How much will the NBN actually cost the Aussie taxpayer?

Sean-Garman Sean Garman analyses the financial claims underpinning the National Broadband Network:

 The National Broadband Network (NBN) has the potential to be an extraordinarily expensive white elephant that potentially exposes the Australian taxpayer to financial risks well beyond the political and business cycles. The NBN capital structure as it is currently set up increases the risk that this monopoly will be a financial, legal and operational drain on the Federal Government. There are a number of claims about the financial cost of the NBN which have not been rigorously examined by media commentators either because they do not understand or because they are too focused on the political or technological aspects of this project.

NBN will ‘only’ cost the taxpayer $27.5bn not $43bn

This claim is often repeated by the Government and pro-NBN supporters. At this moment, the Australian Government is directly contributing $27.5bn in equity into the NBN capital structure with the NBN Co. borrowing $13.4bn from 2015 onwards. The problem with this analysis is that it does not examine the potential downside risks to putting in ‘only’ $27.5bn in equity for an essentially unproven concept.

Waterfall impact – dividends, cost of equity and returns

In capital structures there is a term called a “waterfall” which is about tranche seniority when being paid an income (interest/dividend) or when the asset is sold. The most senior “tranches” are paid first with whatever remains being paid down the line, hence the analogy to a waterfall.

Debt ranks senior to the equity in capital structures. Under the proposed scheme, if the NBN does not return a sufficient net cash flow then the equity tranche will not return a dividend to the Australian Government. Therefore it will act similarly to dead capital – a sunk cost without any stream of constant income.

The Government assumes that the equity will be borrowed at a market rate of 5.39% (a 10-year Government bond yield) but the return will be 7.04%, thereby earning the government a 165 basis point spread or differential equivalent to $435.75m per annum on the total $27.5bn equity. The NBN will only begin to pay the government dividends from 2020 onwards. By that stage Australian taxpayers would have contributed the equity cheque but without receiving any compensating income from NBN Co.

Unfortunately this assumes that the NBN is profitable enough to provide that constant stream of income to the government. If the NBN is not profitable or there is not enough net cashflow at the end of the period to pay out a dividend cheque, the taxpayer still has to pay 5.39% to the bondholders but will not earn income to compensate for that. The net result is the taxpayer paying more in interest every year than they receive in income from the NBN.

Default provisions and a government guarantee

As I mentioned earlier, debtholders rank senior to the equity holders which raises some interesting questions around what happens in the event of a default. Every financial deal has a ‘term sheet’ which sets out the key terms and conditions. This is very important because technical details matter during times of distress.

NBN Co. is a company, we are told, who sign commercial agreements and the government will not guarantee NBN debt. Assuming this is true, when they borrow the $13.4bn in debt there will be a number of provisions in those documents which will be negotiated with the lenders. This raises additional questions:

  • What triggers a default? i.e. what financial covenants will NBN have and how easy would it be for them to breach it?
  • What legal rights do debtholders have when investing in the NBN Co.?
    • Can debtholders force a change in management in the event of underperformance?
    • Will debtholders take control of the fibre optic assets if covenants are breached?
    • If this happens, can the debtholders use their newly legislated monopolistic powers to push up prices for the retailers in the market?

I can go in this vein for a while. If the Government is serious about not guaranteeing the NBN then this will be reciprocated with debt holders demanding more security around their large investment in an untried company. If it is decided to change the debt structure to remove debt holder security, then investors will need to be compensated with a higher interest rate charged which reduces the internal rate of return (7.04%) that the government is forecast to earn.

A potential albatross around the neck of taxpayers

Supporters of an NBN do have a point that it can generate unexpected benefits over decades which simply cannot be quantified. If this was the only case for the NBN then the government should not pretend that they can quantify a defined benefit in perpetuity and should pay for it out of general tax revenue.

Unknowable benefits are not a good enough excuse to pay $27.5bn upfront, borrow an additional $13.4bn and then leave taxpayers who are pressured to take on a NBN at the mercy of an underperforming monopoly with private debtholders who may have legal rights to take over the company and potentially use their monopolistic powers by hiking-up prices.

In an era with greater-than-ever demands for public investment, we need complete transparency with the largest-ever government programme and we are being failed at every turn by an incompetent Minister who has nailed the trousers of the Australian taxpayer to the NBN mast. Let’s hope the ship doesn’t sink!

