Economic Rationalisation.

By Bruce Evans.

Bruce Evans was elected to the Victorian Parliament in 1961 representing the seat of Gippsland East. In 1964, he was elected Deputy Leader of the Country Party but lost that position in 1970 after a very public falling out with the then Deputy Prime Minister and Leader of the Country Party, John McEwen over the coalition with the Liberals in Canberra. He continued to serve as a back bencher but refused to participate in the Coalition between the National Party and the Liberal Party established in 1990 in Victoria. Coalition was the issue that was at the heart of his dispute with McEwen thirty years earlier. He retired in 1992, the election that Kennett came to power. In November 1999, he commenced working as an Electorate Officer for the Independent Member for Gippsland East, Craig Ingram.

It started in the 1970’s, at opposite sides of the globe and at opposite ends of the political spectrum. In Britain, Prime Minister Margaret Thatcher, and in New Zealand, Roger Douglas, that country’s Treasurer set about dramatic change in financial management. People started talking about corporatisation.

At the time, Parkinson’s Law was supreme. To paraphrase Parkinson’s Law, it stated that the Public Service would use up whatever money was allotted by government, part of it being used to justify why it should be given even more. The status of each Public Servant relied on how many other Public Servants were under him or her so there was no incentive at any level to increase efficiency. This applied not only to the departmental structure but also to services like trains, trams, electricity and water, and Local Government to name a few.

The answer to the ballooning costs of services provided by the public sector was to introduce competition. We were entering the era of the global economy, we were told. We had to be more competitive if we are to be able to compete on world markets.

The Liberal Government in Victoria responded to this clamor by setting up the Public Bodies Review Committee (PBRC) in the late 1970’s. Made up of 12 Members of Victoria’s Parliament, (6 from the government, 4 from the Opposition and 2 from the National Party) the Committee was charged with deciding whether government bodies referred to it should cease to exist. It was given the added teeth that its recommendations would automatically come into effect 12 months after the presentation of its final report unless the government took other action.

Soon after the Act creating the Committee came into force, the "Water Industry" was referred to the PBRC. The State Rivers and Water Supply Commission, which included Irrigation Districts, River Improvement Trusts, Water Supply and Sewerage Authorities, but not metropolitan water supplies, were the subject of the inquiry.

The Committee soon engaged a substantial staff to assist it in its inquiry as well as engaging consultants. The consultants made recommendations based on what purported to be objective analysis but which were heavily biased by the metropolitan background of the authors. One of the consultants was the Institute of Applied Economic and Social Research of the University of Melbourne. It reported on the economic impact of public bodies in Victoria. It recommended, among other things, that government bodies should be required to produce a real rate of return on the capital invested, suggesting a figure of 5%. The recommendation went on to say that where such a target was inappropriate, such as the Melbourne and Metropolitan Tramways Board and VicRail, (at that time, VicRail ran metropolitan trains) a lower target should be set. When I raised this issue in Parliament a Minister interjected that metropolitan passenger services are a social service for the people of Melbourne. (Ref: Hansard 2 June 1983 pp.4908 - 9) This recommendation set alarm bells off in my mind. Someone was making a value judgment that cheap public transport in Melbourne should be of a higher priority than a drink of water in the country.

I gained the impression that academics (and pseudo academics) both on the Committee and among the consultants that it engaged, were swamping the Committee. Alarmed by the fact that there was apparent unanimity on the Committee, I decided that I should seek my Party's nomination to that committee after the election of 1982.

By this time, the fate of water supply and sewerage authorities had been decided and irrigation was on the agenda. I was constantly challenging the assertion by other members of the Committee that irrigation only benefited those farmers whose properties were irrigated. They completely discounted the spin off benefits that followed from the construction of water storages.

Against my wishes, the Committee decided to engage yet another consultant, this time the Centre of Policy Studies, Monash University (C.o.P.S.). I argued that these people were being paid (in this case, $30,000) and were using publicly funded facilities, to express their opinions while country people, usually lacking the means and skills to produce such reports, had to prepare their submissions at their own expense. For farmers and other country people, the presentation of evidence is outside their usual activities and can be nerve racking. Academics are used to and comfortable in the process. If academics had opinions to express on the issues, it was my view that they should make their submissions in the same way as everyone else. It was a grossly unequal and unfair system to pay them to do so under the guise of being consultants. No consultancy organisation that wants to survive produces recommendations that do not suit the views of those who pay their fees.

