Federation. Is. Broken. Surely?

Why don’t we celebrate the Australian Federation? Logically, it would make more sense to mark the formation of the Commonwealth of Australia (January 1, 1901), rather than the highly contentious Australia Day (January 26). The former offers the notion of nationhood and a sense of progress; the latter is tainted with invasion and colonization.

Part of the problem is that we don’t really believe in the Federation (or more likely, we don’t understand or know enough about it). Queensland and New South Wales were initially cold to lukewarm about joining the Federation, and Western Australia only came around once the Constitution Act was passed in 1900. (There’s even a argument to suggest that New Zealand may have joined the Federation before or instead of Western Australia, but I’ll leave that to the historians.)

More significant is the fact that the past two years have revealed considerable cracks in the Federation. States have been taking very different approaches to the current pandemic, with both Western Australia and Queensland at times acting as if they had already seceded. We’ve seen huge inconsistencies in how each State and Territory has responded to Covid – there was little to no national consensus on defining “hot spots”, “red zones”, “clusters”, “complex cases”, “mystery cases” or “close contact”. The respective public health measures and administrative responses were also very different, leading to confusion, frustration and anger over external and internal border controls, hotel quarantine, home isolation, track’n’trace, density limits, social distancing and vaccine roll-out. Overlay that with cack-handed management by the Commonwealth itself, and it’s easy to see why many people feel no love for Federation.

The former Premier of NSW let the cat out of the bag when she referred to “our New South Wales citizens”. Last time I looked, Australian citizenship is conferred at the Federal level, not by individual States or Territories. This Freudian slip just confirms the many fault lines that exist as between the Commonwealth and the States, and as between the States themselves. About the only thing that unites Australians is when a national sports team is competing at international level…

In fact, there are many areas of public policy, administration and infrastructure where the States and Territories adopt different standards and models – for example, we don’t yet have a fully integrated national energy grid, daylight savings results in five different time zones during summer (as opposed to the three during winter), and there are differences in parliamentary structures (bicameral vs unicameral) and election cycles.

The issue of Federation is also fraught from a financial and budgetary perspective. States and Territories have limited options for raising their own revenue, namely payroll tax, land tax, stamp duty and licenses. While they can generate revenue from commercial ventures such as public-private infrastructure projects (and from mining and resources royalties), the bulk of their funding comes from the distribution of Federal income tax and GST (sales tax). (Or they borrow in the public debt markets.) And of course, there is always some aggro on these allocations at COAG meetings (now known as National Cabinet….).

It might also be the case that just as we have too many professional football codes (none of which are truly “national”), we have too many layers of government for a population of just 25 million people (Federal, State, Local). Given that Local Government is not actually provided for in the Constitution, and given the antagonism between States, perhaps there is a case to be made for change. Most people live within a few coastal conurbations. Moreover, many people identify closely with their city, region or rural locality, even more so than their State. Think of border twin towns such as Albury-Wodonga on the River Murray and Tweed Heads-Coolangata on the East Coast. So, why not abolish the States and Territories (as well as dismantling the current local government structure), and instead establish functional municipal, regional and rural governments that are more representative of their local communities, and which are charged with distributing resources and coordinating public services on behalf of the Commonwealth (especially in the areas of health, education, welfare and transport).

One thing is certain: Australia needs to sort out the Constitution before it can re-visit the idea of becoming a Republic. Apart from the issue of a Treaty for indigenous recognition and native title land rights (and resolving the anomaly that is Local Government), the structure of our political institutions also needs reforming. Having Federal elections every three years reinforces short-term policies. Consider also the negative impact the current state of the party political system has on the quality of policy debate and implementation. Look also at the wonky versions of proportional representation we have in the form of single transferable votes and dodgy preference deals, plus Senate party slates and “Captain’s picks”.

This all means that even though we may think we are voting for individual candidates to represent our interests in Parliament, we are in fact voting for party machines. Those party structures are rife with factional warfare, internecine disputes, branch stacking and shady backroom deals – hence, we don’t directly vote for the Prime Minister (who can be rolled by their own parties, as we know to our cost), and we can’t hold our constituent representatives accountable except at the next Federal election.

Even if we acknowledge that we are voting for a candidate based on their stated party allegiance, there is no guarantee that they will vote (or even stay) with that party, so we don’t get the representation we voted for. Add to the mix the continued problems with party donations, campaign funding, Parliamentary lobbying and electoral pork barrelling, and it’s no wonder we have given up on the party political system and have lost all respect for our elected representatives and their party leaders. Plus, the perpetual rent-seeking from entrenched vested interests (coupled with monopolistic institutions and cozy industry duopolies) means there is inertia in favour of this status quo.

The proposed model for a Republic seems to be predicated on having a President as the Head of State (to replace the British monarch and their local representative in the form of the Governor-General). Beyond that there seems to be little agreement on how the the President will be appointed, or what Constitutional and/or political powers will be vested in them. Recent proposals for a nomination and election process have been met with both support and opposition from former Prime Ministers. But until we define what role the President will perform, we can’t begin to think about the process for their elevation to the position.