Sean Garman works in Structured Corporate Finance in London, he was the former Macquarie University Liberal Club President and is now Co-Chair of the Conservative Party’s City Future committee for Conservative supporters under 35 who work in finance in London.


It’s Time to Unleash Business from Government diktat

Sean-Garman Tony Abbott needs to start fighting in the corner of investors, entrepreneurs and small businesses against Labor’s Big Government machine, writes Sean Garman.

Australia is being held back by politicians who are ignorant of the dynamics of the free market. Australian businesses and entrepreneurs cannot achieve their full potential because of restrictive regulations and a political class more afraid of their own shadow than going into bat for a freer and more prosperous economy.

The two most successful Australian sectors are mining and banking but both are coming under attack by politicians. The mining industry is fighting the super profits tax. Banks are fighting Wayne Swan’s “fifth pillar reforms”. Both are being targeted by politicians who have little or no experience in the world outside of the political beltway. The error of the ‘politico-media axis’ is in believing that these two sectors successes require the government to lasso them to allow other industries to grow. What country achieves and drives prosperity by dragging back their bolters? In any other field of endeavour it would be considered as the ‘tall toppy syndrome’. It would be like asking Cathy Freeman to wear weights when she was sprinting in the Olympics! Instead of throwing up barriers to our successful sectors, we should ask why other industries are not as successful.

People point out that Australians suffer from a high interest rate or foreign exchange regime. Others point out that people are too greedy or that innovation is somehow driven by government spending to prop up demand. This is wrong. Innovation is spurred by risk-taking and competitiveness is spurred by a flexible and light-tough regulatory regime that promotes productivity. This can be supported by government through a positive tax regime to promote private equity investment, a technically skilled and critically-thinking society, and a low regulatory regime. This then creates a culture of entrepreneurship and competitiveness.

This is where Tony Abbott needs to sit up and take notice. Hiring people is a massive investment for a small business or entrepreneur. It represents a massive financial and operational risk. Expanding production is a similarly large risk for a business owner. Creating and maintaining a regulatory regime that creates a rigid labour force only throws sand into the machine of private sector investment rather than spurring them to greater productivity and growth.

High regulation that permanently increases costs does not help drive innovation. Labour market rigidity means that business cannot quickly downsize (or cheaply) during a downturn. This blocks businesses ability to access capital. Furthermore, labour market rigidity makes it comparatively cheaper to move production offshore or for competitors to benefit from having a better regulatory climate than Australia. This then creates a slippery slope because while Australians might not want low-wage jobs, pretty soon it is cheaper to move higher value production off-shore and then finally designers, scientists and engineers who create the “idea”. This is what we are seeing in China today. The west started to move low-cost manufacturing and now we are seeing the top ranked scientists and designers move across to be closer to the manufacturing centers.

Australia’s tax regime bashes international private equity and investment capital and this throws up barriers that halt money and expertise flowing through to Australian-based businesses. International investors can bring with them the capital to grow Australian businesses and the skill set to allow them to export goods and services to the world. Our tax regime acts as a disincentive for investors and hence acts as a brake on innovation and growth. Yet arguing for a more efficient and investor-friendly tax regime is not an easy case to make in this media cycle, especially when Labor is beholden to Green “progressives” and agrarian socialists for their majority.

Yet the real test of a leader is doing what is right, not what is easy.

Tony Abbott must now need to listen to the concerns of businesses and investors. Australian business leaders are prepared to speak out if they know there is someone on the other end who is listening. Why would they do that if Tony Abbott meekly accepts Labor’s proposals on industrial relations? Abbott was prepared to king-hit Labor over the ETS but runs from a fight on industrial relations!

I am a positivist by nature. The 21st century offers Australia an opportunity to work towards a higher standard of living. If history has taught us anything, it is that humanity has the capacity for continued innovation and improvement. The growth of the Asian economies, the rising middle class, and the increased globalisation of business is an opportunity that Australia needs to embrace but they need the government and politicians to stop thinking that they know business better than those who do it for a living.

Sean Garman works in banking in the City of London. He was Vice Chairman of Macquarie University Student’s Council, President of Macquarie University Liberal Club and currently provides policy advice to Conservative Party MPs and MEPs on economic policy.