The C.o.P.S.report was prefaced by comments from Michael J. Porter, Director, Centre of Policy Studies. The Director of the Project was Geoff Hogbin, and seven people were named as writers of the report.

On page ii of the Summary are the following paragraphs.

Primary "Beneficiaries"

10. Those who have benefited most from the investment of public funds in the construction and operation of the irrigation system were those who, at the time the investments were made, owned land to which water rights were assigned. These benefits took the form of immediate appreciation of the value of their properties by amounts which reflected the difference between the expected future value of the water in production and the amounts that people expected to pay for water in the future.
11. The capital gains were substantially larger than they otherwise might have been because water has been supplied at prices lower than the cost of providing it, including the cost of capital invested in the system.*

*Underlining is my emphasis.

Country people are surely entitled to know why these same " principles" do not apply to metropolitan public transport. It is equally true that the construction and operation of metropolitan rail and tram services benefits the owners of property served by the system. Despite the "privatisation" of the system, the 2000 - 2001 Budget provides $1,057,000,000 for Metropolitan Transport Services and $396,200,000 for Metropolitan Transport Infrastructure. By the economic rationalists own argument, on investment in the City of Melbourne, capital gains are substantially greater than they otherwise would have been because transport has been supplied at prices lower than the cost of providing it, including the cost of capital invested in the system.

Property owners in the city can invest in development because they know that their site value alone will increase substantially because of additional infrastructure for which they will not have to pay. They will make money by doing nothing.

The Melbourne Underground Rail Loop was not constructed to get people out of Melbourne into the suburbs - it was build to get people into the city and home again. When it was constructed, it was to be funded, 25% by the Melbourne City Council, 25% by the Melbourne and Metropolitan Board of Works (also a ratepayer funded authority) and the remaining 50% by the State Government. As soon as the scheme was completed, the whingeing started and the government soon gave in and reduced the shares of the Melbourne City Council and the MMBW to 10%, increasing the State's share to 80%. Whether city ratepayers fund any of this major boost to the economic benefit of the city is disguised in changes in the accounting procedures of the State government.

CityLink, too, adds to the value of properties in the CBD but it is the motorists who are paying for it, not the ratepayers who are reaping the benefit..

It is not the purpose of this paper to argue for an increase in fares for metropolitan people. The losses of the system should be born by those who derive the benefit, who are the ratepayers of the city. This is the process followed in other parts of the world. It is incredible that highly paid consultants, many of whom would be beneficiaries of this highly subsidised transport system, are not aware of its inefficiencies, nor conscious of the transfer of wealth that it represents. Transport systems in cities like Auckland and Toronto cover 80%+ of their operations from fares and ratepayers pay the rest. London Underground covers 137%. It just as much part of economic rationalisation to pay the infrastructure costs in the cities of Australia as it is for irrigators to pay for the cost of water storages.

There is no doubt that metropolitan Melbourne is subsidised by at least $1 billion annually in transport alone but by far the greatest benefit is going to the central business district. This in turn leads to excessive investment in building in the city thereby creating even greater demand for infrastructure. Every country and suburban business is subsidising its CBD competition.

The political system, as it stands at present, will not provide answers to the problem because political parties, including the National Party, rely heavily on donations from "the city". The newspapers that should be informing the public depend on "the city" for the bulk of their advertising revenue and they have a vested interest in suppressing the facts. Developers in the city have waxed fat on the benefits of subsidies on public transport, as well as in other forms that may well exceed $3 billion annually, and will continue to do so while academics and economic rationalists rationalise irrational arguments.

The chart shows graphically the rate revenue of non-metropolitan Councils, Melbourne City Council and other metropolitan Councils. Melbourne City Council revenue from rates seems to be extremely small given the immense proportion of State expenditure that is spent there. It is likely that businesses in the suburbs are also subsidising their city based competitors. The net result does not seem to be in the spirit of economic rationalisation.

The total rate venue raised over the whole State represents less than 5% of the amount spent by the State government. It is obvious from those figures that rate payers of the City of Melbourne are not paying very much towards the capital and operating costs of the infrastructure that is adding immense value to their properties. It should also be obvious that the State government is carrying costs that, under the theory of economic rationalisation, should be a charge against those who benefit.

This is just one - and probably not the largest - of several ways that wealth is being transferred from the country to the city without the user or beneficiary paying. There will be no change until metropolitan residents become aware of the extent to which wealth is being transferred into "the city" by means of the processes outlined above.

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