Saturday, April 20, 2013

To market, to market?

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.