The NBN ‘summary’ business case

Sean-GarmanSean Garman on the NBN summary business case:

I have just read the NBN “Summary” business case and I cannot believe anyone would produce something so shoddy and then to get it signed off by parliament.

To put it into context. I recently completed a transaction where there was financial, commercial, tax, legal and insurance due diligence completed by both the seller and the buyer. In total, well over 1,000 pages worth of due diligence was read. That transaction is for a fraction of the cost of the NBN.

This project is bound to fail. The business case does not describe the take-up rates and the impact of lower take-up rates. It does not provide a revenue and EBITDA “bridge” that shows where and when the growth is expected to come from to provide enough confidence that it is achievable. It does not explain the debt structuring and whether it will be guaranteed by the government or not which is vital if it is to get debt costs anywhere near the 6% long-term bond rate.

The WACC is assumed to be between 10-11% but it does not explain how that figure is derived and the underlying assumptions (I can guess but in any investment it should be spelled out clearly). It states a risk premium takes a 15-20 year project and discounts it to a shorter-duration bond rate. In short, the financing case is not properly spelled out, the take-up rates are not sufficient for a third party to sensitise and the risk management section is so poor as to be useless.

Malcolm should be able to rip this apart.

Sean Garman works in banking in the City of London. He was Vice Chairman of Macquarie University Student’s Council, President of Macquarie University Liberal Club and currently provides policy advice to Conservative Party MPs and MEPs on economic policy.

Broad reform, not narrow regulation, is needed

Sean-GarmanDiscussion of banking reform should not lead to the re-regulation the industry, writes Sean Garman.

Not too long ago I complimented Joe Hockey’s nine-point plan to reform the banking industry in Australia. Barely a week later and due to an uncharacteristic display of indiscretion, reform is swiftly moving to new regulation to slow down interest rate rises. The Australian banking industry has only itself to blame for this situation (indiscreet comments really do sink financial ships, bankers need subtlety!) but the Coalition should not get into an arms race to regulate banks.

However, banking reform must also fit in with a broader Financial Market reform. Banks aggregate and allocate capital. Financial services are primarily about allocating capital in an efficient manner. There must be greater competition between banks within the banking sector but more importantly there must be competition between the banking sector and other ways to raise capital for individuals and corporates.

The banking industry is never popular, even during the heady days of the pre-2007 crash, banks and bankers tend to be viewed as greedy and excessive. That is why bankers must act with self-restraint and discretion. Historically, lending of money has been viewed with suspicion. All the Abrahamic religions have, in some ways, restricted or banned interest payments (they viewed it as usury) and this distrust of lending continues in some forms to this day.

I don’t want to digress but once we realise where we have come from we soon see that humility is the better part of valour in a society that is not comfortable with excessive profits by lenders and higher interest payments. People have a strong sense of fairness. They tend to view banks and bankers as making profits and bonuses off “their” money. That is one reason why self-restraint is needed; people view banks as a vital part of their personal financial safety and are easily offended when they view their hard work is being taken advantage of.

If the banks have a case to make, then they are not doing it well. The primary reason behind their rate rise has to do with the cost of funding. The RBA writes extensively about the Australian Financial System and has addressed the funding cost issue. This is a quote from the RBA September Financial System publication:

Interest receipts, which stem from the core lending business of the major banks and represent their main source of revenue, have been sufficient over the past two years to fully recoup higher funding costs and partly offset the rise in loan losses. And the net interest margin (NIM) of the major banks' consolidated global operations increased by around 20 basis points since the trough in 2008 but has levelled off a little recently. Over the same period, the NIM for their Australian operations is around 35 basis points higher.

This suggests that while the net interest margin is lower than it has historically been, it is not a catastrophe, and that Australian banks are in a stronger position than their international competitors. In short, while there is a case that bank margins are being squeezed, the focus is on headline profit figures rather than bank funding and in that environment it is a no-win situation for Australian banks.

Banks who claim that their funding base is troubling them have to demonstrate what has happened in order to restore trust that rate hikes are not profit gouging. Trust is lost very quickly, but it takes time to restore.

