The Federal Government is about to attempt to revive the originally dubbed the personally controlled electronic health record (PCEHR) now rebadged myHealth Record.
The bottom line is that clinicians are reluctant to use the system - they don't see enough benefit compared to the cost. They also have very real concerns about putting too much of their own diagnostic and consultation detail on line as they see that as their "intellectual property" - and a reason why the patient will come back to them.
And that is quite valid, the health system would be better off if everyone had a good relationship with a GP. The problem is that is easier to do as you get older. The solution to it may lie in differential Medicare rebate rates - if the patient declares a practice as their primary GP then they get a higher rebate for that GP visit.
But the Government does control the purse strings for a lot of health care, and once the system becomes opt-out there is Government data that can and should be entered. The obvious ones are:
1. The fact of any visit to a doctor and the attendant item number included in the Medicare claim.
2. The details of any script filled. This can be captured by pharmacies and almost certainly is already captured.
3. The details of any pathology tests ordered.
4. Focus on the providers of practice management software to build the appropriate APIs for interfacing between the myHealth Record and the practitioner system.
5. The date and purpose of any hospitalisation in a public hospital.
5. The fact of any imaging from the medicare claim. Build APIs for the myHealth Record to access images held in practice records (subject to data limits).
The issue isn't about training, it is about forcing some of the data onto the system. This won't capture historic data (though the Medicare records might) - and I can't see GPs ever loading historic data. But as time goes on it becomes increasingly rich.
The really good value will come from capturing the referral letters and replies relating to specialist consultations. The easiest way to capture those is by myHealth Record being a convenient and secure means of communicating between practitioners.
The data set obtained is not only useful for the purposes of accurate history taking, but also as data sets in big data studies on health issues. Two contributors reporting on a workshop convened by Australia's Chief Scientist Ian Chubb identified this "big data" analysis as a critical pathway to making the health system more efficient and equitable.
Sally Redman wrote "Australia’s excellent and world-leading big health data sets – including large, long-term research cohorts and routinely collected information such as hospital and Medicare data records – will be central to this effort."
James McCluskey wrote "There is an agreed need for electronic medical records across the nation to simplify patient interactions with the health system and drive new research. Indeed, 'Big Data' in health needs to be better harnessed to inform public health policy and practice"
Jane Gunn wrote "Clinical data should be used to inform efforts to improve the system. Currently we have no standardised system for recording diagnoses and management across separate health care settings. This makes it extremely difficult to keep track of what is happening to people as they interact with the health care system."
The benefits of these health records are so great we need to stop pussy-footing around on "permission" and wherever possible make data capture the default.
Tuesday, July 7, 2015
Monday, July 6, 2015
Where is the NBN Co Corporate Plan?
In my AFR column that appeared in print today I noted that it is 34 months since a full NBN Co Corporate Plan was released.
I just thought I might touch on a bit of history here on why it has been so long.
Prior to the 2013 election NBN Co had submitted a 2013-16 plan, but the Government asked that the plan be reviewed in the light of some current issues. One in particular was the construction delay caused by the halt to Telstra remediation while working with asbestos training and work practices were revised and implemented.
In the 'NBN Debate' conducted on Lateline on 12 August 2013 between Malcolm Turnbull and Anthony Albanese the now Minister asserted the then Deputy Prime Minister was sitting on the plan and wouldn't release it to the public.
Later in the same program a very agitated Mr Turnbull was far more direct saying that the company had been told to keep the "draft" stamp on it because there was a "time bomb ticking away."
Unfortunately Labor wasn't re-elected and so no 2013-16 Corporate Plan was ever published.
However, both the plan that had been originally submitted as referred to by Mr Turnbull and the plan submitted to the Minister subsequently have since been leaked. Most importantly Mr Turnbull chose not only not to release either version of this plan, but instructed his strategic review to work off the 2012-15 Corporate Plan. (An archive on the history of the NBN including Corporate Plans is being developed here.)
Mr Turnbull was particularly aggrieved by the idea that Corporate Plans might be received in "draft" and took to Twitter two days later to record his "outrage".
Mr Turnbull released neither version of the 2013-16 Corporate Plan. The 2014-17 Corporate Plan was released in November 2014. In doing so NBN Co heavily qualified the plan saying:
NBN Co's officers do not give any guarantee ... that the results, performance or achievements expressed or implied by the FY2015 estimates will actually occur. NBN Co is not yet in a position to generate projections with a reasonable level of confidence for FY2016 and FY2017,
The shareholder Ministers also noted the limitations of the 2014-17 Plan, saying:
Given the transitional nature of the 2014-17 Corporate Plan and various ongoing activities (such as negotiation of amendments to the NBN Co/Telstra Definitive Agreements) which will be material inputs to future planning, the forecasts, analysis and risk assessments in the 2015-18 Corporate Plan will be crucial.
As the company advises, it is not in a position to generate forecasts with a reasonable level of confidence beyond the current 12 month business cycle and as such anything beyond that are heavily premised on long-range assumptions.
The Corporate Plan is important. The now Minister thought so when he demanded the original Corporate Plan be published in full. He thought so in the NBN Debate on Lateline.
He also thought so four months after that debate when on 7:30 on 12 December 2013 he said:
We have got to stop the spin. We've got to start telling the truth and have some numbers and forecasts.
The 2015-18 Corporate Plan is the first time NBN Co will make firm commitments about anything to do with the Multi-Technology Mix. Almost everything delivered in FY2015 has been the continuation of the original NBN model.
The plan is already with the Minister. The Minister previously vigorously objected to the idea that a plan other than the final plan might be received by Government. The Minister previously failed to release either version of the 2013-16 Corporate Plan despite insisting on its publication during the election campaign (see Note).
The SSCNBN in its Second Interim Report called for the release of the full plan when finalised. The Government Response is that Government supports the recommendation and notes the Statement of Expectations from the Australian Government to NBN Co requires the preparation
of annual corporate plans for the purpose of “consideration by Government and subsequent public
release”.
More recently the Senate passed a resolution (known as a return to order) on 17 June requiring the tabling of:
A complete and unredacted copy of the NBN Corporate Plan 2015 18, prepared by NBN under the Public Governance, Performance and Accountability Act 2013 and applicable rules and guidelines, and containing each and every financial and deployment forecast identified by NBN and the Department of Communications during the 2015 Budget Estimates hearings as being contained in the NBN 2015-18 Corporate Plan.
The response from the Minister for Finance was:
One observer noted "Fine sentiments, but there's just one small problem: the 2015-2018 Corporate Plan doesn't exist." The writer referred us to the Hansard from Budget Estimates.
There Deputy Secretary in the Department of Communications, Mr Robinson, noted "The corporate plan is still being settled. All the processes get a draft at the end of May and the government considers it and talks to the company. There may be changes in timing of debt associated with that, but it has not been settled."
The language, however, becomes fun in itself as this exchange showed:
Senator CONROY: When do you expect to receive the final draft? Today is 28 May so it does not leave a lot of days.
Mr Robinson: GBE guidelines call for a draft corporate plan by the end of May, and we expect one.
Senator CONROY: A final one?
Mr Robinson: A final draft, yes.
Senator CONROY: Not another iteration? It will be their final one.
Mr Robinson: It is a draft in discussion with the government, but yes.
On the basis of the Minister's earlier comments about drafts it wasn't perhaps that unreasonable to ask for the Corporate Plan. The motion also asked for an un-redacted version of the Strategic Review, but that was also denied.
The questions that Senator Conroy was asking about the Corporate Plan indicate that this plan will be like the 2010 Corporate Plan in that it will still be premised on detail of Government policy.
NBN watchers will wait in anticipation of the Corporate Plan. As a marker the only real Corporate Plan released so far was on 8 August 2012. It was 12 August 2013 when Minister Turnbull aggressively demanded the next one. That should be when we get to see it.
Note: In his outburst on the Corporate Plan in the Lateline Debate Malcolm Turnbull said "You've got a time bomb ticking away. You've got a confession from the company that they're failing and you don't want to let the public know." Mr Albanese had previously repeated that the project was on time and on budget, and under questioning that it would be delivered by FY2021 for $37.4 Billion in Capex. The Corporate Plan that Mr Albanese was supposedly "sitting on" did exactly what Mr Albanese claimed. It did show a $1.6B increase in peak funding due to delays at the start of the roll-out.
That the Government was justified in not relying on that plan is revealed in the next version of the plan that was only considered by the NBN Co Board after the election. It may never have been formally submitted to the Minister but comments about targets indicates the Minister was aware of at least some of its contents. That next version moved the completion date 6 months because of the suspension due to asbestos, it maintained Capex but reduced peak funding by $0.8 billion.
Of course, Mr Turnbull maintains that these weren't achievable.
But in the Lateline interview he also said of his $94 billion estimate:
Now, those four assumptions about revenues, cost of construction, wireless-only households and time are very reasonable ones. We put them out more than four months ago and nobody has been able to say that our assumptions are unreasonable, or, that given those assumptions, you would not end up with a $94 billion figure. And you'd think if they were wrong, in more than four months, the Government or NBN Co or somebody would've said, "No, Malcolm, you've got that number wrong." No-one has said that.
He is right, in large part because Labor didn't use the company management to do political work. But the company did eventually tell him he got it wrong - in the Strategic Review. And as the First Interim Report of the Senate select Committee on the NBN said the most accurate forecast was the cost of the Radically Redesigned model without assuming lower revenues and without assuming limited numbers of simultaneous work fronts. In brief, the Strategic Review largely confirmed the NBN Co Corporate Plans.
I just thought I might touch on a bit of history here on why it has been so long.
Prior to the 2013 election NBN Co had submitted a 2013-16 plan, but the Government asked that the plan be reviewed in the light of some current issues. One in particular was the construction delay caused by the halt to Telstra remediation while working with asbestos training and work practices were revised and implemented.
In the 'NBN Debate' conducted on Lateline on 12 August 2013 between Malcolm Turnbull and Anthony Albanese the now Minister asserted the then Deputy Prime Minister was sitting on the plan and wouldn't release it to the public.
However, both the plan that had been originally submitted as referred to by Mr Turnbull and the plan submitted to the Minister subsequently have since been leaked. Most importantly Mr Turnbull chose not only not to release either version of this plan, but instructed his strategic review to work off the 2012-15 Corporate Plan. (An archive on the history of the NBN including Corporate Plans is being developed here.)
Mr Turnbull was particularly aggrieved by the idea that Corporate Plans might be received in "draft" and took to Twitter two days later to record his "outrage".
Mr Turnbull released neither version of the 2013-16 Corporate Plan. The 2014-17 Corporate Plan was released in November 2014. In doing so NBN Co heavily qualified the plan saying:
NBN Co's officers do not give any guarantee ... that the results, performance or achievements expressed or implied by the FY2015 estimates will actually occur. NBN Co is not yet in a position to generate projections with a reasonable level of confidence for FY2016 and FY2017,
The shareholder Ministers also noted the limitations of the 2014-17 Plan, saying:
Given the transitional nature of the 2014-17 Corporate Plan and various ongoing activities (such as negotiation of amendments to the NBN Co/Telstra Definitive Agreements) which will be material inputs to future planning, the forecasts, analysis and risk assessments in the 2015-18 Corporate Plan will be crucial.
