnings, but also outcomes such as crime and physical and mental health.

Answering these questions persuasively is what modern social science, armed with amazing data and great computing power, does extremely well. Just as a pharmaceutical trial gives one group, say, heart medication and another group a placebo, randomised trials can increasingly guide public policy.

Trying it out

Our study includes a demonstration of that sort of analysis on the money that will spent on the National Broadband Network and the National Disability Insurance Scheme.

We find that, taking into account social benefits such as telemedicine and the expansion of skills, the money being spent on the NBN will make sense even at a very high discount rate of 15.2%. Labor’s original more expensive fibre-to-the-premises model would have made sense at an even higher discount rate of 21.1%.

The benefits of the National Disability Insurance System are harder to measure. But, when account is taken of the value of reducing stress in carers and value of independence to those being cared for, it too becomes worthwhile at reasonable discount rates.

Politics, and political debate, will still need ultimately to control these sorts of investment decisions.

But the debate would be far better if we had a common language for assessing the relevant costs and benefits, and a more principled way of prioritising the competing demands on the public purse.

Authors: Rosalind Dixon Professor of Law, UNSW, Richard Holden Professor of Economics and PLuS Alliance Fellow, UNSW

Why AMP and IOOF went rogue

From The Conversation.

The ‘M’ in AMP stood for Mutual. Like another former mutual, IOOF, it was owned by, and set up to benefit, its members.

Both AMP and IOOF were presented with draft findings that they acted against the interests of their members at the conclusion of the round five hearings of the Royal Commission into Banking and Financial Services.

Although both are now purely commercial organisations, each has marketed itself as different from the others because of its cooperative history and founding ethos.

So what went wrong?

The early twentieth century German sociologist Max Weber argued the culture of an organisation was the product of its history, institutional structure and a consciously held shared ethos of its members. It was a different view to that of mainstream economists who these days assume organisations attempt to maximise profits and that of so-called behavioural economists who assume cognitive biases make decision making less rational.

In his book the Protestant Ethic and the Spirit of Capitalism Weber outlined the ways in which the ascetic sensibilities of the Protestant sects had influenced the growth of commerce in post reformation Northern Europe and 19th century America. They were concerned with thrift as much as with profit.

The ‘P’ in AMP stood for Providence. The AMP was set up to help its members save.

Disengagement, demutalisation and corporatisation changed AMP and IOOF forever

The move away from the government provision of services in the 1970s and Margaret Thatcher’s famous claim in the 1980s that there was “no such thing as society” saw a move away from mutuals and cooperatives in tandem with a move away from thrift.

In the 1990s AMP and IOOF ‘demutualised’, becoming companies listed on the sharemarket. Value that had been accumulated for generations was turned into tradable shares. Members who voted for the change were accused of intergenerational theft. Those who didn’t feel the least bit thrifty cashed-out by selling their shares.

Laws were changed to make it easier.

From a Weberian perspective the current governance problems of AMP and IOOF can in part be attributed to abandoning of the original founding ascetic ideal in favour of an unconstrained focus on profit maximisation for the benefit of shareholders rather than members.

The change in the culture of such organisations in Australia and overseas was accelerated by decisions to put independent directors and executives with “commercial savvy” on boards.

Turning back the clock won’t work

While Weber suggests organisations founded on a particular set of values can be highly disciplined the process of demutalisation/listing can create the conditions for misconduct. Appointing directors and outside managers who have no understanding of the mutual’s ideal allows an aggressive commercial culture to take root. The argument can be extended to former public sector corporations such as the Commonwealth Bank.

Despite calls to wind back the clock very few former cooperatives or public sector entities have. Once they have taken even a half step to corporatisation, as did Telstra, the Commonwealth Bank and the Murray Goulburn Cooperative, the die has been cast. The organisation and its ethos has changed.

Appointing high profile directors and executive directors with CVs that include community involvement is only going to paper over the change.

What might work

Mutual organisations are not misconduct and misstep free. They are vulnerable to ‘groupthink’ in which managers back each other up in order to aviod disharmony.

But commercial organisations that prioritise profits create incentives for managers to rationalise away breaking the law in order to lift short-term profitability or boost share prices and bonuses.

If he were alive today Weber might suggest subjecting such organisations to increased and more effective regulatory scrutiny and increased internal and external democratic accountability would be a necessary first step to improve governance.

Weber might very well argue the Banking Royal Commission itself is helping the community forge a new ethos grounded in community expectations about corporate conduct and purpose, buttressed by strong laws to back them up that will guide individual conduct and organisational governance.

Don’t believe what they say about inequality

From The Conversation.

If you were going to reduce a 150-page Productivity Commission examination of trends in Australian inequality to a few words, it would be nice if they weren’t “ALP inequality claims sunk”, or “Progressive article of faith blown up” or “Labor inequality myths busted by commission”.

