ACCC Chairman critical of market share of Qld State-owned power generators

Yesterday morning, in one of the best interviews of a public official I have ever heard, ACCC Chairman Rod Sims gave frank and informative replies to ABC Brisbane’s Steve Austin on the state of the electricity sector and the inquiry into electricity prices the Commission is currently running. As Chairman Sims noted in his introduction to an inquiry forum held at Brisbane’s Hotel Urban on Wickham Terrace last night, broadly speaking, power prices have doubled in real terms over the last decade on Australia’s east coast. This is of great concern to households and a wide variety of businesses, some of which are experiencing power price increases that are making their businesses unviable or forcing them to curtail operations and shed staff. It was good to see that Queensland industry was represented at Hotel Urban last night. Notably, a representative from Bundaberg Rum attended and addressed the forum regarding his concerns.

On both the radio and at the forum, Chairman Sims made it clear that the Queensland power generation industry is too heavily concentrated: two State-owned generation companies, Stanwell and CS Energy, control two-thirds of the generation capacity. As the companies asserted their market power earlier this year, by bidding high prices to supply electricity at times of shortages in the national electricity market, wholesale power prices in Queensland soared. In June, former Energy Minister Mark Bailey had to direct Stanwell, obviously the main culprit, not to take advantage of its market power, and wholesale prices have since dropped (see this ABC News report).

Nonetheless, Chairman Sims appears concerned that the underlying problem of market concentration in Queensland power generation remains. After Chairman Sims’s comments, the State Government really has no choice but to break up Stanwell and CS Energy, which operate multiple coal, gas, hydro and diesel plants, into a number of smaller generators, and to ideally privatise them (although dealing with the market concentration issue is the major concern). As part of its recent Powering Queensland plan, the State Government has announced it is investigating “the restructure of Government owned generators and the establishment of a ‘CleanCo’”. After Chairman Sims unequivocal comments on market concentration, that restructure will need to feature a major break up of the generation companies.

Also, see Steven Wardill’s article in today’s Courier-Mail:

State Government policy ‘means prices are higher than they should be’

D16 133476 Rod Sims Corporate Photo (1) - September 2016

ACCC Chairman Rod Sims

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Greater use of Gold Coast beaches by restaurants & cafes would boost tourism

Gold Coast, Queensland, Australia

Aerial view of Gold Coast, Queensland, Australia

Mike Winlaw, CEO of the Surfers Paradise Alliance, a business chamber, has suggested the Gold Coast take inspiration from Bali and allow commercial operators greater access to the beachfront. The Gold Coast Bulletin reports that Mr Winlaw said:

“Many tourism destinations have successfully differentiated themselves by offering an exceptional beachside experience combining entertainment and dining, right by the water’s edge.

“With our spectacularly wide coastline, I believe this is an opportunity the Gold Coast needs to seize and one which, if done right, would add much value to the region’s tourism offering by activating that differentiating experience for our own beautiful beaches.

“We have already seen the emergence of a sophisticated dining culture on the Coast, but most of the popular cafes and restaurants have been established in villages set back from the water.

“While there has been some move towards the sustainable commercialisation of our beaches, so far nothing significant has eventuated and other than a limited number of locations across the Coast there is nowhere residents or visitors to the Gold Coast can enjoy the magic experience of dining or being entertained right on the sand as the they watch the waves lapping the shore or the moon rising over the ocean.

What a terrific idea from Mr Winlaw. It is consistent with the point that I and other economists have frequently made that our rules and regulations are significant and often inappropriate constraints on economic activity and employment opportunities. You may recall I discussed the role of policy settings in influencing unemployment in my last post on the upcoming Ted Evans lecture and recent Queensland employment trends.

I should also note that allowing commercial operators greater access to beaches was an idea advanced in the leaked 2015 draft Economic action plan from the Queensland Department of Premier and Cabinet, a plan which regrettably was quickly disowned by the risk averse State Government. Action item 3.42 was:

Allow business to operate on QLD beaches with special permits. Find a way to allow commercial activity on QLD beaches. While there is a need to control commercial activity on public land, like beaches, there are some activities that would be acceptable to the community. Increasing the commercial activity will increase economic activity, provide services to the public and create jobs.