As the company advises, it is not in a position to generate forecasts with a reasonable level of confidence beyond the current 12 month business cycle and as such anything beyond that are heavily premised on long-range assumptions.
The Corporate Plan is important. The now Minister thought so when he demanded the original Corporate Plan be published in full. He thought so in the NBN Debate on Lateline.
He also thought so four months after that debate when on 7:30 on 12 December 2013 he said:
We have got to stop the spin. We've got to start telling the truth and have some numbers and forecasts.
The 2015-18 Corporate Plan is the first time NBN Co will make firm commitments about anything to do with the Multi-Technology Mix. Almost everything delivered in FY2015 has been the continuation of the original NBN model.
The plan is already with the Minister. The Minister previously vigorously objected to the idea that a plan other than the final plan might be received by Government. The Minister previously failed to release either version of the 2013-16 Corporate Plan despite insisting on its publication during the election campaign (see Note).
The SSCNBN in its Second Interim Report called for the release of the full plan when finalised. The Government Response is that Government supports the recommendation and notes the Statement of Expectations from the Australian Government to NBN Co requires the preparation
of annual corporate plans for the purpose of “consideration by Government and subsequent public
release”.
More recently the Senate passed a resolution (known as a return to order) on 17 June requiring the tabling of:
A complete and unredacted copy of the NBN Corporate Plan 2015 18, prepared by NBN under the Public Governance, Performance and Accountability Act 2013 and applicable rules and guidelines, and containing each and every financial and deployment forecast identified by NBN and the Department of Communications during the 2015 Budget Estimates hearings as being contained in the NBN 2015-18 Corporate Plan.
The response from the Minister for Finance was:
There Deputy Secretary in the Department of Communications, Mr Robinson, noted "The corporate plan is still being settled. All the processes get a draft at the end of May and the government considers it and talks to the company. There may be changes in timing of debt associated with that, but it has not been settled."
The language, however, becomes fun in itself as this exchange showed:
Senator CONROY: When do you expect to receive the final draft? Today is 28 May so it does not leave a lot of days.
Mr Robinson: GBE guidelines call for a draft corporate plan by the end of May, and we expect one.
Senator CONROY: A final one?
Mr Robinson: A final draft, yes.
Senator CONROY: Not another iteration? It will be their final one.
Mr Robinson: It is a draft in discussion with the government, but yes.
On the basis of the Minister's earlier comments about drafts it wasn't perhaps that unreasonable to ask for the Corporate Plan. The motion also asked for an un-redacted version of the Strategic Review, but that was also denied.
The questions that Senator Conroy was asking about the Corporate Plan indicate that this plan will be like the 2010 Corporate Plan in that it will still be premised on detail of Government policy.
NBN watchers will wait in anticipation of the Corporate Plan. As a marker the only real Corporate Plan released so far was on 8 August 2012. It was 12 August 2013 when Minister Turnbull aggressively demanded the next one. That should be when we get to see it.
Note: In his outburst on the Corporate Plan in the Lateline Debate Malcolm Turnbull said "You've got a time bomb ticking away. You've got a confession from the company that they're failing and you don't want to let the public know." Mr Albanese had previously repeated that the project was on time and on budget, and under questioning that it would be delivered by FY2021 for $37.4 Billion in Capex. The Corporate Plan that Mr Albanese was supposedly "sitting on" did exactly what Mr Albanese claimed. It did show a $1.6B increase in peak funding due to delays at the start of the roll-out.
That the Government was justified in not relying on that plan is revealed in the next version of the plan that was only considered by the NBN Co Board after the election. It may never have been formally submitted to the Minister but comments about targets indicates the Minister was aware of at least some of its contents. That next version moved the completion date 6 months because of the suspension due to asbestos, it maintained Capex but reduced peak funding by $0.8 billion.
Of course, Mr Turnbull maintains that these weren't achievable.
But in the Lateline interview he also said of his $94 billion estimate:
Now, those four assumptions about revenues, cost of construction, wireless-only households and time are very reasonable ones. We put them out more than four months ago and nobody has been able to say that our assumptions are unreasonable, or, that given those assumptions, you would not end up with a $94 billion figure. And you'd think if they were wrong, in more than four months, the Government or NBN Co or somebody would've said, "No, Malcolm, you've got that number wrong." No-one has said that.
He is right, in large part because Labor didn't use the company management to do political work. But the company did eventually tell him he got it wrong - in the Strategic Review. And as the First Interim Report of the Senate select Committee on the NBN said the most accurate forecast was the cost of the Radically Redesigned model without assuming lower revenues and without assuming limited numbers of simultaneous work fronts. In brief, the Strategic Review largely confirmed the NBN Co Corporate Plans.
Monday, June 29, 2015
The more significant gaps in Australia's innovation system
This week I had a column published in the AFR in which I noted that what is missing in Australia's start-up funding marketplace is risk takers, the lack of risk takers then results in some of the best opportunities looking elsewhere, and thus the return for start-up investing is low.
The AFR also reported on a debate on innovation at The Australian Financial Review/Crawford Australian Leadership Forum in Canberra. In a different take on the financing issue former institutional investor Doug McTaggart told the forum that there was plenty of money available for innovative business ideas, "But we have a huge gap in term of capable experienced personnel who can take an idea from the cradle to the early stages of commercialisation. The US has them in spades."
These "capable experienced personnel" seem to be the magic missing ingredient. Perhaps McTaggart and I are both right - but the important missing part of the skill set of the personnel we bring to the task of taking ideas to commercialisation is the willingness to fail.
The importance of embracing failure had featured in another AFR column reporting on research by Experian. Experian Australia & New Zealand managing director John Merakovsky said, "The key thing, which was pleasantly surprising in the research, is the emergence of, particularly in the progressives, of some acceptance and tolerance of failure. The idea of one big strategy without getting market feedback and getting it right is extremely risky, but being able to go down this path, try things, fail, try things, win, is really important."
The importance of being prepared to fail isn't new in management literature. It was one of the concepts promoted by Peters and Waterman in In Search of Excellence, and captured in the phrase "Ready, Fire, Aim!"
(source see slide 11 here)
At the same Leadership Forum, former IBM Australia CEO Andrew Stevens said "I don't think we have a disruptor mindset" and that as a nation we need to understand this as an issue about jobs "This issue of future jobs for our young people…is one of the central issues for our generation...automation and autonomous systems will have an impact." CISCO's Irving Tan (predictably) said the next wave of digitisation would involve the industrialisation of the internet caused by connecting robots and sensors.
And maybe between these two we might also find our path to experimentation and failure. Disruption isn't a goal directed activity solved by deductive reasoning, it is a creative task that uses skills in "lateral thinking." You learn by doing. As Gretzky says you miss 100% of the shots at goal you never take. But also, to get better at shooting goals you take lots of shots at goal (and OTHER training).
Elsewhere former chief futurist at CISCO Dave Evans wrote "Here's what policymakers need to understand: Each individual device hooked up to the Internet is a kind of experiment, and any given product might succeed or fail. But in aggregate, this is an advance so large it's hard to grasp as a single thing."
Finally though we have to confront the question of whether there is a problem, more specifically does digital disruption really create growth and jobs. That was the question the AFR's Jennifer Hewitt posed after this year's Leadership Forum. Hewitt at least believed that we should give it a go, concluding "And although it's true no one can predict the relative significance of the internet compared with say, electricity, it seems reasonable to take out a form of national insurance policy."
But interestingly that question featured at last year's forum and I answered it almost a year ago in the pages of the AFR. In brief, the digital revolution is only one of the factors influencing our growth rate; its impact is masked by factors pulling growth down, especially growing inequality.
One of the themes of my writing here and elsewhere is "what can Government do to drive Australia in benefiting as a digital economy." But often the question is also "what can industry do."
A separate item in the AFR this week got me very angry. Under the heading "Research students must be trained for jobs in industry" the executive director of the Australian Technology Network makes a case for the Industry Doctoral Training Centre in Mathematics and Statistics model. It teams each PhD student with an industry partner to work on an industry problem applying mathematics and statistics. We are told that students also receive course work in technical and business skills such as leadership, communication, project management and commercialisation. The national student group also gets brought together regularly for conferences and networking events.
This is all very interesting, but the piece is otherwise confused. On one hand industry employs only a third of Australia's researchers, but we are told the PhD program doesn't train researchers for jobs in industry where "many of them will be employed." I get particularly annoyed when the article cites the Global Innovation Index and Australia's "innovation efficiency rank" of 81st as some kind of validation that the "problem" is all about not having researchers "industry ready." My anger is two-fold.
Firstly because the GII is a piece of unscientific gobbledygook (this is true of almost all published Indices - see this discussion that refers to the ITU ICT Development Index). It's starting premise is that the number of patents is the important output. It correlates the index to GDP/capita but never attempts a correlation to growth. The former correlation is to be expected - rich countries spend more on inputs like education, the causal flow is from wealth to investment in innovation. The valuable question is to devise an innovation index that has predictive power on growth!
Secondly because it makes the huge assumption that industry doesn't employ researchers because they are not "industry ready". The reality is that industry simply has no interest in research in Australia, but thinks it does. The latter point comes from the difference between Australian businesses self-assessment of university research collaboration as measured by the WEF Global Competitiveness Index and the data provided by the OECD (see note below).
Industry is forever banging on about students from first degrees not being "job ready", this pitch about research degrees is just another variant. What we need is a national conversation about the difference between education and training. The former prepares the individual by providing base level knowledge and skills ready to be trained. Medical practitioners provide the best model - the degree provides the foundation, two years in hospitals followed by specialist (including GP) "training" creates the skilled practitioner. But that is only the start of a career that demands life-long learning.
So - the gaps in our system - a lack of risk takers and managers who know how to fail fast, a jaundiced view of ICT, and industry that has a mistaken belief about its own participation in research and training.
Note:
Australia is rated last in the OECD for firms collaborating on innovation with higher education or public research institutions both SME and large firms. The World Economic Forum Global Competitiveness Index (I have used the 2014-15 report) includes as one of its indicators of "innovation" (12.04) "University-industry collaboration on R&D" which is derived from a survey question "In your country, to what extent do business and universities collaborate on research and development (R&D)? [1 = do not collaborate at all; 7 = collaborate extensively] |
2012–13 weighted average". To derive a single rank for the OECD the expenditure in the OECD data is weighted 70% to large firms and 30% to small as this weighting generated the highest correlation between the two ranks. Australia is ranked 33 out of 33 on the OECD data but its managers rank itself 15th in the OECD. (Note the OECD data is collaboration expenditure as a percentage of product i.e. revenue)
The AFR also reported on a debate on innovation at The Australian Financial Review/Crawford Australian Leadership Forum in Canberra. In a different take on the financing issue former institutional investor Doug McTaggart told the forum that there was plenty of money available for innovative business ideas, "But we have a huge gap in term of capable experienced personnel who can take an idea from the cradle to the early stages of commercialisation. The US has them in spades."
These "capable experienced personnel" seem to be the magic missing ingredient. Perhaps McTaggart and I are both right - but the important missing part of the skill set of the personnel we bring to the task of taking ideas to commercialisation is the willingness to fail.