We are now moving towards a more regulated banking market. I believe that this is the wrong path but anger quickly translates into irrational actions by politicians to sooth voter ire.

On a broader note, we have seen in the northern hemisphere is that capital raising has suffered from concentration risk. That is, companies raising funds suffered because they raised money from the banking sector which during the height of the crisis, hoarded capital, withdrew credit lines and caused corporate liquidations.

Australia needs to learn from these experiences. We need to broaden the number of channels companies can raise funds to boost overall competition and reduce the risk that companies are forced to liquidate due to a concentration of lending in too few hands.

Banks are intermediaries between supply of capital and demand for credit. Increasingly large companies are bypassing banks and raising money directly from the wholesale market. They believe that wholesale funding provides greater stability than bank-funding. This is the next stage in the financial evolution with the increased disintermediation of the banking sector. Australian politicians must recognise this and promote it as a way of ensuring competition between different methods of raising capital, in particular for corporate customers.

A broader reform approach should focus on developing our equity and debt capital markets. Encouraging international investment, like the Chi-X, forms a major part of improving market liquidity with the ultimate aim of allowing Australians to find it easier to raise funding or to invest their savings.

A broader reform package should include (but not exclusively):

  • Greater equity market competition to include a potential market for small or medium-sized companies.
  • A more developed corporate bond market so Australian-domiciled companies can raise funds directly from the wholesale market. The Australian corporate bond market is not as developed as it could be and this can lead to a greater competition with the major banks.
  • Retail deposits should be split between those who are guaranteed by the government and those which are not. This should be explicitly made to consumers who take out a deposit to reduce the moral hazard of taxpayers taking the risk while individuals and corporates get the returns.
  • The Australian Government – both Federal and States – can use their economies of scale by asking their employees to open up a deposit account in a second tier bank where the government and deposit their monthly salary payments. This gives second tier lenders sufficient capital to boost competition in the retail sector.

Reform is not easy but we cannot make the mistake of re-regulating industry. Banks might be unpopular and indiscreet but the Coalition must not be populist.

Sean Garman works in banking in the City of London. He was Vice Chairman of Macquarie University Student’s Council, President of Macquarie University Liberal Club and currently provides policy advice to Conservative Party MPs and MEPs on economic policy.

Hockey finally hits the target

Sean-GarmanRegulation isn't all bad – it's the scale of regulation that needs to be debated, writes Sean Garman.

Joe Hockey firmly put his foot in his mouth last week, but on Monday he made an extremely subtle and strong (not an easy combination) contribution on reforming the banking industry in Australia. Hockey was right to identify and discuss the extraordinary support that the RBA, Treasury and ACCC have provided to the banking industry.

Banking and finance has a long and checked history regarding both in providing stability and in how the public view the banks. Banking has never been a popular industry because by its nature it charges customers interest to borrow money and because it inverses the normal competitive paradigm of rather “the customer is always right” to “we have to say ‘no’ because they are not good enough”. This is an important issue to remember when the furore of banking is raised because at times rationality is put to one side and irrational anger can quickly rise.

Joe Hockey rightly brought up the broader issue of the competitive dynamic in our banking industry. Australia suffers from a lack of a diverse marketplace of banks. Instead of having a market – many specialist lenders without any one provider acting as a systemic risk – we have a supermarket-style banking system with a few large players who service multiple customers each with their own risk profiles. This might provide a “one stop shop” but ultimately hurts the long-term competition in the banking industry where it is preferable for multiple lenders providing competition in an appropriate framework.

Hockey was right to bring up the idea of a “social contract” between banks, government and the public. Banks have a special place in the economy and in our society. It is meant to be a safe haven for our money. Banks are meant to serve customers rather than view them as offering mere transactions. Banks that raise interest rates or charge exorbitant fees ignore that they have a social commitment to their customer base and have a moral obligation to reciprocate the support provided to them by showing self-restraint. If banks want lower regulatory burdens, they need to show that self-restraint which has been conspicuously lacking as of late.

Some people will be shocked about terms such as “social commitment” but banking is a unique industry, particularly when dealing with individual customers. People need banks to act as though they have a genuine relationship with the customer rather than looking at how much they should be charged. Customers might stay with a bank for their entire lives and might know the branch employees extremely well. Additionally, the bank is viewed as a save storage for their wealth.  This fundamental trust is a characteristic of banks that separates it from other sectors.