Given the secrecy around government policy advice and decision making, and given the main author of the Economic Action Plan is no longer in the department, it is unclear whether the Premier’s department is still producing such provocative and economically sensible pieces of policy advice.

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On the upcoming Ted Evans lecture & Qld’s recent employment trends

On 14 September, the Economic Society of Australia (Qld), of which I am the Secretary, is hosting the inaugural Ted Evans Public Policy Lecture at Customs House, Brisbane. The inaugural lecturer will be none other than former Treasury Secretary Ted Evans himself. Evans was the major advocate within the Treasury for floating the dollar in 1983, and led the Treasury during the GST implementation. But he may well be remembered by many for a profound observation he made on unemployment in the 1990s. At the time of Ted Evans’s retirement in 2001, the then Prime Minister John Howard observed:

Ted will be forever associated with that memorable phrase; in one sense, we can choose the level of unemployment which we are willing to bear; when discussing economic and social constraints on reducing unemployment.

While general economic conditions obviously play a large role in determining the level of unemployment at any time, Ted Evans’s famous phrase suggests we should review current policy settings (e.g. penalty rates, trading hours’ restrictions) with a view to changing those which are constraining employment. This is particularly the case for Queensland, where our unemployment rate remains stuck above 6 percent. In June, it was 6.3 percent (ABS trend estimate), significantly higher than the national average of 5.6 percent, not to mention the NSW unemployment rate of 4.8 percent, based on the June labour force data released by the ABS on Thursday.

While the volatile seasonally adjusted Queensland unemployment rate jumped 0.4 percentage points to 6.5 percent in June, this was likely a statistical aberration, as the labour market appears to have been improving over this year, vacancies are higher than they were 12 months ago, and nationally the labour market is performing reasonably well. My fellow Queensland economists Pete Faulkner and Nick Behrens are also positive about the Queensland labour market outlook:

Jobs report as expected, but it’s generally good news

Queensland employment growth stands out in June 2017

As I have noted previously, the positive trend in the labour market means the Palaszczuk Government will most likely be able to claim jobs growth was superior over its term than during the previous LNP Government’s term (see chart below).

Jobs_since_election_Jun17

That said, the Government remains vulnerable to criticism, because the bulk of the jobs growth has been in part-time jobs, and public sector employment has surged. This has led property market experts, among others, to question the true strength of the Queensland labour market, as reported recently in the Courier-Mail:

Buyers agent firm Propertyology warned the state’s jobs growth was “being artificially inflated by one solitary sector” – the public service.

Property director and Real Estate Institute of Australia hall of famer Simon Pressley said “it’s clear that Queensland’s economy is weaker than how it appears on face value”.

Certainly, the Queensland public service has been a major contributor to recent jobs growth in Queensland (see chart below based on the most recent public service data for March 2017*).

Public_sector_jobs_March_17

Growing the public service is one way of increasing employment, but it is generally not an efficient or sustainable way of doing so. We should instead reflect on Ted Evans’s point that the level of unemployment we are willing to bear is a policy choice, and re-evaluate those policy settings that restrain economic activity and employment growth.

*Note that full-time employment in Queensland is now slightly above the level in March 2015 (1.6423M) with the ABS estimating full-time employment at 1.6435M (in trend terms) in June 2017. Over the term of the current Government, full-time employment is now up by 13,600 or 0.8 percent.

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Queensland’s economic transition since the end of the mining investment boom

According to the Brisbane Times, at the LNP state conference on Sunday, Queensland Opposition Leader Tim Nicholls was highly critical of the Government’s economic management:

“…you certainly can’t create jobs or effectively manage our finances when the Queensland domestic economy is $6.5 billion smaller in 2017 than it was in 2015 when we were last in office.”