The importance of embracing failure had featured in another AFR column reporting on research by Experian. Experian Australia & New Zealand managing director John Merakovsky said, "The key thing, which was pleasantly surprising in the research, is the emergence of, particularly in the progressives, of some acceptance and tolerance of failure. The idea of one big strategy without getting market feedback and getting it right is extremely risky, but being able to go down this path, try things, fail, try things, win, is really important."
The importance of being prepared to fail isn't new in management literature. It was one of the concepts promoted by Peters and Waterman in In Search of Excellence, and captured in the phrase "Ready, Fire, Aim!"
(source see slide 11 here)
At the same Leadership Forum, former IBM Australia CEO Andrew Stevens said "I don't think we have a disruptor mindset" and that as a nation we need to understand this as an issue about jobs "This issue of future jobs for our young people…is one of the central issues for our generation...automation and autonomous systems will have an impact." CISCO's Irving Tan (predictably) said the next wave of digitisation would involve the industrialisation of the internet caused by connecting robots and sensors.
And maybe between these two we might also find our path to experimentation and failure. Disruption isn't a goal directed activity solved by deductive reasoning, it is a creative task that uses skills in "lateral thinking." You learn by doing. As Gretzky says you miss 100% of the shots at goal you never take. But also, to get better at shooting goals you take lots of shots at goal (and OTHER training).
Elsewhere former chief futurist at CISCO Dave Evans wrote "Here's what policymakers need to understand: Each individual device hooked up to the Internet is a kind of experiment, and any given product might succeed or fail. But in aggregate, this is an advance so large it's hard to grasp as a single thing."
Finally though we have to confront the question of whether there is a problem, more specifically does digital disruption really create growth and jobs. That was the question the AFR's Jennifer Hewitt posed after this year's Leadership Forum. Hewitt at least believed that we should give it a go, concluding "And although it's true no one can predict the relative significance of the internet compared with say, electricity, it seems reasonable to take out a form of national insurance policy."
But interestingly that question featured at last year's forum and I answered it almost a year ago in the pages of the AFR. In brief, the digital revolution is only one of the factors influencing our growth rate; its impact is masked by factors pulling growth down, especially growing inequality.
One of the themes of my writing here and elsewhere is "what can Government do to drive Australia in benefiting as a digital economy." But often the question is also "what can industry do."
A separate item in the AFR this week got me very angry. Under the heading "Research students must be trained for jobs in industry" the executive director of the Australian Technology Network makes a case for the Industry Doctoral Training Centre in Mathematics and Statistics model. It teams each PhD student with an industry partner to work on an industry problem applying mathematics and statistics. We are told that students also receive course work in technical and business skills such as leadership, communication, project management and commercialisation. The national student group also gets brought together regularly for conferences and networking events.
This is all very interesting, but the piece is otherwise confused. On one hand industry employs only a third of Australia's researchers, but we are told the PhD program doesn't train researchers for jobs in industry where "many of them will be employed." I get particularly annoyed when the article cites the Global Innovation Index and Australia's "innovation efficiency rank" of 81st as some kind of validation that the "problem" is all about not having researchers "industry ready." My anger is two-fold.
Firstly because the GII is a piece of unscientific gobbledygook (this is true of almost all published Indices - see this discussion that refers to the ITU ICT Development Index). It's starting premise is that the number of patents is the important output. It correlates the index to GDP/capita but never attempts a correlation to growth. The former correlation is to be expected - rich countries spend more on inputs like education, the causal flow is from wealth to investment in innovation. The valuable question is to devise an innovation index that has predictive power on growth!
Secondly because it makes the huge assumption that industry doesn't employ researchers because they are not "industry ready". The reality is that industry simply has no interest in research in Australia, but thinks it does. The latter point comes from the difference between Australian businesses self-assessment of university research collaboration as measured by the WEF Global Competitiveness Index and the data provided by the OECD (see note below).
Industry is forever banging on about students from first degrees not being "job ready", this pitch about research degrees is just another variant. What we need is a national conversation about the difference between education and training. The former prepares the individual by providing base level knowledge and skills ready to be trained. Medical practitioners provide the best model - the degree provides the foundation, two years in hospitals followed by specialist (including GP) "training" creates the skilled practitioner. But that is only the start of a career that demands life-long learning.
So - the gaps in our system - a lack of risk takers and managers who know how to fail fast, a jaundiced view of ICT, and industry that has a mistaken belief about its own participation in research and training.
Note:
Australia is rated last in the OECD for firms collaborating on innovation with higher education or public research institutions both SME and large firms. The World Economic Forum Global Competitiveness Index (I have used the 2014-15 report) includes as one of its indicators of "innovation" (12.04) "University-industry collaboration on R&D" which is derived from a survey question "In your country, to what extent do business and universities collaborate on research and development (R&D)? [1 = do not collaborate at all; 7 = collaborate extensively] |
2012–13 weighted average". To derive a single rank for the OECD the expenditure in the OECD data is weighted 70% to large firms and 30% to small as this weighting generated the highest correlation between the two ranks. Australia is ranked 33 out of 33 on the OECD data but its managers rank itself 15th in the OECD. (Note the OECD data is collaboration expenditure as a percentage of product i.e. revenue)
Monday, June 22, 2015
Will aerial cable rules plague the NBN?
The proposal announced last week to amend the Low Impact Facilities Determination (the LIFD) to increase the size of cable used for aerial telecommunications deployment raises the question of whether the NBN will face a new round of controversy.
People of a certain age will recall the public consternation that followed the deployment of the Optus and Telstra HFC networks. This consternation received a bit of a public revival when NBN Co first advised that it might include an aerial component in its rollout. (An example including a summary of the history is provided in this Senate committee submission by Ross Kelso and Peter Downey). See also this story about Haberfield.
Dr Kelso says of himself that he "successfully lobbied on behalf of local government for major changes to the Telecommunications Act and associated Codes for reduction of carrier powers and immunities." Dr Kelso also refers to a report for the Department "Putting cables underground : report of the review of options for placing facilities underground, as required under clause 49 of schedule 3 of the Telecommunications Act 1997 / Putting Cables Underground Working Group" which unfortunately doesn't seem to have been captured in the appropriate archiving of the Department website.
Those earlier concerns about NBN aerial deployment were assuaged by the agreements with Telstra and Optus. The Telstra agreement provided access to Telstra infrastructure and reduced the potential use of aerial deployment. More importantly the agreement with Optus saw one of the two HFC networks being completely retired - which would have included its removal. So Labor's NBN was going to reduce the amount of aerial infrastructure over all.
The decision to retain BOTH HFC networks under the MTM deployment already means that there was to be no improvement. The proposal introduced last week means it will get worse.
The consultation paper outlines exactly how it is that the MTM has introduced this problem:
In limited circumstances, such as when NBN Co adds an extra cable to an existing 42mm bundle, the diameter of the HFC cable bundle will be 48mm. Typically, HFC cable bundles will be much smaller than this. In addition, NBN Co has advised that in very limited circumstances, individual copper cables of up to 40mm in diameter will need to be used to augment the copper network for FTTN. Further guidance on the limited use of such cabling will be provided in the Explanatory Statement to the amending Determination and other documents as required.
The question is how much attention will be paid to the issue BEFORE the LIFD is amended, or how much it will simply be after the infrastructure is augmented.
Certainly one politician has previously sought to make the greater use of aerial infrastructure for communications an issue - that is the Parliamentary Secretary to the Minister for Communications, Paul Fletcher. The video below is from his original by-election campaign in Bradfield.
But Mr Fletcher came to this late.
When the Optus cable was being deployed the Member for Warringah was highly vocal on the topic.
Here are some excerpts.
Grievance Debate (“Information Superhighway” ) 18 September 1995
I have to say that I am not against pay TV. I just think that pay TV, if delivered by cable, should be delivered by cable underground. It should be delivered by cables which enhance our life and do not detract from our life. We have more than enough clutter overhead. We have more than enough space junk in our cities already; we do not need any more to deliver us pay TV via cable.
….
This is an absolute outrage. It shows that this system of rules that the government has in place is completely meaningless. It shows that Austel is a watchdog which does not even bark let alone bite. It shows the need for the government to get serious about telecommunications regulations straight away.
Statements by Members, 6 March 1995
I support the introduction of pay TV but not at the expense of the local environment. Telecommunication companies now propose to deliver pay TV by cables draped from existing power poles: that is, cables of the diameter of a one-dollar coin draped from pole to pole with a signal amplifier the size of a briefcase suspended from the wire every 200 metres. Maybe some communities will be prepared to accept overhead cabling even more cluttered and ugly than it is at present, but I suspect that the vast majority would object to having the information superhighway dangling overhead right outside their front doors.
Adjournment 27 November 1995
I am not here to apportion blame; I am here to appeal for reason. Telstra say they cannot give Optus access to their wires at anything other than what Optus think is an extortionate cost. Optus say that they cannot afford to go underground. Sydney Electricity say they cannot put all their wires underground because the profits have to be high and the prices have to be low. If that is economic rationalism, it does not make much sense to me.
I call for a local summit of Sydney Electricity, Optus and Telstra, in my electorate, to try to ensure that 21st century technology is not delivered by 19th century means.
The Member for Warringah kept at it when the Coalition formed Government in 1996.
Second Reading Appropriation Bill no.1 10 October 1996
Earlier this week in my electorate corporate rights and environmental concerns came into head-on collision. Optus commenced its cable rollout in the municipality of Manly and many of my constituents feel that they are now threatened with a form of technological home invasion. The reason for this is the former government's telecommunications regime, which put telecommunications carriers in effect above the law. You and I cannot put a flagpole in our backyard without getting council permission first, yet these carriers can do virtually what they like. They can put a 30-metre-high phone tower virtually wherever they want.
…
I commend the new Minister for Communications and the Arts, Senator Alston, for his draft telecommunications national code, which gives councils significantly more say over infrastructure. . ...It is very important that we have a national plan to ensure that, sooner or later, all the overhead infrastructure goes underground. ...
It is my understanding that the minister is looking into the possibility of a national burial fund for overhead infrastructure and that he is considering bringing the various parties to this issue together to see whether a sensible compromise can be hammered out. I strongly support those efforts and they cannot happen a moment too soon for the people in my electorate.
I wonder what position Mr Fletcher and Mr Abbott will take on the proposed amendment to the LIFD!
People of a certain age will recall the public consternation that followed the deployment of the Optus and Telstra HFC networks. This consternation received a bit of a public revival when NBN Co first advised that it might include an aerial component in its rollout. (An example including a summary of the history is provided in this Senate committee submission by Ross Kelso and Peter Downey). See also this story about Haberfield.
Dr Kelso says of himself that he "successfully lobbied on behalf of local government for major changes to the Telecommunications Act and associated Codes for reduction of carrier powers and immunities." Dr Kelso also refers to a report for the Department "Putting cables underground : report of the review of options for placing facilities underground, as required under clause 49 of schedule 3 of the Telecommunications Act 1997 / Putting Cables Underground Working Group" which unfortunately doesn't seem to have been captured in the appropriate archiving of the Department website.
Those earlier concerns about NBN aerial deployment were assuaged by the agreements with Telstra and Optus. The Telstra agreement provided access to Telstra infrastructure and reduced the potential use of aerial deployment. More importantly the agreement with Optus saw one of the two HFC networks being completely retired - which would have included its removal. So Labor's NBN was going to reduce the amount of aerial infrastructure over all.