Banks that lose the trust of the public lose the right for government (therefore taxpayer) support. The moment bankers lose the trust of their customer base is the moment the bank moves from a relationship-based system to a transaction system and should not expect customer loyalty in response.

The centre-right must break loose of the bounds that any regulation is inherently bad or that there is no such thing as “market failure”. We need to operate in a free market system with appropriate regulation to reduce the risk of a complete breakdown in our financial and economic system. The question should be over the scale and nature of regulation rather than esoteric debates about whether or not there should be regulation as a whole. 

Sean Garman works in banking in the City of London. He was Vice Chairman of Macquarie University Student’s Council, President of Macquarie University Liberal Club and currently provides policy advice to Conservative Party MPs and MEPs on economic policy.

Abbott can rewrite politics, again

Sean-Garman Tony Abbott has a unique opportunity to change the face of Australian politics, writes Sean Garman

The election has thrown up an enormous opportunity for Tony Abbott to rewrite the laws of Australian politics, again. In an era of extraordinary cynicism, where politics is so professionalised to have lost all meaning, Tony can make the Coalition a national, rather than sectional, political force.

We have seen massive swings against Labor across the country. We have also seen amazing amounts of sandbagging of marginal seats. Many people who do not live in those seats are angry that they are not being properly franchised by their government.  The new Green MP, the new Independent, the swings in previously safe seats show this broad view that people believe they are being ignored. Money – in transport, telecommunications, water etc – is spent where it provides parties the most return. This disenfranchisement of Australian voters has been occurring for a while. It is wrong and it must change.

Tony Abbott is a Conservative. Some are dismissive of his beliefs – focusing on the influence of B.A. Santamaria – rather than on the British Conservative traditions that Tony Abbott embodies. In an era of extraordinarily cynicism, Tony Abbott can be a radical Conservative making it his mission to serve the national interest rather than the swing seat interest. He can tap into the lessons of past Conservative leaders like Benjamin Disraeli who was explicit about representing and building “One Nation”, instead of representing only narrow interests.

For this to work, Tony Abbott must get the four independents “in the tent” so to speak. While Andrew Wilkie is a former Green member, it represents an opportunity to build a cross-political consensus. Abbott can reform parliament, strengthening the hand of an independent Speaker, improving question time and creating an independent economic body responsible to Parliament and not the government. Indeed, Abbott can restore the primacy of parliament to Australian politics. This can be extended to making Cabinet ministers make a statement to parliament on major policies before a statement to the media. It means that the judicial-legislative-executive balancing act is retained.

Abbott can also focus on longer-term infrastructure improvements. In telecommunications we can get a market-based solution that has government support where the market cannot provide a solution to provide Australian consumers with access to fast broadband. It means having a water policy that transcends states. It means building high speed transport links so people can live in regional areas surrounding major cities but work in those cities. Abbott can also put in place a long-term solution to our energy supply gap.

There is no reason why we need to go to an election any time soon. Abbott might be a one-term Prime Minister but he can be a PM that re-writes the political map with Australians, irrespective of seats, being enfranchised. It is an amazing opportunity that should not be passed up. I remind everyone that it was Robert Menzies who first spoke about the “forgotten people”. There are many in Australia who felt forgotten by politicians; and it is time for the Liberals to remind themselves of their historic role in representing those without representation.

Sean Garman works in banking in the City of London. He is a committee member of the Conservative Party’s external business relations group City Future. He provides policy advice and economic research to UK and European politicians.

From the other side of the debate

Sean-Garman Sean Garman highlights some of the concerns of potential investors in relation to the new resources tax.

There has been considerable noise built up about the resources super-profits tax with some very dodgy information being released to confuse the public. I will try my best to present the concerns of potential investors – i.e. those who are prepared to take on the financial risks for the upside financial rewards. Perceptions differ depending on where you are sitting.

