An off-the-cuff remark by Malcolm Turnbill last week raised
my ire. In talking about the NBN, Turnbill characterised, or rather caricatured
the government's model of the NBN as 'Soviet' in its conception. This flourish
of political polemic will work with many loyal Liberals but will also have some
penetration in the wider community.
Of course, the element of truth is not missing, otherwise Malcolm can be
laughed out of town. The NBN will be a government monopoly; not because of an
ideological position but through the sheer practical difficulty of implementing
competition in communications infrastructure in Australia.
Put simply, Australia lacks the density of population to
make duplication, even in suburban areas, a workable option. Therefore,
competition is impossible. Did Malcolm know this? Undoubtedly. Does he actually
believe there will be competition? No.
What he actually hopes is that something resembling
competition will fall out of the FTTN model so he can keep the
frothing-at-the-mouth ideologues at bay. Perhaps someone will challenge Telstra's
stranglehold on Australia's copper by offering cheap fibre. Where's the queue
for those companies? He also knows that technology will change sufficiently in
the next 5 years that the price for the final leg will be lower; so politically,
why make your option sound more expensive by using today's costs?
We are not surprised that a major project should be a
political football. Unfortunately, only when a country digs deep and acts boldly
do nation-changing events occur. And they are not driven by markets. What we
can safely say is, although markets deliver efficiency, they do not deliver
inspiration.
Let us take two examples.
First, let us look back at a project that by today's standards
would be considered mind boggling - the transcontinental railway in the US. Even if we took a conservative index of 2%, in
today's money, what the US government offered would be in the 10s of billions
of dollars. The real value is probably closer to half a trillion dollars. For
one railway. Not a communications network to every city and town in the
country.
How did it get paid for? No, not taxpayers money directly, but government
bonds. Loan us the billions and we will reward you with 6% interest. Where's
the market? In the buying and selling of bonds. Does the market identify the
need, have the bold vision or work out how it will be done? No. But without a
bond market, giving the government your money doesn't seem half as attractive.
The transcontinental railway was not just a means of joining
the economic powerhouse of California to the East Coast industrialists. It was
also a social program to make sure unemployed soldiers of the Civil War did not
languish in poor houses. In every way, it was a win-win; except if you happened
to be a labourer who died as a result of avoidable hazards of building the
railway.
Regardless of which of the economic orthodoxies takes your
fancy, these kinds of projects are very common in modern history and very
compelling in their logic. They are not exactly rocket science. But the Soviet
experience has made a convenient whipping boy of all state enterprise. Big
government projects = big government spending = big government control.
But all government projects are not equal in the manner in
which they are conducted. What made the Soviet model dysfunctional was not its
ownership or payment by the government, but the dead hand of centralised
management of the whole economy, not just a project. China now proves that
state control and ownership are not antagonistic to free enterprise and market
capitalism.
But another example looms to illustrate just how poor
markets are at achieving anything except the best deal for the shareholder.
The price of carbon has collapsed in Europe. There are a multitude
of factors that impact this price but the major factors are these:
The price of energy has collapsed. The Woodside decision is
premised in the poor returns on gas, regardless of the health of China's
growth. The boom in US shale oil prospects means energy is going to be cheap. Capping
carbon will be increasingly difficult and investors know it.
The signals that the market has given to those who were
likely to go green has already worked - too well. Those companies who might
have needed carbon credits are now green or carbon neutral, so the value of
credits has dropped through lack of demand.
Lastly, large energy users are realising that direct
investment in energy sources that don't fluctuate in price - that is, renewables
- beats being a polluter and paying for carbon use.
Unfortunately, a carbon tax cannot succeed unless the
restriction on carbon pollution continues to close. It is the government
setting strong targets and beginning large projects that sets the market going.
Requiring zero emissions by 2020 might hold the price up. Investing a trillion
dollars in renewables might do the same. Nothing like a 'piece of the action'
to light up a capitalists eyes.
Nothing like a bold plan from the government to
galvanise people to buy bonds.
The government needs to offer a prize of a 40 billion dollar contract, paid for in government bonds, to the company who can produce 0 emissions energy
at the same price as the cheapest oil or coal and billion dollar contract, paid for in government bonds, to the company who can produce 0 emissions energy
at the same price as the cheapest oil or coal and then stand back and wait.