The decision to retain BOTH HFC networks under the MTM deployment already means that there was to be no improvement. The proposal introduced last week means it will get worse.
The consultation paper outlines exactly how it is that the MTM has introduced this problem:
In limited circumstances, such as when NBN Co adds an extra cable to an existing 42mm bundle, the diameter of the HFC cable bundle will be 48mm. Typically, HFC cable bundles will be much smaller than this. In addition, NBN Co has advised that in very limited circumstances, individual copper cables of up to 40mm in diameter will need to be used to augment the copper network for FTTN. Further guidance on the limited use of such cabling will be provided in the Explanatory Statement to the amending Determination and other documents as required.
The question is how much attention will be paid to the issue BEFORE the LIFD is amended, or how much it will simply be after the infrastructure is augmented.
Certainly one politician has previously sought to make the greater use of aerial infrastructure for communications an issue - that is the Parliamentary Secretary to the Minister for Communications, Paul Fletcher. The video below is from his original by-election campaign in Bradfield.
But Mr Fletcher came to this late.
When the Optus cable was being deployed the Member for Warringah was highly vocal on the topic.
Here are some excerpts.
Grievance Debate (“Information Superhighway” ) 18 September 1995
I have to say that I am not against pay TV. I just think that pay TV, if delivered by cable, should be delivered by cable underground. It should be delivered by cables which enhance our life and do not detract from our life. We have more than enough clutter overhead. We have more than enough space junk in our cities already; we do not need any more to deliver us pay TV via cable.
….
This is an absolute outrage. It shows that this system of rules that the government has in place is completely meaningless. It shows that Austel is a watchdog which does not even bark let alone bite. It shows the need for the government to get serious about telecommunications regulations straight away.
Statements by Members, 6 March 1995
I support the introduction of pay TV but not at the expense of the local environment. Telecommunication companies now propose to deliver pay TV by cables draped from existing power poles: that is, cables of the diameter of a one-dollar coin draped from pole to pole with a signal amplifier the size of a briefcase suspended from the wire every 200 metres. Maybe some communities will be prepared to accept overhead cabling even more cluttered and ugly than it is at present, but I suspect that the vast majority would object to having the information superhighway dangling overhead right outside their front doors.
Adjournment 27 November 1995
I am not here to apportion blame; I am here to appeal for reason. Telstra say they cannot give Optus access to their wires at anything other than what Optus think is an extortionate cost. Optus say that they cannot afford to go underground. Sydney Electricity say they cannot put all their wires underground because the profits have to be high and the prices have to be low. If that is economic rationalism, it does not make much sense to me.
I call for a local summit of Sydney Electricity, Optus and Telstra, in my electorate, to try to ensure that 21st century technology is not delivered by 19th century means.
The Member for Warringah kept at it when the Coalition formed Government in 1996.
Second Reading Appropriation Bill no.1 10 October 1996
Earlier this week in my electorate corporate rights and environmental concerns came into head-on collision. Optus commenced its cable rollout in the municipality of Manly and many of my constituents feel that they are now threatened with a form of technological home invasion. The reason for this is the former government's telecommunications regime, which put telecommunications carriers in effect above the law. You and I cannot put a flagpole in our backyard without getting council permission first, yet these carriers can do virtually what they like. They can put a 30-metre-high phone tower virtually wherever they want.
…
I commend the new Minister for Communications and the Arts, Senator Alston, for his draft telecommunications national code, which gives councils significantly more say over infrastructure. . ...It is very important that we have a national plan to ensure that, sooner or later, all the overhead infrastructure goes underground. ...
It is my understanding that the minister is looking into the possibility of a national burial fund for overhead infrastructure and that he is considering bringing the various parties to this issue together to see whether a sensible compromise can be hammered out. I strongly support those efforts and they cannot happen a moment too soon for the people in my electorate.
I wonder what position Mr Fletcher and Mr Abbott will take on the proposed amendment to the LIFD!
Wednesday, June 10, 2015
RBA Governor Glenn Stevens bells the cat on infrastructure policy
Many thanks to Bernard Keane and Glen Dyer of Crikey who neatly summarised the political message in Glenn Stevens speech yesterday.
Having outlined the bank's disappointment about private sector investment not filling the gap left by the collapse of the mining boom, Stevens effectively said the solution was in more effective infrastructure spending.
In particular he said "it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product."
In some ways he was reflecting the earlier criticism of the Productivity Commission that there is too much emphasis on big tendered projects rather than ongoing infrastructure programs.
But a "meta-analysis" of the problem comes down to the move over the last twenty years from having Government Departments that had their own construction capability and instead outsourcing the work to the private sector.
The public sector model was criticised for being inflexible (unable to ramp up and down to deal with priorities) and for high labour costs (through sweet heart deals by managers who don't confront market pressure). Both have proven to be spurious.
The "optionality" that was supposedly created by contracting out ignored the fact that there aren't really other activities that can be turned down and up counter-cyclically to a major contract. So the so-called competitive tendering market just includes the cost of this optionality (the cost to ramp up and then close down) for each project. Maintaining a standing workforce and planning projects around the availability of resources turns out to be a cheaper way to do things.
External contracting has been successful in driving down wages, but that hasn't flowed through to cost. Much of our construction industry is now foreign owned and I'm prepared to take a bet that large scale corporate tax avoidance is rife, and probably occurs at multiple levels in the tiered contracting model. So the country is bleeding money with every contract.
I know Stevens talked about "risk sharing between the public and private sectors" - but this is such a hard concept. The only risk the private sector is potentially best at is managing execution risk on the contract - but the game constructors play is to see how much they can interpret out of scope of the original work and then bill as a variation. The alternative of build-operate-transfer (such as the LCT and CCT) fail because the private sector is least well placed to absorb demand forecast risk.
The nature of the problem is now very clear. The destruction of the public sector construction capability is causing lasting damage to the economy.
Unfortunately it isn't doing lasting damage to the law firms, accountants and banks that generate enormous transaction fees from the private sector model. Together they not only constitute the most effective lobbyists in the country, they are also increasingly the source of Government's contracted advice.
It would be hoped that the left wing Think Tanks like the Chifley Research Centre or McKell Institute might find the time to pursue this. Unfortunately, McKell's recent report on Transport Infrastructure didn't dare touch it. Similarly NBN Co never considered the prospect of a direct employment model for building their network.
It is most frustrating that endless repetition of a mantra about the efficiency of the private sector is supported despite all the evidence to the contrary.
Having outlined the bank's disappointment about private sector investment not filling the gap left by the collapse of the mining boom, Stevens effectively said the solution was in more effective infrastructure spending.
In particular he said "it would be confidence-enhancing if there was an agreed story about a long-term pipeline of infrastructure projects, surrounded by appropriate governance on project selection, risk-sharing between public and private sectors at varying stages of production and ownership, and appropriate pricing for use of the finished product."
In some ways he was reflecting the earlier criticism of the Productivity Commission that there is too much emphasis on big tendered projects rather than ongoing infrastructure programs.
But a "meta-analysis" of the problem comes down to the move over the last twenty years from having Government Departments that had their own construction capability and instead outsourcing the work to the private sector.
The public sector model was criticised for being inflexible (unable to ramp up and down to deal with priorities) and for high labour costs (through sweet heart deals by managers who don't confront market pressure). Both have proven to be spurious.
The "optionality" that was supposedly created by contracting out ignored the fact that there aren't really other activities that can be turned down and up counter-cyclically to a major contract. So the so-called competitive tendering market just includes the cost of this optionality (the cost to ramp up and then close down) for each project. Maintaining a standing workforce and planning projects around the availability of resources turns out to be a cheaper way to do things.
External contracting has been successful in driving down wages, but that hasn't flowed through to cost. Much of our construction industry is now foreign owned and I'm prepared to take a bet that large scale corporate tax avoidance is rife, and probably occurs at multiple levels in the tiered contracting model. So the country is bleeding money with every contract.
I know Stevens talked about "risk sharing between the public and private sectors" - but this is such a hard concept. The only risk the private sector is potentially best at is managing execution risk on the contract - but the game constructors play is to see how much they can interpret out of scope of the original work and then bill as a variation. The alternative of build-operate-transfer (such as the LCT and CCT) fail because the private sector is least well placed to absorb demand forecast risk.
The nature of the problem is now very clear. The destruction of the public sector construction capability is causing lasting damage to the economy.
Unfortunately it isn't doing lasting damage to the law firms, accountants and banks that generate enormous transaction fees from the private sector model. Together they not only constitute the most effective lobbyists in the country, they are also increasingly the source of Government's contracted advice.
It would be hoped that the left wing Think Tanks like the Chifley Research Centre or McKell Institute might find the time to pursue this. Unfortunately, McKell's recent report on Transport Infrastructure didn't dare touch it. Similarly NBN Co never considered the prospect of a direct employment model for building their network.
It is most frustrating that endless repetition of a mantra about the efficiency of the private sector is supported despite all the evidence to the contrary.
Thursday, May 28, 2015
The Rich are Getting Richer - but more equal with each other
The BRW Rich list is out for another year. Apart from the headline that Gina Rinehart is supposed to have gone from wealth of $20 to $14 billion what can we learn?
Well apart from that move at the top we can also reveal that the bottom entry has gone from $250 million to $286 million. However, the BRW is quite confusing in its list construction. Some wealth amounts are listed for families but occupy one place, whereas others might be listed in two names but the list for some reason gives them two places. As a consequence there are actually only 185 "wealth pools" listed, not 200. The average pool has gone from $1000 million to $1053 million. That's a growth of a bit over 5% and hence better than inflation.
Unsurprisingly if the bottom has increased and the top massively decreased the wealth distribution is ever so slightly more even as shown in the chart of proportion of population measured against cumulative proportion of wealth.
Well apart from that move at the top we can also reveal that the bottom entry has gone from $250 million to $286 million. However, the BRW is quite confusing in its list construction. Some wealth amounts are listed for families but occupy one place, whereas others might be listed in two names but the list for some reason gives them two places. As a consequence there are actually only 185 "wealth pools" listed, not 200. The average pool has gone from $1000 million to $1053 million. That's a growth of a bit over 5% and hence better than inflation.
Unsurprisingly if the bottom has increased and the top massively decreased the wealth distribution is ever so slightly more even as shown in the chart of proportion of population measured against cumulative proportion of wealth.
However the change is very slight. Statistical analysis of the list over the last ten or more years could be a fun exercise. I'll just add it to the long list of fun exercises I have to do.....
Thursday, May 21, 2015
When research isn't
I have a weekly Google Alert on the term "Digital Economy"to keep track of what is happening in the policy space.
This week I got VERY EXCITED (yes I want that emphasis) when I saw two stories (Computer Business Review and Information Age) that said over half of all UK businesses don't understand the digital economy.
You can understand my excitement, because getting business to understand the implications of the economic transformation we are in is a critical part of reaping the benefit.
One of the two handily linked to the media release issued by the company that commissioned the research. The release started:
A study released today has found over half (57%) of business leaders do not understand the Digital Economy, highlighting that organisations are not yet fully prepared to deliver the digital experiences and access buyers desire and require.
Reading the release I realised that both stories were simple cases of "churnalism" - faithful reproduction of the release as if it is an actual story. More importantly the release contained no link to the "study."
So I went to the website of the company that conducted the research, OnePoll, hoping to find it there. I was immediately concerned once I read the description of the company that came up on the Google search for OnePoll.
