Welcome to La Trobe University. My name is
Jan Libich and I'm really pleased to be able to welcome Professor Stephen King from Monash
University. Welcome Stephen. Thank you very much for joining us. Thanks for inviting me Jan. Professor King is a very esteemed researcher
but he has contributed on many other fronts. He was also Dean at Monash University and
he served as a Commissioner at the Australian Competition and Consumer Commission (ACCC).
This is actually the topic of our interview today, we'll be talking about public policies.
We'll be talking about government regulation. Topics like healthcare, infrastructure, competition
and so on. So let's start with one of the books that
you wrote - and you've written many! With Joshua Gans you wrote a book called 'Finishing
the Job.' It was full of ideas about how to improve public policies. Let's start with
healthcare. Can you tell us a little about healthcare and healthcare financing, what
the problems are and what the solutions are? Okay. The best division that we can start
off with is to separate healthcare financing, as you mentioned, from the provision of health
care. Those two things are sometimes confused, not just in Australia, but around the world.
The big question that we tried to tackle in that book was to look at the current Australian
system of health insurance, which is health financing through the Medicare system, and
through the private insurance systems that back up Medicare, and the incentives and constraints
that a government's put on that system. In particular we were interested in trying to
work out what are the incentives, are they right, are they helping people get health
care or are they actually standing in the way of people getting healthcare? And what was your conclusion? Well, the Medicare system in Australia suffers
from... I'll call it the 'Australia Post' disease. The Australia Post disease is the
use of pricing for one product to either subsidise another product, or to subsidise other consumers
of that product. The classical example being postal services world-wide where urban consumers
end up subsidising rural consumers, and in fact uniform pricing is called 'postage stamp
pricing' for that very reason. It's done in every country. So there's a subsidy built
into the price. The same happens with Medicare. Medicare,
it's actually quite explicit. The Medicare scheme is designed so that everybody pays
their taxes under the progressive tax scheme that we've got in Australia. Wealthier individuals
will pay more towards Medicare than poorer individuals, which is a good thing. There's also the Medicare levy. There's also the Medicare levy, which is part
of your income taxes, and obviously if you earn more, you pay more, because that's a
flat two per cent. There's also incentives for wealthier individuals
to buy private health insurance. So, if you earn more than a certain amount and you don't
buy private health insurance, then you get a big whack in your tax from the government.
So the government essentially gives you an incentive to buy private health insurance. Private health insurance does two things.
It covers things that Medicare doesn't cover. It covers the extras if you like, so if you
want a private bed, a choice of your own doctor, in particular, if you want to avoid waiting
lists for some elective surgery, private health cover or private health insurance is the product
for you. But it also doubles-up with Medicare. So a
lot of the payments that are made by private insurance companies when you go into, for
example, a public hospital for emergency care, well, if you didn't have private health insurance,
that would be paid for by the Medicare insurance scheme. So there's this doubling-up. That's
quite deliberate to try to make the richer pay more. And if I recall, your argument was that we
want to have more people in the private insurance sector because that frees up some of the resources
from the public sector. That's the idea behind the argument, what
it's doing is essentially like a progressive tax scheme. I personally would prefer a much
more transparent scheme. I would prefer if we simply said: we've got a universal health
cover system called Medicare. If you want the extras, if you want the private health
insurance to get your own doctor, private room, to avoid the waiting lists, that's fine,
you go out and pay for that separately. And we have higher tax rates so that there's explicitly
a transfer from the wealthiest parts of Australia to pay for the health insurance of the poorest
parts of Australia. The trouble with the current system is that
it makes the richer people pay more by this sort of transfer - you pay for the same insurance
twice. You also have another group paying more. And the question we ask in the book
is: who else would want private health insurance? The answer is, those who are at the highest
risk of requiring health cover. In particular, health cover for things that are not emergencies
but are still pretty deleterious. There's two main groups in society that probably
want private health cover but aren't necessarily rich. And they are the elderly, so if you
want a hip operation and you haven't got private health cover, the waiting list can be a year.