The editorial in the Australian Financial Review of August 30 says questions about whether inequality is increasing are “abstract”, taught in universities as “an article of faith”, and a “political truncheon”.

Here I should disclose that I teach courses covering inequality as well as undertaking research on the topic. Also, I was one of the external referees for this week’s Productivity Commission report.

It adds to a growing pile of high quality research on trends in income distribution in Australia, including a recent Australian Council of Social Service (ACOSS) and University of New South Wales study using data from the Australian Bureau of Statistics (ABS) that provides an in-depth analysis of income and wealth inequality in 2015-16 and an analysis of trends since 2000.

Also released at the end of July was the latest HILDA Statistical Report that analyses how things have changed over time for individuals between 2001 and 2016.

The Productivity Commission survey takes the deliberately ambitious approach of assessing a wider range of outcomes than income, including indicators of household consumption and wealth, their components, and changes over time and in response to events such as transitions to work, divorce and retirement.

Rising inequality? A stocktake of the evidence, Productivity Commission 2018, CC BY

Much of the reporting seems to have misread the messages the survey and the Chairman’s speech to the National Press Club were trying to emphasise. For example, the editorial in the Financial Review argues the Commission’s report shows “economic growth has made everyone in Australia in every income group better off”.

Well, no, it doesn’t.

The finding that every income group has benefited from income growth should not be interpreted as meaning every person in Australia is better off. The discussion of mobility in the report makes the point that the incomes of households and individuals fall as well as rise.

Put simply, not everyone – in fact very few (about 1%) – stay in exactly the same place. Table 5.1 (page 96) shows more than 40% of the Australian population were in a lower income group in 2016 than they had been in 2001, for reasons ranging from retirement to disability to unemployment to family breakdown.

Productivity Commission, CC BY

Single adults on Newstart, although not the same people, have fallen down the income distribution over the past 25 years, from around the bottom 10% to the bottom 5%. As another example, someone who worked on a manufacturing production line until it was closed and then got a job as a sales assistant would be better paid than a sales assistant used to be but most certainly not better paid than they used to be. They would have little reason to believe the Financial Review.

And as the Commission was at pains to point out, the stabilisation and slight decline in overall inequality over the past decade is to a large extent the result of specific government decisions.

One of the most important was the one-off increase in age pensions by the Rudd government in 2009. The 2016 ACOSS report on poverty found the relative poverty rate (before housing costs) for people aged 65 and over fell from around 30% in 2007-08 to 11% in 2013-14, due to the “historic increase” in pension rates.

ABS income surveys show the average incomes of households headed by people aged 65 and over climbed by 16% in real terms between 2007-08 and 2015-16, while for the population as a whole the increase was about 3%. As a result, the average incomes of older households jumped from 69% to 78% of those of households generally.

While economic prosperity was needed to fund that increase, it didn’t automatically fund it. That needed deliberate government intervention.

In his speech releasing the report, Commission chairman Peter Harris specifically noted “growth alone is no guarantee against widening disparity between rich and poor”.

Some forms of poverty for children “have actually risen”.

The slide in inequality resulting from the increase in the age pension is likely to have disguised increases in inequality elsewhere.

According to the Bureau since the global financial crisis the number of workers who are underemployed – working part time and wanting more hours – has climbed from about 680,000 to 1.1 million; from 6.3% to 8.9% of the workforce.

And the ABS finds wage disparities have increased. The ratio of the earnings of a worker at the 90th percentile (earning more than 90% of workers) to the earnings of a worker at the tenth percentile grew from 7.75 times in 2008 to 8.24 times in 2016. This was due to widening wage differentials for both full-time and part-time workers and an increase in the proportion of part-time workers

We often hear about Australia as a “miracle economy” enjoying 27 years of economic growth. In fact, the Commission report (Figure 1.2 page 13) shows real net national disposable income per person – a better measure of individual economic well-being than GDP – actually fell in six out of the last 27 years.

Productivity Commission

The income survey data show an even more mixed record. The Our World in Data database shows that by 2003 the real income of the median Australian household was only about 5% higher in real terms than in 1989, while the second and third decile households – mainly headed by those on low wages and some on social security – were actually no better-off than in 1989, largely due to the effects of the early 1990s recession.

Virtually all of the increase in real disposable household incomes enjoyed since 1989 (or 1981 for that matter) came in one five-year period, between 2003 and 2008 during the first mining boom.

What is striking about Australia compared to other countries is that since the global financial crisis we have largely maintained the income lift from the boom.

Will we be blessed by another boom to pump up the figures? Or might we be less lucky?

Despite the way it’s been spun, the Commission’s main message is that in the decades ahead we will need both policies that generate economic growth and policies that ensure it’s well spread. One without the other could leave many of us worse off.

Author: Peter Whiteford, Professor, Crawford School of Public Policy, Australian National University