And down at the bottom of the homepage I found this delightful piece of text.
pr surveys for brand exposure
Generate content and news angles with a OnePoll PR survey, and secure exposure for your brand.
Our PR survey team can help draft questions, find news angles, design infographics, write & distribute your story.
The "study" was the creation of an agency that specialises in the creation of surveys that have only the purpose of securing brand exposure. I have emailed the contact on the press release and asked if there is a study that has actually been released, or whether the word "release" was a circular reference to the media release itself. (I recently had this conversation with an Australian PR firm over a similar claim of the release of a study).
These kinds of surveys are not new. As Kristen Drysdale explained in a recent episode (Serises 3, Episode 1) of ABC TV's The Checkout they are the source of most of the "clinical studies" claims made by the beauty industry.
My view is that in a data saturated world the last thing we need is bogus data that we need to wade through.
Joe Hockey got into a blather having used the term "disintermediation" to describe the disruption in the economy, but it has been around a long time and refers to the removal of the "middle men" in transactions. Shopping and the media are great examples.
If journalism is to have a future in mediating the information flow, it needs to understand that its job is to validate the claims made in a media release. It isn't hard to do. Simply Googling the name of the firm that conducted the research revealed that there should be concerns.
If a company claims research has been "released" but the details of the research haven't been released, then simply don't report the survey. Or even better write the real story that starts "today firm X tried to con the public and gain brand exposure by claiming to have released a study that wasn't released."
If the worst that happens to the commissioning firm is that they spend money and get no coverage, then one employee might not get their bonus. If the firm gets negative coverage as a consequence then management might care what marketing gets up to.
This week I got VERY EXCITED (yes I want that emphasis) when I saw two stories (Computer Business Review and Information Age) that said over half of all UK businesses don't understand the digital economy.
You can understand my excitement, because getting business to understand the implications of the economic transformation we are in is a critical part of reaping the benefit.
One of the two handily linked to the media release issued by the company that commissioned the research. The release started:
A study released today has found over half (57%) of business leaders do not understand the Digital Economy, highlighting that organisations are not yet fully prepared to deliver the digital experiences and access buyers desire and require.
Reading the release I realised that both stories were simple cases of "churnalism" - faithful reproduction of the release as if it is an actual story. More importantly the release contained no link to the "study."
So I went to the website of the company that conducted the research, OnePoll, hoping to find it there. I was immediately concerned once I read the description of the company that came up on the Google search for OnePoll.
And down at the bottom of the homepage I found this delightful piece of text.
pr surveys for brand exposure
Generate content and news angles with a OnePoll PR survey, and secure exposure for your brand.
Our PR survey team can help draft questions, find news angles, design infographics, write & distribute your story.
The "study" was the creation of an agency that specialises in the creation of surveys that have only the purpose of securing brand exposure. I have emailed the contact on the press release and asked if there is a study that has actually been released, or whether the word "release" was a circular reference to the media release itself. (I recently had this conversation with an Australian PR firm over a similar claim of the release of a study).
These kinds of surveys are not new. As Kristen Drysdale explained in a recent episode (Serises 3, Episode 1) of ABC TV's The Checkout they are the source of most of the "clinical studies" claims made by the beauty industry.
My view is that in a data saturated world the last thing we need is bogus data that we need to wade through.
Joe Hockey got into a blather having used the term "disintermediation" to describe the disruption in the economy, but it has been around a long time and refers to the removal of the "middle men" in transactions. Shopping and the media are great examples.
If journalism is to have a future in mediating the information flow, it needs to understand that its job is to validate the claims made in a media release. It isn't hard to do. Simply Googling the name of the firm that conducted the research revealed that there should be concerns.
If a company claims research has been "released" but the details of the research haven't been released, then simply don't report the survey. Or even better write the real story that starts "today firm X tried to con the public and gain brand exposure by claiming to have released a study that wasn't released."
If the worst that happens to the commissioning firm is that they spend money and get no coverage, then one employee might not get their bonus. If the firm gets negative coverage as a consequence then management might care what marketing gets up to.
Thursday, March 5, 2015
Telco competition hasn't reduced prices
Ever since the open market structure for telecommunications was adopted in 1997 in Australia, the ACCC has been required to publish an annual report reflecting on the state of competition.
As part of that report the ACCC has developed a price index to show the movement in prices. Every year it shows a real price decline.
In the media release to accompany this year's report the ACCC Chair Rod Sims states:
Competition is driving substantive reductions in the price of telecommunications services, significant infrastructure investment to improve the quality and coverage of services, and technological innovation. Consumers are seeing lower prices and improved services as a result of the vigorous competition that began in the 1990s.
Unfortunately for the ACCC their price index isn't the only one available.
As part of the data collection for the Consumer Price Index the ABS also publishes data on the groups of goods used to derive the index. Communications data is available from 1972 and so the real price movement (Group Index/CPI) can be derived. The chart below shows the real price movements over that period as reported at the September 2014 quarter.
Communications is the red dotted line - and the decline has been relatively consistent since the 1975 spike. That spike (I think) was due to a massive increase in stamp prices when Post and Telecom were split from the PMG.
Since 1980 the ABS has kept a separate sub-series on telecommunications and postal prices. This shows that post prices have been stable in real terms while telecommunications prices just continue to drop.
There are two small blips in the 1988-91 period and around 1997 but neither of these periods of reform result in a fundamentally new trajectory.
I have previously undertaken a rudimentary econometric analysis of the data to 2009 and was able to demonstrate that scale and experience effects explained the price movements better than did the reduction in industry concentration as a consequence of competition reform.
It is a great pity that the competition regulator continues to claim benefits for a set of reforms that cannot actually be credited to them. In particular, infrastructure competition cannot be claimed to be the source of price declines in Australian telecommunications.
As part of that report the ACCC has developed a price index to show the movement in prices. Every year it shows a real price decline.
In the media release to accompany this year's report the ACCC Chair Rod Sims states:
Competition is driving substantive reductions in the price of telecommunications services, significant infrastructure investment to improve the quality and coverage of services, and technological innovation. Consumers are seeing lower prices and improved services as a result of the vigorous competition that began in the 1990s.
Unfortunately for the ACCC their price index isn't the only one available.
As part of the data collection for the Consumer Price Index the ABS also publishes data on the groups of goods used to derive the index. Communications data is available from 1972 and so the real price movement (Group Index/CPI) can be derived. The chart below shows the real price movements over that period as reported at the September 2014 quarter.
Communications is the red dotted line - and the decline has been relatively consistent since the 1975 spike. That spike (I think) was due to a massive increase in stamp prices when Post and Telecom were split from the PMG.
Since 1980 the ABS has kept a separate sub-series on telecommunications and postal prices. This shows that post prices have been stable in real terms while telecommunications prices just continue to drop.
There are two small blips in the 1988-91 period and around 1997 but neither of these periods of reform result in a fundamentally new trajectory.
I have previously undertaken a rudimentary econometric analysis of the data to 2009 and was able to demonstrate that scale and experience effects explained the price movements better than did the reduction in industry concentration as a consequence of competition reform.
It is a great pity that the competition regulator continues to claim benefits for a set of reforms that cannot actually be credited to them. In particular, infrastructure competition cannot be claimed to be the source of price declines in Australian telecommunications.
Sunday, December 14, 2014
Turnbull's Triumph? Not really.
Christmas has come early for NBN Co and the Minister for
Communications Malcolm Turnbull. Not only have they been able to announce the
renegotiated deals with Telstra and Optus. The bigger present has been the
mostly uncritical adoption of the company’s and the Minister’s messaging.
The AFR took the first prize by heading
an Adele Ferguson column “NBN deal is Malcolm Turnbull’s triumph.” Elsewhere
in the paper we were advised that “Telstra is primed to win a bigger role
building and maintaining the national broadband network under a deal
with the government-owned NBN Co.”
We need to just step back from this hype.
Firstly, let’s just note that Mr Turnbull always said the
negotiation with Telstra, which
started in September 2013, would be concluded quickly. In February this
year he said they would be completed
by “the middle of the year.”
If taking twice as long to complete the first significant
task is a triumph, failure must be spectacular.
And despite descriptions of a “side deal” for Telstra in
designing, building and maintaining the network, the reality is that both NBN
Co and Telstra have simply said discussions are continuing.
The six month delay might be understandable if that more
tricky negotiation was concluded, but it hasn’t been.
The next issue is to consider what Telstra is actually
agreeing to. The Telstra
announcement is thin on details. While Telstra is “kept whole” there is no
detail on whether the specific amounts for duct leases and disconnection
payments have changed. For the former we are advised that the payments deliver
“equivalent NPV on a simplified basis.” For the latter the announcement merely
says “payment construct preserved.”
We do know that NBN Co has taken on some extra costs. The
first is a cap on duct remediation costs. The second is that NBN Co will bear
the burden of duct remediation and maintenance costs in FTTN and HFC regions.
The announcement is totally silent on what the agreement
says about the state of the copper before it is handed over.
It is well known that there are many cables that have
suffered damage from a misguided earlier plan to seal the network with
gel-filled joints. The gel has reacted with the cable sheath in many places,
the only permanent solution of which is a new cable.
These are the joints that are currently ‘protected’ by
inclusion in plastic bags.
Outside of the nit-picking on detail, the important point is
that Turnbull’s renegotiation was only possible because there was a negotiation
in the first place, and that only occurred because of a thing called “strategic
commitment.”
Game theorists identify strategy as the move you make taking
into account all the possible moves of your opponent. The question then comes
down to how your opponent plays his strategy.
A good example is the story of the Optus Pay TV cable (HFC).
As the second carrier Optus paid Telstra for access to the copper network for
the origination and termination of each long distance call (originally called
ingress and egress). Telstra was charging something like 4.5 cents per minute,
and Optus thought it should be lower.
So Optus devised a plan to build an HFC network to also
carry voice. But Telstra ignored the plan.
Optus then created a joint venture (OptusVision) with
Continental Cablevision to build the HFC network. Telstra now realised the
threat from Optus was real. Then CEO Frank Blount approached Optus offering to
reduce the interconnection price, but by then Optus had a partner who told
Optus they couldn’t do a deal because their voice traffic was now committed to
the JV.
Telstra’s only response left was to build its own HFC
network.
The move by Optus to sign a partner is a case of strategic
commitment. An irrevocable act that will convince your opponent you are serious
about the strategy.
Back in 2008 Telstra refused to submit its full bid for the
original (fibre to the node) NBN unless the Government abandoned its
requirement for structural separation. The Government’s advice was that there
was no way to force Telstra to hand over its copper, and no rival bidder had a
strategy for acquiring it.
The decision to proceed with a fibre to the home network was
made on the advice of the Expert Panel and others that FTTN was not a cost-effective
pathway to FTTP. However, it had the additional benefit of being a credible
commitment the Government could make without needing Telstra’s co-operation.
Announcing the NBN in April 2009 as a decision rather than a
plan added to its value as a strategic commitment. In reality it was only a
proposal until the Implementation Study was completed in May 2010. It was never
really a decision made in a rushed eleven weeks.
It was only when it was faced with this commitment and the
proposed separation legislation (that only would have achieved functional
separation and restricted Telstra’s mobile growth) that Telstra changed its
strategy. They also, as a consequence, changed management.