For example, is the Presidency going to be a mere figurehead, with no decision-making authority apart from confirming the Will of Parliament? Should the President be directly elected via universal suffrage, under a single, popular vote and “first past the post” method (rather than via a fudged proportional representation model? If we have an electoral college system (as in the USA), who gets to participate, how are they appointed and how do they get to cast their votes? How long should the President hold office? Is the Office of President designed to “keep the bastards honest” in Parliament, or to intervene when the Parliamentary party system breaks down, or to sue the Commonwealth on behalf of affected citizens when the Constitution is breached? Will the President have any role in forming public policy, or negotiating international treaties? Or will the President be voted in under a popularity contest, and as a reward for past public service, kind of like a plebiscite for Australian of the Year?

Another thing may also be certain: the timing (and likelihood) of Australia becoming a Republic will depend on the politicians of the day, how they advocate for it, and the model they propose. Because wrongly or rightly, the form and substance of the Republic will be linked to the character of the Prime Minister who has to invoke the necessary Constitutional reforms, and the nature of the Government they lead to implement it. Which is a large reason why the Referendum on the Republic failed last time – the proposed model was not clear enough to the electorate, and Australian voters may have feared the outcome would result in a President who did not represent them, or who did not reflect the choice of the people. A bit like our recent run of Prime Ministers, and the revolving door at the Lodge!

Next week: Gratitude and the Great Recharge

 

 

 

Is crypto finally going mainstream?

Just as my last blog on crypto regulation went to press, news broke that CBA (one of Australia’s “four pillar” banks) will be adding crypto assets to its mobile banking app. Add that to the launch of a crypto equities ETF by BetaShares, and further media coverage of local digital asset fund manager Apollo Capital, and you may start to believe that crypto is finally going mainstream in Australia.

But, before anyone gets too excited, a few caveats are in order.

First, the recent flurry of announcements from the Australian Senate, ASIC and AUSTRAC are simply the latest stages in a long-running debate about how crypto assets should be regulated, serviced and distributed. Despite these positive noises, there is still some way to go before crypto reaches critical mass (even though data for Australia shows we have one of the higher rates of market adoption).

Second, there is a lot of noise out there, and not all of it here in Australia. The SEC, FATF, ISDA, Cboe and SGX are just a few of the institutional voices making announcements on crypto and digital assets in recent weeks. On top of that, of course, there is the President of El Salvador (and the Mayor-Elect of New York) weighing in on behalf of the politicians. Some of this commentary is mere posturing; some is about being seen to be doing something; and a large part is just the legacy markets trying to catch up (and hoping to take control?).

Third, a closer look at CBA, BetaShares and Apollo Capital reveal some significant limitations in terms of what their products actually offer:

The CBA is planning to launch a trial among a small sample of their mobile banking users (although, no doubt, if things go well, it will be rolled out more extensively). But it does not mean the app becomes a fully-fledged crypto wallet: customers will only be able to buy/sell crypto within the app, and they won’t be able to send crypto to third parties. Plus, only a small set of crypto assets will be available.

The BetaShares ETF is not offering direct exposure to Bitcoin or other crypto assets. Instead, the fund is designed to invest in companies (mainly crypto exchanges, miners and technology providers) that are significant or strategic industry players. While that may mitigate the market volatility (and price fluctuation) that crypto experiences, it doesn’t necessarily make for higher returns.

The Apollo Capital fund is only available to wholesale or accredited investors – not retail customers. And while Apollo has done a reasonable job of growing its AUM, I don’t believe there are any major allocations from Industry Super Funds (which manage 27% of Australians’ retirement savings), Retail Funds (21%) or Public Sector Funds (18%). And despite anecdotal evidence that Self-Managed Super Funds (SMSF) are more active in crypto assets (along with Family Offices and HNWIs), recent data from the ATO suggests crypto assets held within SMSF are not much more than $200m.

Having worked in this industry since 2016, it’s always been apparent from an institutional perspective that few want to go first, but nobody wants to be last, when it comes to launching crypto products and services. Of the three Australian stories this week, the most significant is probably the CBA; it certainly got a lot of attention at the recent State of Play presentation by Blockchain Australia, in large part due to the industry implications, and how it will help bring crypto to an even wider audience.

Next week: Summing Up (and Signing Off)

 

 

Opening Up…

This week, Melbourne is trying to get back to some semblance of normality, following 11 weeks of the current lock-down. But it’s far from “business as usual”.

Based on casual observations, people were desperate to queue up for personal grooming services, restaurants and outdoor shopping. (I did see at least one classic mullet, but I wasn’t sure if it was a fashion statement or just another case of Covid hair…)

Despite the latest changes announced by the Victorian Government over the past week, the ongoing public health provisions mean there will still be a “work from home” directive, retail and restaurants will be subject to density limits (and vax certificates) and masks will be required indoors.

One cafe in my neighbourhood, which has kept going during lock-down with serving takeaways, is deferring opening up for dining-in because they can’t get enough staff. This demand for talent within the hospitality sector means that employers are having to offer sign-on bonuses and higher wages.