The Opposition Leader appears to be referring to Queensland’s level of State Final Demand or Gross State Expenditure. I am unsure of the exact data series he used, but I can get something close to his estimate using Queensland Treasury State Accounts data. That said, State Final Demand/Gross State Expenditure is not really the best economic measure to use, as it does not include exports and imports in its calculation. Rather gross state product (GSP), the comprehensive measure of economic activity, should be preferred.

During the mining investment boom, State Final Demand/Gross State Expenditure was boosted by a temporary surge in capital expenditure, which was always expected to fall back, and to subsequently lead to higher exports. Indeed, a major feature of Queensland’s economic transition at the end of the mining investment boom has been a surge in exports, as new projects including LNG plants have come online, and a fall in imports, as the investment phase and its related imports of capital equipment and supplies have ended (see chart below).

Transition_chart1

This transition has meant that, although Gross State Expenditure/State Final Demand has fallen as temporarily high capital expenditure has declined, GSP has nonetheless increased (see chart below). Over 2015 and 2016, GSP grew at an annual average rate of 2.8 percent, compared with an historical average annual growth rate of over 4 percent.

Transition_chart2

The Opposition could argue that growth has not been as strong as it could have been with better economic policies, and point out the bulk of jobs created during the Government’s term have been part-time (see my last jobs data post), but the Opposition will find it hard to argue the economy is smaller than when it was last in office.

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Is North Qld under-funded by the State Government relative to the South East?

In Saturday’s Courier-Mail, State Affairs Editor Steven Wardill reported on the unmovable perception among North Queenslanders that their region is under-funded by the State Government, despite official data showing otherwise. Wardill noted:

Facts and figures are dismissed out of hand. Northern Queensland may spend 31 per cent of the state’s revenue and produce only 21 per cent of it, but that kind of detail is cast aside as “bullshit, mate” by those who insist there’s an imbalance.

It’s accepted that the state’s capital commandeers all the cash, even though it’s not true. It’s what’s best described as a “vibe” and it’s venomous.

I am unsure of the source of the 31 versus 21 percent figures, but I am confident that North Queensland is not being under-funded by George St relative to other regions, based on official budget data from Queensland Treasury that I would consider reliable. Figures that I presented in my post-State Budget post show that NQ regions receive significantly more State Government capital works funding per capita than South-East Queensland. That chart was based on data presented in the 2017-18 Budget, and I have now analysed the data in previous Budget papers to determine that regional Queensland typically receives more than its fair share relative to SEQ (see chart below).*

Regional_shares_Chart1

Indeed, if any region should be complaining, it is the Logan-Beaudesert region in SEQ which has been persistently under-funded relative to other regions (see chart below).

Regional_shares_Chart2

If there ever is a separate State of NQ, its residents may well end up wishing they had remained with the rest of Queensland, once they realise just how good a deal they actually had.

*NB. I have included the following regions in SEQ: Brisbane, Ipswich, Logan Beaudesert, Moreton Bay North and South, Gold Coast and Sunshine Coast. I have included the following regions in NQ: Cairns, Fitzroy, Mackay and Townsville. Part of the Outback region lies in NQ, but the part in NQ could not be split out.

Posted in Infrastructure, North Queensland, Uncategorized | Tagged , , , , , , , , , , | 12 Comments

Sweetheart deal to lure Land 400 “war machine” contract winner to Qld undesirable

If we want the most efficient and productive economy possible, with the largest number of sustainable jobs, then we should aim to minimise the taxes and charges on all businesses, not just the favoured few which have the resources to lobby governments and can play them off against each other in interstate bidding wars. Alas, the Queensland Government is getting into an interstate bidding war with Victoria to attract the winner of what the Courier-Mail has labelled a “lucrative multibillion-dollar war machine contract”, the Land 400 contract with the Australian Defence Force (for further information on the contract see Nick Behrens’s post Land 400 ADF Contract a must have for Queensland Manufacturing). While it would be terrific for the Queensland economy if the winning bidder invested in Queensland, the Queensland Government should avoid cutting a sweetheart deal with the winner.