It was only through these actions that the original
negotiations occurred, and hence that Mr Turnbull has been able to conclude
this new deal.
Whether it is a good or bad deal is yet to be seen. But so
far it is nothing more than a transfer of the copper and HFC assets, though
duct ownership stays with Telstra.
Clearly FTTH zealots will see it as a bad deal on principle.
But that is a different discussion. NBN Co now presumably has all the
information it needs to prepare a properly and fully costed Corporate Plan for
MTM. That needs to be released in its entirety without redactions.
Thursday, November 27, 2014
Does the nation have a Digital Economy Strategy?
A group of carriers, consumer and small business representatives has formed a coalition that argues that Australia must set an ambitious broadband policy for the next 15 years.
The group today launched a "2030 Communications Vision" project and plans to hold a seminar discussing broadband issues in February.
Retiring iiNet regulatory chief Steve Dalby claimed there has been "an absence of leadership on a broader, integrated view of why telecommunications is important to Australia and the Australian economy. There is no national objective or national strategy to take us forward in the digital economy."
Well - technically there is a strategy, because it was released by the Labor Government in 2011 and updated in 2013.
The status of the 24 actions listed in the update was advised in response to an Question on Notice from February Estimates. The status of the 34 projects was advised in response to an Question on Notice from May Estimates.
Before the election the Coalition released its own - somewhat limited - Digital Economy policy. Amongst a plethora of commitments the policy stated the Coalition would "update the NDES during its first term."
Presumably the construction that the NDES is to be merely further updated not replaced means the EXISTING updated NDES is still the actual strategy.
Commentator Phil Dobbie in his weekly Crosstalk podcast made some disparaging comment about the NDES. Unfotunately I didn't write it down when I listened and I'm not going to go through it again.
What I'm waiting for is someone to subject the plan - especially as updated - to some decent scrutiny.
And just maybe it would have helped if industry and consumers had engaged with the Strategy rather than take it as a given.
The group today launched a "2030 Communications Vision" project and plans to hold a seminar discussing broadband issues in February.
Retiring iiNet regulatory chief Steve Dalby claimed there has been "an absence of leadership on a broader, integrated view of why telecommunications is important to Australia and the Australian economy. There is no national objective or national strategy to take us forward in the digital economy."
Well - technically there is a strategy, because it was released by the Labor Government in 2011 and updated in 2013.
The status of the 24 actions listed in the update was advised in response to an Question on Notice from February Estimates. The status of the 34 projects was advised in response to an Question on Notice from May Estimates.
Before the election the Coalition released its own - somewhat limited - Digital Economy policy. Amongst a plethora of commitments the policy stated the Coalition would "update the NDES during its first term."
Presumably the construction that the NDES is to be merely further updated not replaced means the EXISTING updated NDES is still the actual strategy.
Commentator Phil Dobbie in his weekly Crosstalk podcast made some disparaging comment about the NDES. Unfotunately I didn't write it down when I listened and I'm not going to go through it again.
What I'm waiting for is someone to subject the plan - especially as updated - to some decent scrutiny.
And just maybe it would have helped if industry and consumers had engaged with the Strategy rather than take it as a given.
Wednesday, November 26, 2014
Competition in telecommunications ... ITU data
This week the ITU has published its latest ICT Development Index. I don't want to write about that now - except to state that like so many other similar exercises calling this an "index" is perpetrating a fraud.
The concept of an "index number" was developed to find a way to relate different prices and quantities in different time periods. The founder of econometrics Irving Fisher analysed said "For those who have made any attempt to penetrate their mysteries, index numbers seem to have
a perennial fascination." This may not be the case for my readers, but the survey article I took the quote from provides plenty of detail on how intricate is the process of developing index numbers for their use in analysing time series data.
The ITU's IDI is not such an index. It is an attempt to make comparisons across countries at one point in time. Indeed the construction of the index guarantees that the change in the index number from one time period to the next for an individual economy has no meaning. The only temporal comparison that can be made is of the rank.
This is because the final index number is composed as the weighted sum of a three sub-indices each in turn based on a number of indicators. The data for the indicators themselves are also first manipulated in a kind of standardisation process.
The report states that "The indicator weights were chosen based on the principal components analysis (PCA) results. The access and use sub-indices were given equal weight (40 per cent each). The skills sub-index was given less weight (20 per cent), since it is based on proxy indicators." Figure 2.2 provides a table of the actual weights used and it is hard to discern from this exactly what role the principal component analysis played.
Most significantly there is no objective test by which it is possible to determine if the IDI measures anything, nor if the value of the IDI has any purposeful predictive power. Indeed, like most indices of this kind (I'm thinking here of the Global Innovation Index) the composition of the index is heavily theory laden. There is nothing inherently wrong in a theory laden index if that index can then be compared to some other observable - because it then works as a test of theory. But if there is no such observable the index runs the risk of becoming part of a circular argument in support of the theory.
But I didn't come here to discuss the IDI - I need to do more maths before I reach any conclusions.
What I did come here to do was to pass comment on analysis in the report that purports to claim that competition in telecommunications markets has a statistically significant impact on reducing prices in telecommunications. I have serious concerns about the methodology employed.
(My own simple working paper on this reached a conclusion that competition is not a significant factor in price reductions).
My two concerns are to do with the model employed and the goodness of fit. Both fixed broadband and mobile market data are modelled. In both cases a simple linear model of prices is developed. This is highly unlikely to be the appropriate functional form for the relationship between prices and the relevant variables - including GNI per capita, industry concentration (HHI), urbanisation and a regulatory variable. At the very least theory would suggest that the effect of a change in concentration would be proportional to the HHI - not a linear composition.
In both cases the modelling claims that all the variables are statistically significant - though competition is identified as explaining only 5% of the variation in prices. However the R-squared for the two models are 0.408 and 0.409. The report claims that such a value of correlation means the models have "medium explanatory power" based on the range of possible values being zero to one.
This is simply rubbish. The reality is that such a low value means that more than half the variability in prices is due to factors not included in the model. One of those at least will be declining costs of technology due to local scale economies and global experience effects. The consequence of adding other variables or changing the functional form so that the explanatory power of the model increases will affect the statistical validity of all the variables.
It is, quite frankly, embarrassing to see a major international organisation publish such a poorly constructed piece of econometric modelling.
The concept of an "index number" was developed to find a way to relate different prices and quantities in different time periods. The founder of econometrics Irving Fisher analysed said "For those who have made any attempt to penetrate their mysteries, index numbers seem to have
a perennial fascination." This may not be the case for my readers, but the survey article I took the quote from provides plenty of detail on how intricate is the process of developing index numbers for their use in analysing time series data.
The ITU's IDI is not such an index. It is an attempt to make comparisons across countries at one point in time. Indeed the construction of the index guarantees that the change in the index number from one time period to the next for an individual economy has no meaning. The only temporal comparison that can be made is of the rank.
This is because the final index number is composed as the weighted sum of a three sub-indices each in turn based on a number of indicators. The data for the indicators themselves are also first manipulated in a kind of standardisation process.
The report states that "The indicator weights were chosen based on the principal components analysis (PCA) results. The access and use sub-indices were given equal weight (40 per cent each). The skills sub-index was given less weight (20 per cent), since it is based on proxy indicators." Figure 2.2 provides a table of the actual weights used and it is hard to discern from this exactly what role the principal component analysis played.
Most significantly there is no objective test by which it is possible to determine if the IDI measures anything, nor if the value of the IDI has any purposeful predictive power. Indeed, like most indices of this kind (I'm thinking here of the Global Innovation Index) the composition of the index is heavily theory laden. There is nothing inherently wrong in a theory laden index if that index can then be compared to some other observable - because it then works as a test of theory. But if there is no such observable the index runs the risk of becoming part of a circular argument in support of the theory.
But I didn't come here to discuss the IDI - I need to do more maths before I reach any conclusions.
What I did come here to do was to pass comment on analysis in the report that purports to claim that competition in telecommunications markets has a statistically significant impact on reducing prices in telecommunications. I have serious concerns about the methodology employed.
(My own simple working paper on this reached a conclusion that competition is not a significant factor in price reductions).
My two concerns are to do with the model employed and the goodness of fit. Both fixed broadband and mobile market data are modelled. In both cases a simple linear model of prices is developed. This is highly unlikely to be the appropriate functional form for the relationship between prices and the relevant variables - including GNI per capita, industry concentration (HHI), urbanisation and a regulatory variable. At the very least theory would suggest that the effect of a change in concentration would be proportional to the HHI - not a linear composition.
In both cases the modelling claims that all the variables are statistically significant - though competition is identified as explaining only 5% of the variation in prices. However the R-squared for the two models are 0.408 and 0.409. The report claims that such a value of correlation means the models have "medium explanatory power" based on the range of possible values being zero to one.
This is simply rubbish. The reality is that such a low value means that more than half the variability in prices is due to factors not included in the model. One of those at least will be declining costs of technology due to local scale economies and global experience effects. The consequence of adding other variables or changing the functional form so that the explanatory power of the model increases will affect the statistical validity of all the variables.
It is, quite frankly, embarrassing to see a major international organisation publish such a poorly constructed piece of econometric modelling.
Competition in telecommunications...UK style
One of these days I will write a definitive account of how we all got so much wrong in the pursuit of better outcomes in telecommunications than were being delivered in the early 1980s. But today I just want to compare and contrast two countries, the UK and Australia.
The first thing to note is that both countries were early leaders i the move to restructure telecommunications markets - at least amongst those that had grown up under the European PTT model. Both were early (in the 70s) in spinning telecommunications out of the Post Office. Both introduced competition in the late 80s and early 90s.
The UK did one thing differently - they fully privatised BT before undertaking competition reform. But in reality it has made little difference.
The UK stayed with an industry specific regulator with both technical and competition function (Ofcom) whereas Australia dismantled AUSTEL in 1997 and gave competition and access to the ACCC.
BT sold its mobile operation to what became O2. BT also agreed to voluntary functional separation of its access network - but only in the face of a very determined Ofcom Chair Steven Carter.
But today we learn that BTs competitors are complaining through their industry body the UK Competitive Telecommunications Association (UKCTA) that BT still retains a monopoly position "some 30 years after privatisation and 10 years after the formation of Ofcom."
I'll be honest and say that from the Foreword to their report I can't understand exactly what it is that the UKCTA is arguing for. It seems to be another version of "we need you to increase competition by increasing regulation of the monopolist." This, I might say, sounds awfully like the current refrain of Optus, Vodafone and the Competitive Carriers Coalition in Australia.
They seem to know what they don't like but I haven't ever heard anything that sounds like a convincing story of what the market structure looks like after whatever intervention they seek today. I have drafted something for publication elsewhere on the economics and if it doesn't get a run I'll share it here.
In the meantime getting a new single technology structurally separated access network for 93% of the population was a really good place to start. But no one was ever prepared to hitch their wagon to defending the one thing that could deliver.
Disclaimer: The CCC was originally formed around the meeting table in my office at AAPT. It's original mission was a response to the content sharing deal between Foxtel and Optus. At that time I questioned my colleagues at AAPT on whether as part of the deal we should demand that the Telstra HFC cable be made open access as it provided service in areas poorly served by exchange based ADSL. There was no interest because we did not have the capacity to build a billing and provisioning system to access it.