While this should be good news for job seekers, the resulting upward pressure on staffing costs will likely trigger a rise in inflation (and higher interest rates?), and possibly further disruptions in supply chains.

Added hiring shortages will come from those employees who have used the lock-down to reassess their career options, and have decided to change jobs – also known as the “Great Resignation”.

Even among those employees who are returning to the office, many of them are only intending to be there 2-3 days a week. This will create a mid-week bulge in the CBD, with various knock-on effects: traffic jams, cramped public transport, and erratic trading patterns for small businesses in retail and hospitality. Employers will also be stressing how they maintain productivity levels with the adoption of extended weekends.

Finally, some industries such as tourism and international travel will take several months to get back to pre-pandemic levels – expect to see steep prices while capacity and supply remain constrained.

Next week: Crypto Regulation in Australia

 

 

“What Should We Build?”

Over the past week, the Leader of the Federal Opposition has been asking a series of questions on Twitter and elsewhere, about “what should Australia be building?”. As well as building the foundations of Labor’s Federal Election policy platform for boosting jobs in the manufacturing sector, it also provides lots of photo ops for pollies in hard hats and hi-viz clothing. (I do wonder why the potential Prime Minister hasn’t thought of this idea before, or why he appears to not know the answer – isn’t that his job? It also makes me wonder whether we need Parliament anymore, since our elected representatives prefer to conduct their “debates” via Social Media and Press Conferences…. it would save a lot of time and money!)

By this time next year, Albo could be PM (Photo sourced from Twitter)

There has been no shortage of suggestions from the Twitterati, which fall into the following main categories:

  • Renewable energy
  • Trains
  • Trams
  • Ferries
  • High-end engineering

But there has also been commentary around Labor’s ambivalence on the coal and gas sector (especially in the key state of Queensland), and the irony that we export cheap raw materials and import expensive finished goods. Then there is debate on the amount of local manufacturing content that already exists in Australia’s state-based trains and urban trams/light rail systems (skewed by the question of local vs foreign ownership). Plus, there’s the thorny issue of high-speed inter-city trains…

As I commented recently, the manufacturing sector accounts for fewer than 1m local jobs (less than 10% of the working population), and 6% of GDP. It has been declining steadily as a contributor to GDP since the 1960s, and more rapidly in recent years since we abandoned key subsidies to the car industry. I don’t think anyone is suggesting we return to the days of metal bashing and white goods. And while we’ve got to be selective about the type of manufacturing base we want to to develop, we also have to be realistic about the manufacturing capabilities we want to encourage and enhance.

The latter involves developing transferable skills, creating interoperable production lines, deploying modular designs and inter-changeable components, and recycling/repurposing. All of which should mean we don’t need to make every part of every item domestically, but we know how to assemble, service, maintain, repair and replace goods locally, and we can focus on adding value that can be fed back into the supply chain, which in turn can be exported (via know-how and services). Australia has some decent research and development capabilities, but we are not always very good at raising domestic investment, or commerciliasing our IP (so this value ends up being transferred overseas, with little to no return accruing locally).

I’m not a huge fan of simplistic “buy local goods/support local jobs” campaigns, or local content quotas. The former can degenerate into trade protectionism and economic nationalism; while the latter tend to favour inefficient incumbents within cozy duopolies (see the broadcasting and media sector). The current debate has also raised questions about procurement policies, and I for one would welcome a total revamp of government IT purchasing and deployment at Federal, State and LGA levels.

There’s also the consumer angle: Australians are notoriously “cost conscious”, so will they be prepared to pay more for locally-made goods, even if they are better designed, well-made and energy efficient, compared to cheaper, less-sustainable imports? (This is also linked to the question of wage growth and restrictive trade practices.)

The recent pandemic has highlighted some challenges for the structure of the local economy:

  • Disruption to distribution networks and supply chain logistics
  • Food security
  • Energy self-sufficiency
  • Inability to service equipment locally or source spare parts
  • Different standards across the States
  • Medicine and vaccine manufacture, sourcing and distribution

For an up-to-date perspective on where Australian manufacturing policy needs to be heading, I recommend taking a look at the Productivity Commission’s latest submission to a current Senate enquiry. (Am I alone in thinking that the PC, along with the ACCC, is doing more to develop and advance economic policy than our elected representatives?)

The PC’s submission addresses a number of key points:

  • R&D incentives are hampered by complex tax treatment
  • Policies (and subsidies) favouring one industry create uncertainty for others
  • Need for IP reform (especially “fair use” of copyright)
  • The National Interest test needs clarifying
  • More effort on up-skilling through more relevant education and training
  • The role of manufacturing capabilities in supporting supply chain infrastructure

Finally, while I agree that there needs to be some focus on renewable energy and public transport, we should not ignore food and agriculture, bio-tech, IT, automation, robotics, materials science and other high-end capabilities in specialist design, engineering and recycling (including reclaiming precious minerals from obsolete equipment).

(And did I mention the “Innovation Agenda” and the revolving door at the Federal Ministry?)

Next week: Dead Pop Stars