The first concern is the impact on profits and cash flow. The marginal effective tax rate will rise from approximately 41% to approximately 58%. This increase results in a corresponding decrease in positive cash flows and consequently dividends. Considering that the tax kicks in at profit returns above 6% then it is fair to say that many investors will be concerned. From an equity investor perspective there is less funds to go back in the form of dividends because the tax reduces positive cash flow. From the debt investor community there will be lower positive net cash flows for debt servicing – both paying interest and repaying principal. Debt financing is cheaper then equity financing so the optimal capital structure can be affected by this tax resulting in a less efficient return for all concerned in existing projects.

The government has correctly stated that they will take 40% of the downside risk. In effect the government is paying for 40% of losses. This distorts investment decisions – as pointed out by Chris Joye – because it reduces downside risk and should make investments more attractive. I disagree with this argument.

One of the key risks is if the government does not provide that 40% rebate for a failing mine. This is a significant risk because of the arbitrary decision-making process of this government which results in a higher sovereign risk. Let us take a hypothetical risk – a major correction in commodities prices that make many new mines loss-makers.  Before the government reimburses investors losses they will be facing severe fiscal problems. Lower corporate and income tax receipts with the knock-on effects in regional Australia as well as national confidence, along higher transfer payments in the form of welfare payments results in a deteriorating fiscal position. It is at this critical moment that the government is forced to reimburse investors paying out potentially billions of dollars. This will be considered politically unpalatable and since the decision-making by this government is arbitrary at best there is a risk that they will not pay.

Investors now face lower upside gains but potentially no downside mitigation. This will have an impact on investment in new mines or, more specifically, mines that are about to be developed. It will have a broader long-term increase in sovereign risk because investors are now reliant on the government protecting them from downside impacts as well as concerned about future changes to the tax system. All of this increases sovereign risk.

There are some upsides to this tax. It is a profits-based tax instead of a blanket royalty-based system. It will reduce the cost for many smaller mines and mining companies allowing them to be more competitive with the larger players. Finally, it can result in either lower corporate taxes (e.g. to 25% as per the Henry Tax Review) or can be directed to sovereign wealth fund.

Unfortunately the original design has been bastardised. The funds raised from the tax will go to recurring government expenditure not a sovereign wealth fund (so much for setting Australia up for a post-boom world). The modelling assumptions appear to be unrealistic. Finally, rather than promoting the potential for smaller miners to compete on a more even basis, the government has made everyone nervous.

The quicker this tax can be killed off the better we will be.

Sean Garman works in banking in the City of London. He is a committee member of the Conservative Party’s external business relations group City Future. He provides policy advice and economic research to UK and European politicians.

A dangerous and backward tax threatens a profitable and lively sector

Sean-Garman Rudd's resource tax is not about spreading wealth, but about spending other people's money, writes Sean Garman.

The Rudd Government’s “Resources Rent Tax” has got to be one of the most backward, populist and pig-headed of economic reforms to come before Australia since Chifley’s attempt to nationalise the banks. This tax has to be defeated and it must be through a combination of Coalition, business and community pressure to tackle a pernicious attack on the wealth of Australia.

A poor tax cloaked in the rhetoric of populism

Kevin Rudd argues that the resources are the “wealth of a nation” and that it must be distributed evenly. Kevin obviously does not get it – without private investors this wealth will not be found and shall continue to sit under the ground. It costs money and time to find minerals to extract them and to sell them. It requires private investors, willing to take a risk, to extract this wealth and sell it creating jobs and tax revenues in the process. Historically government-run businesses have failed yet Rudd is too arrogant to listen to history and see the effects of similar policies.

This tax is ridiculous on a number of levels. Let us move beyond the theory towards the reality. Financial investment decisions dictate that the yield (interest income) from a government bond is the risk-free income. If you want to take no risk, invest in a government bond because companies and projects are riskier than the government. The return above the government bond when you invest in a project has a risk attached to it. The question is whether the return is sufficient to warrant the risk. What Rudd has done is say that any profits above the government bond yield are “super profits”. Any second-year university student can show that this is ridiculous. No sane investor will ever consider 7% returns (when the government bond attracts 6%) as a super profit. According to Rudd if you invest your money and get the market rate of return then that is considered “super profits”. It flies in the face of financial and investor reality.

In project finance the risk is considerable. Massive amounts of capital are spent before anything is extracted to be sold. In order to get a good rate of return, companies, investors and banks need to know that the potential return is sufficiently high to offset the risk. Rudd has proposed a new corporation tax on top of the existing tax. Some estimates suggest that the marginal effective tax rate can be around 58% for many mining companies. The reduction in return for both debt and equity investors will make many think twice at ever investing in large-scale exploratory projects in Australia.