The first thing to note is that both countries were early leaders i the move to restructure telecommunications markets - at least amongst those that had grown up under the European PTT model. Both were early (in the 70s) in spinning telecommunications out of the Post Office. Both introduced competition in the late 80s and early 90s.
The UK did one thing differently - they fully privatised BT before undertaking competition reform. But in reality it has made little difference.
The UK stayed with an industry specific regulator with both technical and competition function (Ofcom) whereas Australia dismantled AUSTEL in 1997 and gave competition and access to the ACCC.
BT sold its mobile operation to what became O2. BT also agreed to voluntary functional separation of its access network - but only in the face of a very determined Ofcom Chair Steven Carter.
But today we learn that BTs competitors are complaining through their industry body the UK Competitive Telecommunications Association (UKCTA) that BT still retains a monopoly position "some 30 years after privatisation and 10 years after the formation of Ofcom."
I'll be honest and say that from the Foreword to their report I can't understand exactly what it is that the UKCTA is arguing for. It seems to be another version of "we need you to increase competition by increasing regulation of the monopolist." This, I might say, sounds awfully like the current refrain of Optus, Vodafone and the Competitive Carriers Coalition in Australia.
They seem to know what they don't like but I haven't ever heard anything that sounds like a convincing story of what the market structure looks like after whatever intervention they seek today. I have drafted something for publication elsewhere on the economics and if it doesn't get a run I'll share it here.
In the meantime getting a new single technology structurally separated access network for 93% of the population was a really good place to start. But no one was ever prepared to hitch their wagon to defending the one thing that could deliver.
Disclaimer: The CCC was originally formed around the meeting table in my office at AAPT. It's original mission was a response to the content sharing deal between Foxtel and Optus. At that time I questioned my colleagues at AAPT on whether as part of the deal we should demand that the Telstra HFC cable be made open access as it provided service in areas poorly served by exchange based ADSL. There was no interest because we did not have the capacity to build a billing and provisioning system to access it.
Thursday, November 6, 2014
About tax
No matter how much modern libertarians might fantasise about small government, the size is never zero and so governments need to raise tax.
In determining tax policy there are three objectives that need to be met.
The first is to raise the revenue required to deliver the services demanded (plus or minus any desired surplus or acceptable deficit).
The second is to raise the tax efficiently. This means both the technical efficiency of raising the tax with the least expense in raising taxes and the allocative efficiency of trying to minimise the effect of the tax on price signals and incentives.
The third is equity, to ensure the tax system is equitable in its treatment. Usually two principles are considered here. The first is that two individuals in the same circumstances need to be taxed equally. The second is that tax should be rendered relative to an individual's capacity to pay.
The unfolding story of the growth in tax minimisation strategies by the largest corporations in the world shows how current tax arrangements fail all these tests.
The AFR this morning pulled out Amazon as a particular case. Amazon in Australia has two direct lines of business, and then it has its third role as an importer. Amazon Web services is a cloud hosting service that counts among its clients (possibly indirectly) both the Liberal Party and the Labor Party. It is selling these services domestically and has facilities here.
The second business is the sale of e-books for Kindle. Today as a registered Kindle shopper in Australia I can only order from amazon.com.au, not amazon.com. At least the pricing looks the same (one is designated in $AU the other in $US). I'm prepared to be that delivery also happens from a local server but I can't prove that.
But the transaction by me with Amazon is occurring - in fact required to occur - in an Australian domain. Yet somehow for tax purposes the transaction doesn't occur in Australia. I wonder if it occurs ANYWHERE for goods and service tax purposes or is deemed in each country involved to have occurred in another.
The short answer is "probably not." The topic globally goes under the name of "Base Erosion and Profit Shifting" or BEPS for short. The OECD BEPS project however seems to be mostly focussed so far on inter-administration identification of the transaction flows rather than discussion of how to make sure the "proper" tax is paid. Australian action seems to be similarly limited.
How does the Australian business community react to this issue. The Chief Executive of the BCA addressed the question this week. In doing so she outlined her own view of the objective of the tax system, namely:
Digital technology and increased interconnectedness in the global economy has had a profound impact on our lives and the way we do business....The Business Council has called for a global mindset from Australian businesses to capture these opportunities, specialise within supply chains and access new markets.
In an increasingly competitive business environment, taxation arrangements influence where we work and invest. International tax laws should not be an obstacle in the unstoppable evolution of the global economy. They should not be so excessive or complex such that they hinder trade, investment and innovation.
Rather they should be modernised to ensure they remain fit for purpose in achieving their dual objectives of revenue raising, and incentivising growth and investment.
It is worth noting the extent to which the issue of BEPS is directly associated with the Digital Economy. It provides both the transactions that are problematic, but also provides the means to make other transactions become problematic.
But far more telling is the BCA's understanding of the objectives of tax design. Firstly it is NOT an objective of tax policy to "incentivise growth and investment", the objective is to limit the distortionary effects of taxation. The second is that there is no recognition of the role of equity.
The BCA then advances this flawed thinking into its own proposals. After first cautioning Australia about doing anything alone, and how everything needs to be managed within international tax arrangements, the BCA goes on to assert that Corporate Australia is over-taxed. (That this argument sounds like the defence of copyright piracy - we only steal because you charge so much - is just delicious irony).
So as far as the BCA is concerned the real issue is simple:
But in listening to the OECD on BEPS, it is important to hear the message in the context of its overall advice on tax reform and its role in economic growth. This is about getting a better tax mix between direct and indirect taxes to better encourage investment, innovation and entrepreneurialism – key drivers of growth.
Competition in global corporate tax rates has intensified. Japan and Spain recently announced corporate tax cuts to boost investment and growth. If we look back a decade, our corporate tax rate of 30 per cent was a little above the averages of the OECD and our competitors in the Asia-Pacific region – which were about 29 and 28 per cent, respectively. Since then, these averages have fallen around 5 percentage points while we have stood still.
In a nut-shell, because corporations choose where to invest (or more importantly where to pay tax) Australia needs to lower its corporate tax rate. To make up the revenue indirect taxes need to increase.
This is where the PM comes in having been duped by this argument. So he has initiated his discussion about Federation as a means to get the States to demand the rate of the GST increase...as part of fulfilling the BCA agenda.
But it is all absolute rubbish.
Firstly, by ignoring the equity argument the BCA is ignoring the fact that some of its members are paying far higher tax rates than others - depending a lot on their corporate structure. Secondly, a lot of the Digital Economy transactions are simply escaping the nett of indirect taxes - as my e-book example shows. And finally, in a result owing to Ramsey that for a mark-up on prices to have minimum economic distortion the mark-up should be in inverse proportion to the elasticity of demand.
The most important feature of the BCA's own tax paper is that Australia is a low tax economy.
We need a decent discussion on tax, but the BCA should not be at the centre of it. Personally I doubt that any of the CEOs who actually comprise the BCA would have the slightest clue about tax as a policy issue. They understand it as a private issue - if the company pays less tax I can pay a higher dividend the share price goes up and I get a bonus.
And the first thing we need to agree globally is that shifting transactions and notional company locations for the purposes of tax minimisation are economically distortionary and to be eradicated. It can be done. A challenge is that a country that sets a low tax level can have actually increased its total tax take as a consequence and will be reluctant to change. But the change can be effected by the countries at the ends of the transactions (for example, by jointly agreeing that the intermediate transactions did not exist).
Note: Interesting question what impact the lack of a GST has had on the prices of education and health services discussed yesterday. It is possible that the relative price has been able to rise because of the lack of tax...
In determining tax policy there are three objectives that need to be met.
The first is to raise the revenue required to deliver the services demanded (plus or minus any desired surplus or acceptable deficit).
The second is to raise the tax efficiently. This means both the technical efficiency of raising the tax with the least expense in raising taxes and the allocative efficiency of trying to minimise the effect of the tax on price signals and incentives.
The third is equity, to ensure the tax system is equitable in its treatment. Usually two principles are considered here. The first is that two individuals in the same circumstances need to be taxed equally. The second is that tax should be rendered relative to an individual's capacity to pay.
The unfolding story of the growth in tax minimisation strategies by the largest corporations in the world shows how current tax arrangements fail all these tests.
The AFR this morning pulled out Amazon as a particular case. Amazon in Australia has two direct lines of business, and then it has its third role as an importer. Amazon Web services is a cloud hosting service that counts among its clients (possibly indirectly) both the Liberal Party and the Labor Party. It is selling these services domestically and has facilities here.
The second business is the sale of e-books for Kindle. Today as a registered Kindle shopper in Australia I can only order from amazon.com.au, not amazon.com. At least the pricing looks the same (one is designated in $AU the other in $US). I'm prepared to be that delivery also happens from a local server but I can't prove that.
But the transaction by me with Amazon is occurring - in fact required to occur - in an Australian domain. Yet somehow for tax purposes the transaction doesn't occur in Australia. I wonder if it occurs ANYWHERE for goods and service tax purposes or is deemed in each country involved to have occurred in another.
The short answer is "probably not." The topic globally goes under the name of "Base Erosion and Profit Shifting" or BEPS for short. The OECD BEPS project however seems to be mostly focussed so far on inter-administration identification of the transaction flows rather than discussion of how to make sure the "proper" tax is paid. Australian action seems to be similarly limited.
How does the Australian business community react to this issue. The Chief Executive of the BCA addressed the question this week. In doing so she outlined her own view of the objective of the tax system, namely:
Digital technology and increased interconnectedness in the global economy has had a profound impact on our lives and the way we do business....The Business Council has called for a global mindset from Australian businesses to capture these opportunities, specialise within supply chains and access new markets.
In an increasingly competitive business environment, taxation arrangements influence where we work and invest. International tax laws should not be an obstacle in the unstoppable evolution of the global economy. They should not be so excessive or complex such that they hinder trade, investment and innovation.
Rather they should be modernised to ensure they remain fit for purpose in achieving their dual objectives of revenue raising, and incentivising growth and investment.
It is worth noting the extent to which the issue of BEPS is directly associated with the Digital Economy. It provides both the transactions that are problematic, but also provides the means to make other transactions become problematic.
But far more telling is the BCA's understanding of the objectives of tax design. Firstly it is NOT an objective of tax policy to "incentivise growth and investment", the objective is to limit the distortionary effects of taxation. The second is that there is no recognition of the role of equity.
The BCA then advances this flawed thinking into its own proposals. After first cautioning Australia about doing anything alone, and how everything needs to be managed within international tax arrangements, the BCA goes on to assert that Corporate Australia is over-taxed. (That this argument sounds like the defence of copyright piracy - we only steal because you charge so much - is just delicious irony).
So as far as the BCA is concerned the real issue is simple:
But in listening to the OECD on BEPS, it is important to hear the message in the context of its overall advice on tax reform and its role in economic growth. This is about getting a better tax mix between direct and indirect taxes to better encourage investment, innovation and entrepreneurialism – key drivers of growth.
Competition in global corporate tax rates has intensified. Japan and Spain recently announced corporate tax cuts to boost investment and growth. If we look back a decade, our corporate tax rate of 30 per cent was a little above the averages of the OECD and our competitors in the Asia-Pacific region – which were about 29 and 28 per cent, respectively. Since then, these averages have fallen around 5 percentage points while we have stood still.
