"It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong." Richard P. Feynman
Thursday, September 6, 2012
The clash of ideology and reality continues in Oz
While Julia Gillard is spending money like a drunken sailor on unfunded policies , a downturn in revenue has prompted Martin Ferguson , the Energy Minister and one of the few adults in the government, to shelve plans to close brown coal power stations saving billions in compensation. This latest backflip shows a government that does not know what it is doing and the uncertainty is causing sovereign risk which will deter investment in this country. Dennis Shanahan has the story:
Ever since the bungled negotiations and implementation of the resource super-profits tax through 2010 to now, business, industry and investors, both domestic and foreign, have grown concerned that it is not possible for the government to keep its word.
Sovereign risk is the element of a long-term investment that calculates the degree of certainty in a sovereign government's ability to stick to its policy and agreements. The greater the uncertainty the greater the risk and the less chance of investment. This is not a threat to the hundreds of billions in the "pipeline" already committed to projects under way but is becoming a real threat to the investments Australia needs to avoid a bust after the boom.
The decision to end the negotiations to buy and close down Australia's "dirtiest" brown-coal power plants is not just a shift in policy that might ultimately save the budget billions; it is another shift in the goalposts that sends the wrong signals to industry and investors.
Apart from the fact the government's purchase and closure of the high carbon-emitting power stations was instrumental in reaching its target of cutting greenhouse gases and would cost hundreds of jobs, it was a core element of agreement with the electricity suppliers about the long-term conversion to "cleaner" gas-powered stations.
These negotiations, which Energy Minister Martin Ferguson says were conducted in "good faith" but were undermined by the economics of electricity demand (and costs under the tax), are another symbol of Labor's inability to deal with business realistically, openly and frankly.
From the beginning of the closure negotiations, it was clear there was a yawning gap between what the suppliers wanted to close down their plants and what the government could afford to pay. It was an open secret that the government's undisclosed price set aside in the "contingency fund", which is off-budget and would stay off-budget until the deal was done, was billions short of expectations.
Ferguson said yesterday this was simply the case and he was protecting taxpayers' funds. Nonetheless this is another example of pragmatic business being squeezed into an ideologically driven process with limited funds and faith.
Ever since the blighted RSPT and then its bastardised offspring, the minerals resource rent tax, and the wheeling and dealing on the carbon tax, Labor's policies and attitudes towards business have been cavalier to say the least and at times hostile and damaging.
Sovereign risk - where companies began to compare Australia unfavourably with African dictatorships - began when mining companies felt betrayed by Wayne Swan over a tax they did not know was coming. It has continued with the MRRT until now, with the Treasurer warning states they could lose GST funds if they raise mining royalties despite an agreement signed by Julia Gillard and Swan that all state royalties would be covered by the commonwealth.
It's continued with the introduction of a $23-a-tonne carbon tax, cost-cutting on green car industry funds, the freezing of federal grants in this budget, which covers clean energy projects, and dropping the $15 floor price for carbon after 2015.
If Australia wants to continue to be the envy of the world, as Swan repeated on the release of the national accounts, if it wants to keep the investment pipeline running and if it wants to avoid a steady flight of future investment, the government needs to turn its attention to sovereign risk and not just the impact of the high dollar, labour costs and new taxes.