That's a lot of pain for a year. So there's an incentive for the elderly, even if they're
not rich, to get private health insurance to avoid the year wait. The other group is
young families with young children. Young children tend to do things like break bones. Why do they do that?! I don't know why they do that. Why do they
play these nasty, rough games like football? You are also at a stage of the child's life
where you're learning about the child's health prospects and it's those early first five
to six years where a lot of long-term health issues may first be diagnosed, and where that
private health cover provides you with a back-up. So, we've got a system that tries to push
the wealthy into private health cover by doubling up, by having this 'if you don't buy it, you
get penalised', but it also is essentially paying twice for the same coverage. That actually
captures the elderly as well and young families as well. Exactly the sort of people that we
don't want - they're the people we want covered! They're the people we want to be insured. This is I think why you call it anti-insurance. That's exactly why. What do you do with that? How do you design? How do you get around the system? Well, the
benefit of getting around the system, or the correct way to get around the system, is to
say that the current system has been designed to try and be progressive. It's trying to
make the richer pay more, which is good. I personally am in favour of a much more progressive
tax system in Australia than the one we've currently got. Currently we're quite a low
tax country. I think we should be taxed more for things like a universal health care system. But, at the moment, we try and do it through
the back door. We try and hide the tax. So we say there will be a tax, but only if you
don't go out and buy private health insurance. By the way, when you buy that private health
insurance you're actually getting some services that you're already getting through the tax
system, through the Medicare system, but we don't want you to access them through the
Medicare system. A much better system would be to simply say,
"You know what? Medicare is truly universal. It covers everybody for the services they
need at a particular level of care. There may still, and almost certainly will still
be, waiting lists for certain procedures. If you want the extras - private room, private
doctor, or to get around the waiting list - you pay and can go out and buy explicitly
private health insurance". And we have a more progressive tax system. You know, let's have
people - families - who are earning over $100,000 a year, let's increase their taxes, and have
that money if you like, 'dedicated' towards the Medicare health insurance system. Make
it clean and transparent. I guess some people would argue that the better
services would only be for the rich, but this is already happening. That's already the situation! But there's a bigger issue here. It seems
like most health care systems around the world are struggling financially. The per capita
expenditure is growing much faster than the economy and the projections are not looking
good, especially when you take into account the ageing populations, because the more older
people you have, the more you pay. And we know that going all private is also not the
solution. If you look at the US, they spend twice as much of their GDP as some other countries
on healthcare and their health outcomes are actually not very good. So where's the problem
here? What's the kind of 'big solution'? If it shouldn't be all private health care, if
it shouldn't be all public, where's the balance? I actually think Australia's pretty close.
As part of our project looking at health insurance in Australia, Joshua (Gans) and I looked at
a range of different health insurance systems around the world - from the American system,
which is almost completely private... Obamacare has tried to change this... Obamacare is changing that... ... through to the Canadian system, which
is very strongly public, very little private involvement. But of course, you know, on one
side of the border, on one side of Lake Michigan you end up with individuals unable to pay
for cancer treatment. On the other side of Lake Michigan in Toronto, you have individuals
who because of the waiting lists in the public hospitals can die of a heart attack whilst
they're on the waiting list for surgery. Neither of those sound like particularly desirable
solutions. I actually think in Australia, and we came
to this conclusion, that in Australia, we've actually got a pretty good balance. We've
got that good mix of public and private insurance. We should be looking at redesigning our system
around the edges, but it doesn't need a major overhaul. I think fortuitously - I don't think
it was actually ... you know, no one came up with a brain storm and said let's come
up with this system we've got in Australia. It's evolved over time since Medibank was
originally introduced back in the early 1970s by the Whitlam government. It's evolved to
our current system, but it actually works really well. The areas where it doesn't work well, is with
the current funding of the health insurance system - that needs to be made transparent
to avoid the anti-insurance problem. The other area where it doesn't work particularly well
is in the issue of who provides the services. So at the moment we have this division between
public and private health insurance and that spills over into public and private provision
of health services. Now, if you've got public health insurance, if you're a public patient,
that doesn't mean you have to go into a public hospital. Or it does, in Australia - but it
shouldn't mean that. So the government should actually be there saying, "we want to now
work out how to buy the health products that we want for our citizens in the best possible
way, the best mix of public and private hospitals." So that's the other area where Australia's
lagging, but compared to most of the world, you know, on no grounds should we do a massive
change in our health insurance system because we are actually one of the best in the world. You mentioned that we slowly converged to
a pretty good system. It seems to be the case in many other areas in Australia. I recently
interviewed Professor Bruce Chapman who was the designer of the student loan system, and
we seem to have one of the best systems in the world. Similarly the pension systems,
when I asked John Piggott recently about designing the optimal pension system he said the Australian
system's pretty close to that ideal. So it brings up the issue of how come Australian
institutions seem to be at a very high level. Do you have a view on that? Look, I actually think that the Australian
policy debate tends to come up with a very good mix of equity and efficiency. If you
have the same debates in say the US, it tends to be a strong efficiency line and not very
much on the equity line, or a lot less than in Australia. If you have the debate in some European countries,
then I think probably the equity arguments tend to dominate the efficiency arguments. In Australia, whether it's due to our background,
or whether it's due to our magnificent cultural mix that we have in this society, we've got
a great balance between the equity and efficiency. So there's a lot of policies that need fiddling
around at the margins to improve. Heath insurance is one. I think the HECS scheme, subject to
issues in the recent Federal budget, the HECS scheme for tertiary education is a brilliant
idea. It's been translated overseas. And on the other one, which is pensions and the superannuation
scheme, I think we've got pretty close to a well-designed scheme up until the time you
retire. I don't think that we've actually got to the point where we can say post-retirement
we've got a great scheme. Because, at the moment the incentives aren't quite right.