In a nut-shell, because corporations choose where to invest (or more importantly where to pay tax) Australia needs to lower its corporate tax rate. To make up the revenue indirect taxes need to increase.
This is where the PM comes in having been duped by this argument. So he has initiated his discussion about Federation as a means to get the States to demand the rate of the GST increase...as part of fulfilling the BCA agenda.
But it is all absolute rubbish.
Firstly, by ignoring the equity argument the BCA is ignoring the fact that some of its members are paying far higher tax rates than others - depending a lot on their corporate structure. Secondly, a lot of the Digital Economy transactions are simply escaping the nett of indirect taxes - as my e-book example shows. And finally, in a result owing to Ramsey that for a mark-up on prices to have minimum economic distortion the mark-up should be in inverse proportion to the elasticity of demand.
The most important feature of the BCA's own tax paper is that Australia is a low tax economy.
We need a decent discussion on tax, but the BCA should not be at the centre of it. Personally I doubt that any of the CEOs who actually comprise the BCA would have the slightest clue about tax as a policy issue. They understand it as a private issue - if the company pays less tax I can pay a higher dividend the share price goes up and I get a bonus.
And the first thing we need to agree globally is that shifting transactions and notional company locations for the purposes of tax minimisation are economically distortionary and to be eradicated. It can be done. A challenge is that a country that sets a low tax level can have actually increased its total tax take as a consequence and will be reluctant to change. But the change can be effected by the countries at the ends of the transactions (for example, by jointly agreeing that the intermediate transactions did not exist).
Note: Interesting question what impact the lack of a GST has had on the prices of education and health services discussed yesterday. It is possible that the relative price has been able to rise because of the lack of tax...
Tuesday, November 4, 2014
The use and abuse of price signals
I was somewhat confused to read in this morning's Oz about Tony Abbott's plans for the G20.
We all know that the G20 goal is to try to come up with initiatives to increase global growth by 2%. Apparently the PM's approach to this is a bit like his approach at the World Economic Forum - to just tell everyone what we are doing domestically.
Apparently the PM told the Oz "that price signals on healthcare and market fees for universities would be part of the nation’s formal pledges at the G20 summit."
The Australian went on to note "Mr Abbott played down the chances of a major commitment on climate change and confirmed his plan to make the gender gap on workforce participation a key issue at the event."
So let's just unpack those two for a moment. The PM is apparently a fan of the use of "price signals" and "markets" when it comes to traditional Government service delivery like health and education, but his most significant election commitment - now delivered - has been the abolition of a price on carbon.
He wants to move away from Government spending on health and education and instead make direct payments to industry to reduce carbon emissions. This is a Prime Minister who embraces the concept of "markets" only when the direct beneficiary is the corporate sector, and embraces Government action when the direct beneficiary is...the corporate sector.
The PM who wants to be known as the "infrastructure Prime Minister" asserts that "the continued move from short-term consumption spending to long-term investment spending will continue." And yet the infrastructure Minister is struggling to find anything new to announce other than projects where rail has been de-funded to fund a road (Melbourne's East West link).
He also says "Australia’s commitment at the G20 would be to promote growth through private investment rather than relying on public outlays." This marries up with e B20 message about infrastructure. It is the corporate sector's desire to have Government fund the private sector to build infrastructure which the corporate sector benefits from.
Let's be really clear that the main beneficiaries of the PPP model are the finance sector and the construction industry. The latter is corrupt to the core and is responsible for Australia having the most expensive construction sector (just use the North West Rail as a guide).
But let's go back to two issues. The value of price signals in health and education and the economic value of increased female workforce participation.
Despite the pervasive presence of public sector delivery of health and education services, these are not actually free. There are already prices for many of the services in these sectors - and they are included in the ABS statistics on the Consumer Price Index. In fact, they are both measured with their own group index (education since 1982 and health since 1989).
That means we can inquire into how the price of these services have changed relative to other prices. The chart below is prepared by converting all the group and overall indices to a common base of 100 in September 2014. The group indices have then been divided by the overall index to effectively create a "real" index.
This shows that the real price to Australian consumers of health and education services has been growing solidly over the last fifteen years. Somehow the PM seems to be under the impression there is no "price signal" already in this market, whereas the reality is the price signal is very clear and has been increasing.
Anyone who seriously wants to address the question of "cost of living" pressure faced by households should study this graph. (As an aside since this is the DigEcon Gazette - I will write more separately about the decline in communication prices...but will simply note that trend line actually stretches over 40 years!)
Now let's turn to the question of workforce participation. Two things stand out. The first is that when unemployment is high, the availability of labour as an economic input isn't a constraint on growth. The second is that the PM talks as if his initiative of a paid parental leave scheme will be the first great intervention to grow participation.
The G20 wants to increase growth BECAUSE of persistent high unemployment rates, especially in the European economies (see list below taken from the 25 October 2014 Economic Data in The Economist).
| Country | Unemployment Rate |
| Argentina | 7.5% |
| Australia | 6.1% |
| Brazil | 5.0% |
| Canada | 6.8% |
| China | 4.1% |
| European Union | 11.5% |
| France | 10.5% |
| Germany | 6.7% |
| India | 8.8% |
| Indonesia | 5.7% |
| Italy | 12.3% |
| Japan | 3.5% |
| Mexico | 4.8% |
| Russia | 4.9% |
| Saudi Arabia | 5.6% |
| South Africa | 25.5% |
| South Korea | 3.2% |
| Turkey | 9.8% |
| United Kingdom | 6.0% |
| United States | 5.9% |
Workforce participation rates between the two genders have been converging.
Analysis of only the lines themselves might suggest the convergence is slowing - but measuring the difference (green columns measured on right hand vertical axis) shows the trend continuing.
In other words, accelerating female labour force participation is unlikely to be the most important critical issue. (I should do additional analysis by age because I suspect that part of the effect is due to older segments of the female population having a lower participation rate - paid maternity leave doesn't fix that).
So our PM is going to lecture other leaders about his inconsistent application of price signals and markets, and a post hoc justification of his expensive PPL when labour availability is not their major issue.
This is the PM trying to sell his modern day Thatcher/Reagan agenda as economic planning.
The PM is more accurate when he simply says "“Lower taxes, less regulation and long-term fiscal discipline are at the heart of our plan." Just what the BCA asks him to say.
It would be nice if he and his Treasurer could really look at what the economy of the future looks like and what the capabilities we need are - a skilled and healthy workforce and (as I wrote on my other blog) clean energy.
Sunday, October 19, 2014
Missing in Action: The Productivity Commission and ICT in the 21st Century
(This paper was originally drafted over two years ago - but its conclusions are still valid)
In the late 1990s the Productivity Commission’s focus was in seeking to explain the surge that had occurred in Australia’s productivity over the preceding decade.
In the late 1990s the Productivity Commission’s focus was in seeking to explain the surge that had occurred in Australia’s productivity over the preceding decade.
A PC staff research paper in 2001 considered the impact of ICT on Australia’s productivity surge.[i] A particular focus of that report was whether Australia was disadvantaged by not having an ICT manufacturing capability. The paper found that “ICT-related productivity gains can be accessed through use and not just production; and that, through rapid uptake of ICTs, Australia has already caught an ICT-related productivity wave.”
The comments of that paper were captured in a speech delivered by PC Chairman Gary Banks in 2002.[ii] The key points in that speech were listed as;
• Australia’s productivity growth surged to a record high in the 1990s – more than double the rate achieved over the 1980s. Australia’s productivity surge was also very strong by international standards.
• A new set of service industries – especially Wholesale trade and Finance & insurance – made major contributions to the 1990s productivity acceleration.
• Australia was comparatively quick in adopting information and communications technologies (ICTs) in the 1990s and their use has featured in the productivity accelerations of the new service industry contributors.
• Microeconomic reforms were pivotal in Australia’s improved productivity performance, by sharpening incentives for businesses to be more productive and providing them with greater flexibility to adjust to a more competitive environment. Microeconomic reforms encouraged and assisted the uptake of ICTs and the transformation of industries in ways that tap new productivity potential.
• In looking to the future, further productivity gains are possible from continued ICT uptake and business transformation, and Australia is well placed to benefit from e-commerce.
• Policy will continue to play an important role – particularly in relation to labour market flexibility and the development of ‘human capital’ (in the widest sense).
In brief the adoption of ICT had been a significant past contributor to the productivity surge and could be expected to continue to be so.
In 2007 another staff research paper compared Australia’s productivity performance to that of the US.[iii] That paper suggested Australia might never be as productive as the US and concluded;
Broadly speaking, government policy will be most supportive of productivity catch-up by putting in place the framework that underpins sound private choices within firms and industries. This means focusing on economic incentives (such as competition), capabilities (such as skills and research and other infrastructure) and flexibility (the scope for firms to adapt, experiment and to implement new business models).
The PC has, however, tended to focus its efforts very much on the first of these over recent years.
The PC has conducted a research project that links the first and third title “An analysis of the effect of product market competition on innovation and productivity in Australia”.[iv] This study is taking as a starting point a joint PC/ABS paper that draws on the ABS Business Longitudinal Database.[v] That study interestingly did not find a simple correspondence between increased competition and innovation, as other market characteristics were also important.
It is unclear whether this study controlled for the separate findings of another ABS study on the same data set that found strong evidence of a link between ICT use and innovation.[vi] This links ultimately links innovation to (communications) infrastructure.
It could indeed be disappointing if the PC were to reach a conclusion about innovation and competition without also considering the link between broadband and innovation.
Despite all the evidence provided by the PC about the productivity surge of the 90s and its link to ICT, and its views about productivity growth being fuelled by further ICT adoption and infrastructure investment, the PC has been strangely silent on the NBN.
Indeed its only foray was the one that led the Minister to redefine appropriate language for a lunchtime television audience when he was asked about a competitive neutrality complaint report emanating from the PC.
There has been much commentary about suggestions made by the coalition that the Government should have conducted the PC to undertake a cost/benefit analysis of the NBN plan. The PC has not historically undertaken many cost benefit analyses.
However there is nothing stopping the PC undertaking its own research into the productivity impacts of investment in broadband. The fact that it has ignored the topic for over a decade indicates that there may indeed be some substance to the view that the PC is now pursuing a myopic view of the determinants of productivity; a myopic view not even supported.
[i] Dean Parham, Paul Roberts, Haishun Sum Staff Research Paper: Information Technology and Australia’s Productivity Surge Productivity Commission 2001
[ii] Gary Banks The drivers of Australia’s productivity surge Presented at Outlook 2002, hosted by the Department of Industry, Tourism and Resources and the Australian Bureau of Agriculture and Resource Economics, National Convention Centre, Canberra, 7 March. Productivity Commission
[iii] Ben Dolman, Dean Parham, Simon Zheng Staff Research Paper: Can Australia Match US Productivity Performance? Productivity Commission 2007
[iv] http://www.pc.gov.au/research/productivity/product-competition-effect the study is due to conclude in June 2012.
[v] Les Soames, Donald Brunker, Tala Talgaswatta Research Paper: Competition, Innovation and Productivity in Australian Businesses Australian Bureau of Statistics and Productivity Commission 2011
[vi] Jessica Todhunter and Ruel Abello Research Paper: Business Innovation and the Use of Information and Communications Technology Australian Bureau of Statistics 2011
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