Deputy Premier Jackie Trad has committed Queensland to do “whatever we can” to lure whichever multinational defence contractor, Rheinmetall Defence or BAE Systems, wins the contract. Doing “whatever we can” likely means exemptions from payroll and land taxes for several years. Previous governments have also done whatever it takes to lure investment, including most famously the Beattie Government in luring Virgin to Queensland, but that does not make it right. In its comprehensive 2015 Review of Industry Assistance in Queensland, the Government’s independent economic adviser, the Queensland Competition Authority, provided strong advice against engaging in interstate bidding wars (on pp. 32-33 of the Final Report, Volume 1):

…interstate bidding wars to attract investment and major events…are unlikely to provide long-term benefits to a state.

Queensland could engage in such activities and could conceivably ‘win’ at the expense of other states. But these potential gains would be at a significant cost to Queensland taxpayers. There is also no guarantee that a project will deliver expected economic gains, or remain in the jurisdiction once the inducements cease. The empirical evidence from overseas tends to suggest that at best, the losses tend to cancel out the wins.

Research shows that firms tend to base locational decisions on the rate of return they can achieve on an investment. The location decision is largely driven by general economic factors based on a range of cost drivers, as well as social and political factors (e.g. transport, energy and labour costs, infrastructure, workforce skills and social and political stability). Government assistance plays an insignificant role, if any, in a firm’s location decisions.

I applaud the Queensland Government for its commitment to jobs and admire the Deputy Premier for her fierce advocacy for the State, but I would suggest the Government should heed the lessons contained in the QCA’s Industry Assistance Review.

330px-Kim_Beazley

The Qld Government has recruited Kim “Bomber” Beazley to help it lure a multi-billion dollar defence manufacturing contract to Queensland

Posted in Queensland Government, Uncategorized | Tagged , , , , , , , | 6 Comments

ID scanning law a risk to night time economy and Brisbane’s growing international reputation

When I picked up the most recent issue of Monocle, I was pleased to see Brisbane in the list of the world’s top 25 cities, but I suspect Tyler Brule and his Monocle staff would be aghast at Queensland’s new ID scanning law, and they would reassess Brisbane’s status. The ID scanning law, which requires venues in the City and Valley trading after midnight to scan patrons’ IDs, has received some heavy criticism this week, in the Brisbane Times (see Winemakers turned away from top bar due to ID laws) and in the Courier-Mail by Paul Syvret, who considers it a nanny-state measure (For an allegedly modern capital city approach to party precincts is just plain dumb). The ID scanning law has become a risk to the night time economy and Brisbane’s growing reputation among international travelers.

The Queensland Government needs to urgently re-think the ID scanning policy. It was adopted as a compromise after the failure of the Government’s 1am lockout law which was repealed earlier this year. But it appears to have been hastily implemented without the benefit of a sound public policy process to ensure it delivers net benefits (i.e. it passes a cost-benefit analysis test) and that it is a proportionate response to the problem.

As reported in the Brisbane Times earlier this year, night time economy spokesman Nick Braban had hoped that the ID scanning law would only apply to the larger beer barn-type venues and not to “smaller, boutique venues”. But, given the law now applies at the sophisticated city bar the Gresham, it would appear it is not well calibrated and is a disproportionate response to the risk.

As an economist, I am disappointed that there does not appear to have been an economic study, including both a cost-benefit analysis and an economic impact analysis, performed on the ID scanning policy before it was adopted. A publicly available Regulatory Impact Statement (RIS) would have been highly desirable given the significant costs the policy is is imposing on the industry, through ID scanners costing thousands of dollars and which each require a staff member to operate, and the risk the policy poses to the night time economy and our international reputation. Such a RIS, which could be subject to rigorous review by the Queensland Productivity Commission, would compare the ID scanning law with more nuanced and likely more cost-effective options, such as increasing the fines for venues which serve intoxicated patrons or which fail to provide sufficient security to manage their large crowds.

I do not deny Queensland has a problem with alcohol fueled violence, but we should find a proportionate and cost-effective response to it, and sound economic analysis is essential in developing that response.

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