Mining companies will have to reappraise their investment decisions. Other countries with projects with a previously lower rate of return will suddenly get more money invested in them because they are comparatively more attractive. Overall, mining companies and the mum-and-pop shareholders lose out because the most attractive prospects (in Australia) are now not attractive and poorer prospects will be sought out instead.

A bad decision from a bad Prime Minister

This tax, at its heart, is about spending other people’s money. It is not about ensuring that the wealth is spread, that a sovereign fund can be created or that we can have a more balanced economy.

Rudd needs to be defeated on this one

My suggestion to Tony Abbott will be to go all-out against Kevin Rudd. Attack him over his gutlessness on tax reform, attack him over his economic incompetence and attack him over his chameleon-like tendencies. Reiterate his image as a man of spin, demolish his economic credibility and this will diminish his standing in the polls. The Coalition must fight this decision with every sinew in our body and to make the case that the most dangerous risk to our future prosperity is another three years of Kevin Rudd.

Sean Garman works in banking in the City of London. He is on the committee of City Future; a part of the Conservative Party’s Business Relations organisation and provides policy and economic research to the UK Shadow Treasury team. Sean has a B-Com from Macquarie University where he was Vice Chairman of the Student Council and President of the Liberal Club.

The new paradigm for the centre right

Sean-Garman The centre right should begin to advocate for a more civil society, writes Sean Garman.

One of the great struggles that the centre-right has is the conflicting beliefs among members. Indeed, we have on this forum Libertarians, Progressive Liberals and Conservatives. However, the labels do not accurately cover everyone. Within this mix come different views which can provide for some tough and uncompromising arguments. In this article, I will try to offer a new paradigm of thought that encompasses many of the different virtues within centre-right factions.

Towards a stronger society

We are living in a fast-paced world. Increasingly we are living individualistic lives. Libertarian thinkers believe that individuals are supreme and a minimum of intervention by government is needed or required. Simplistic observers therefore assume that Libertarians do not want people to live in communities or to live within the law. Indeed, Liberalism was a similar argument again the yoke of an authoritarian system to break down class bonds. Conservatism tried to counter this with the argument that cautionary change is better than dramatic change because of the law of unintended consequences. No belief seemed to want to extend state power. There is a golden thread that weaves through these three ostensibly disparate analyses. That thread of thought is responsibility and civil society – the two being mutually inclusive for one cannot live without the other. If we are to live in a country with less governmental intrusion then we must accept greater individual responsibility over our own lives.

David Cameron said that “there is such a thing as society; it is just not the same thing as the state”. This encapsulates what Australian centre-right thinkers now need to move toward. We have lived within a paradoxical world of advocating greater individual economic rights while conversely imposing a greater amount of governmental interference on individuals. We forgot that the glue which holds people together is not the government but their communities.  A stronger society can provide adequate social norms without requiring state intrusion.

Civil society is rarely used by Australian politicians. It should be used more and more often because a civil society is where trust, mutual obligation, individual and collective responsibility work together to stop excessive and outrageous behaviour. George Soros had a similar view in his work Open Society ‘in a perfectly changeable, transactional society the individual is paramount… In a society where stable relationships prevail, this [getting ahead without showing scruples] is much less of a problem because it is difficult to be successful if you violate the prevailing social norms.’

Our rhetoric is a significant problem. For too long we either argue for government action or individual freedom. We need to recognise that while people want freedom, they have a deeper yearning to live within a community that respects each other, that works together and understands one another.

Towards a politics of civil society

Moving power and responsibility towards communities requires a paradigm shift in thinking amongst politicians. The latest thinking on the role and nature of government has shown that devolving power to local communities, public sector employees and the third sector has had a dramatically better impact than other methods. A community cannot act as a community, work together and achieve outcomes if it does not have the capacity to achieve those outcomes because Canberra or State Capitals demand a greater share of power. How can a community act with responsibility once the right to act has been sucked into an office many miles away?

