The State and the Sirens – a paradox of good government

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The recent spate of handouts to Alcoa and the car industry is part of a worrying trend. Governments (both Federal and State) appear to be open to vested interest lobbying that seeks self-serving intervention, even when that intervention is not in the national interest. This is a significant reversal from the post-Hilmer-report 1990s. Why has it happened?

Part of the answer is that governments have forgotten a key lesson from the Hilmer report. Like Ulysses facing the Sirens’ song, governments face lobbying by vested interests that can create short-term political gain at long-term cost: both political cost and economic cost to Australia. The song of the lobbyists sounds sweet to government – particular when it is sung in marginal seats for a minority federal government. But one under-recognised lesson from the Hilmer report is that government, like Ulysses, must ‘tie itself to the mast’ if it is to avoid the short-term temptation of the lobbyists. By forgetting this lesson, governments are currently the play-things for vested interests. It is time for governments to re-establish the binds that can protect them from the lobbyists’ Siren song.The implementation of the Hilmer report allowed government across Australia to establish institutions and processes that bound them to a reform process. This is explicit in the ‘institutional arrangements’ discussed in chapter 14 of the report. The Committee looked at different institutional arrangements. These included explicit constraints on government action. For example, for infrastructure access, the Commonwealth government could act unilaterally. So to protect both the government and the public interest, the committee “recommended that the Commonwealth Minister not be able to act under these powers without the affirmative recommendation of the advisory body” (p.318). In other words, the government would commit to a process that limited its discretion. No point lobbying the Minister to declare a facility because a separate review body  had to look at the proposal before the Minister could act.

This recommendation was partially implemented through the National Competition Council (vested interest alert – of which I am a Member).

The Hilmer Committee also recommended that state privatisation could be overseen by a process to provide ‘independent analysis and advice’ if the privatisation was not accompanied by appropriate restructuring. While this wasn’t implemented, other arms-length processes were subsequently endorsed by the Council of Australian Governments. Thus, all states signed up to a process of legislative review based on two steps. If legislation restricted competition then it would be checked to see (1) that the benefits of the legislation outweigh the costs of restricting competition and (2) even if the benefits do outweigh the costs, that the benefits could not be achieved in a way that doesn’t restrict competition.

Where do these institutional ‘ropes’ lie today? The NCC still has oversite for infrastructure access. But the concept of having state access regimes certified appears to languish. The Australian Energy Regulator, together with a variety of state bodies, have oversight for a range of industries – and so is able to limit the potential for government opportunism in areas such as energy and water. But the idea that state-owned enterprises should be reformed appears to have wained. Legislative review appears to have become series of ‘tick the box’ regulatory impact statement. And, of course, key areas of interest have ‘moved on’ in the last twenty years. In particular, telecommunications has been transformed out of recognition, and, as was argued at the Economics Society Conference last week, the NBN is an example of the antithesis of the ‘Hilmer approach’.

So what is the effect of this on government? The most obvious effect is that when called upon to ‘do something’, politicians feel the need to respond. This may be handing out cash or making populist laws to intervene in various industries (problem with banking – let’s have bank specific ‘price signalling’ laws. Problem with petrol – let’s have a petrol Commissioner. Problem with supermarkets setting prices too high – let’s have ‘grocery choice’. Problem with supermarkets setting prices too low – let’s have a rolling series of inquiries, … ).  While politicians can sometimes palm the problem off to an independent body (e.g. the PC or the ACCC), because they have given themselves the freedom to act, politicians are called on to act – whether the action is desirable or not.

What can the politicians do to protect themselves? They need to rediscover the ropes that can bind them to the mast. One way to start would be legislative review. The federal government can restart a process of arms-length legislative review. The process should be public and the benchmark should be the one set by the Hilmer report – does the legislation restrict competition; if so do the benefits outweigh the costs; and even then, can the benefits be achieved in a less anti-competitive way? The independent body that reviews legislation could start with any new legislation that restricts competition while simultaneously working its way back through existing legislation. And the body’s report must be tabled with proposed legislation when it is put before parliament.

The States should be invited to join the process. The review body will be able to quickly handle lots of legislation, but where there is a significant issue that it does not have the resources to fully explore it could suggest an independent review – perhaps by the PC. Of course, governments need not accept the recommendations, but it gives them both an excuse to avoid bad new legislation, and a reason to revisit bad old legislation.

This is only one set of ‘ropes’. There are a variety of others.

And who wins? Well obviously the general public, by undermining the vested interest rent seeking by various groups. But the big winners are the politicians themselves. I doubt any of our politicians really want to be making off-the-cuff decisions to satisfy lobbyists and shock-jocks. They know that this is not good government. By binding themselves, the politicians actually free themselves to develop good laws. And this is a paradox of good government.

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