The centre-right should begin to advocate a more civil society. David Cameron has spoken about a “Big Society”. I think Australian politicians should learn from their British counterparts. Civil society provides freedom within social norms – stability in a sea of change. Indeed, from Burke’s ‘Little Platoons’ to Alexis de Tocqueville’s observation of American’s “habits of association”, civil society provides a means for more social capital – a wealth not measured in GDP. The State evolved from society but it should not overtake society.

I want to leave you with a quote from Francis Fukuyama:

If the institutions of democracy and capitalism are to work properly, they must coexist with certain premodern cultural habits that ensure their proper functioning. Law, contract, and economic rationality provide a necessary but not sufficient basis for the stability and prosperity of postindustrial societies; they must as well be leavened with reciprocity, moral obligation duty toward community, and trust…

Trust, responsibility and civil society should become the core principles of a new centre-right paradigm to replace the old failings of previous systems.

Sean Garman works in banking in the City of London. He is on the committee of City Future; a part of the Conservative Party’s Business Relations organisation and provides policy and economic research to the UK Shadow Treasury team. Sean has a B-Com from Macquarie University where he was Vice Chairman of the Student Council and President of the Liberal Club.

Should Australia have a public bank?

Sean-Garman Sean Garman presents the arguments for and against a public bank. 

Australia’s financial system has weathered the financial crisis very well and the big four banks are all considered as well managed. However, Australian consumers lack genuine competition in the retail banking market. Economists ranging from John Quiggin to the (in my view seriously smart) Chris Joye have begun to argue for a government-owned retail bank. The question we must ask is – what should centre-right thinkers do? Should we agree or should we advocate our own approach to redesigning the Australian financial system?

Arguments for and against publicly owned retail bank

There are a number of arguments in favour of a public bank.

  1. There is a lack of competition in the retail market. Many of the second-tier bank and non-bank lenders have been taken over by the big four who now have a stranglehold of new mortgage lending.  
  2. The financial system is inherently fragile and vesting too much market share will mean these institutions are “too big to fail” and will have an implicit government guarantee.
  3. The big four banks have not adequately serviced their customers with a reduction in the number of branches and ever-higher-fees.
  4. The big four banks are rapidly expanding internationally and moving into new areas within finance increasing the probability that a number of fat tail risks of extreme losses will make a bank insolvent.

There are arguments against such a bank:

  1. It takes time for any bank to establish itself, set up the means of distribution and have the IT and security system to take in sufficient numbers of depositors.
  2. Increasing competition will increase the supply of credit but not increase the aggregate savings rate forcing the big four banks to become more reliant on the wholesale credit market.
  3. A government bank is susceptible to politically-motivated lending policies artificially increasing the supply of credit to boost the economy leading to long-term problems in the economy.
  4. There is no evidence to suggest that a government-owned bank will be better managed than any other financial institution.

Ideas for the Coalition

The Coalition should be able to present a bold and innovative plan to the Australian people. There are very many good reasons to have a government-owned bank while conversely there are reasons not to go ahead with the idea. Anyone arguing the “free market” case needs to expand and explain their idea (“do no evil” is a good start). However, I think the Coalition can offer a number of alternatives to the public.

Firstly, it can advocate that the Post Office become either a bank in its own right or becomes a distributor for other second tier bank products. The latter idea is something that Chris Joye has brought up before. It does make sense. Post Offices have the physical method of distribution (branches) and with some improvements to their IT infrastructure can be used by second tier lenders or have their own plain vanilla banking platform.

Secondly, the Government can create their own bank but make it a mutual organisation. What this means is that depositors can become members of the organisation and can positively impact on management decision. The government can have explicit targets (e.g. size of deposits etc) which once enacted will reduce their ownership stake. This is a very Conservative policy because it is market orientated; mutuals do not rapidly grow during a boom but are more resilient during the crash.

Third, the government can do nothing. This is the “Lilley” option (named after a Tory MP). If we take the opinion that the law of unintended consequences is too great then do not bother with any change. However, if in the future the Labor Party presents a bold policy then this might not be an option.

Sean Garman works in banking in the City of London. He is on the committee of City Future; a part of the Conservative Party’s Business Relations organisation and provides policy and economic research to the UK Shadow Treasury team. Sean has a B-Com from Macquarie University where he was Vice Chairman of the Student Council and President of the Liberal Club.