And I know John (Piggott) himself has also written on that issue. That being said, I
think as our population gets older and more people retire with superannuation balances,
I would expect in the next three to six years we'll see changes in superannuation to try
and fix up the problems that we have post-retirement. Let's move on to other areas of public policy.
Let's think about infrastructure. I mean, there's always this issue of who should provide
infrastructure. And I think people generally agree that governments should build roads
and so on, and various other essential infrastructure projects. But things like the National Broadband
Network (NBN) where you have a kind of internet network, is that a good idea, should it be
provided by the government or should it be in the realm of the private sector? Well, I'm not going to necessarily let you
get away with the "governments should build roads" argument. Alright, well... We've got an East-West link tunnel that's
on the drawing boards, at least in Victoria. Now, that will be owned by the government
at least initially... well, let me step back a bit. The strategy for that is for the government
to take a risk-owning role. So the government will control the risk associated with traffic
flows on that road, but for it to actually be a private road. So developed privately
and the private party that runs the road, if I can call it that, will be paid for their
services. You start getting into these grey areas with
contracts about who actually owns what. I suppose this goes back to your postage situation.
Obviously this may be the case for some kind of lucrative areas but probably not some kind
of regional road. So this is again where one kind of richer area subsidises the smaller
area. Yep, it depends. In the end! But again, in relation to the National Broadband
Network, in many countries this is actually done privately. Okay, the NBN in my personal view is one of
the worst policy disasters that we've had in the last decade, well and truly. Go back
forty years; it's hard to find one that is as poorly designed as the NBN. So, the first question to always ask is: "What's
the problem? Why do we need government investment in this area? Why isn't the private sector,
left to its own devices, going to be successful?" And with the NBN, the answer's obvious. You
can't run broadband out to rural and regional Australia. It's simply never going to be profitable.
The density of population isn't there. But how do you then solve that problem? Well,
a sensible solution would've been to say, okay, we the government, are going to step
in and build broadband infrastructure in rural and regional Australia. We're going to make
sure there's an equity of access to high speed internet across Australia and we're going
to cover those areas where the market isn't going to work. That would've been a sensible
thing. We would have had a rural and a regional broadband network, an 'RRB'. Why did we end
up with a National Broadband Network? First thing to note, there is no problem in
the cities. So for example, if you look at the Melbourne CBD and inner city area, we've
had competition there for at least twelve to fifteen years. In fact, when I was at the
ACCC, one of the things that the ACCC does is it regulates telecommunications systems
- it's never regulated central business district telecommunications. Why? Because there's so
much broadband, so much fibre in the centre of Australian cities that, if you want high
speed broadband, there's ten people who can provide it to you, to your door, to your basement,
whatever. So there's no problem there. There's really no problem in the outer suburban
areas until you start getting into low population. Why? Well you've already got the ADSL, so
you've got the copper, you've got at least two cables going past a lot of the suburbs,
and certainly one cable which is the Foxtel cable. The Optus cable is also still out there
to provide broadband. And you immediately have, and perhaps some separation of Telstra,
a couple of competing broadband suppliers. It starts looking like there's no problem.
So why did we get a National Broadband scheme? It seems like Telstra would have built something
similar by themselves? Well, let me get to Telstra because Telstra's
a great example of what the problem is. So now, why do we have a National Broadband
system? It's the 'post office' problem again. We've got a situation where the government
wants to provide a rural and regional broadband network. Damn. That's expensive. We can't
charge commercial rates, that's just not going to make any money, that's why we have to intervene.
That means higher taxes. Higher taxes - that's electorally unpopular. Let's hide the tax!
How are we going to hide it? What we're going to do is build a national broadband and make
the people in the cities pay for the country users. So we'll have a postage stamp, or a
uniform price across Australia, but that means the price in the cities is massively above
a competitive price and of course, it's a subsidised price in the bush, which is of
course what we want in the bush. So the national broadband scheme is national.
We've got all this infrastructure being built that quite frankly, would have been built
privately: the private sector would have taken the risk in the cities. And the pricing is
going to have a hidden tax. The tax is going to be on internet usage. What madness! If
we're building the NBN because it's the future of the Australian economy, because it's going
to help transactions, it's going to help commerce, it's going to help entrepreneurs, we're going
to have e-medicine, we're going to have e-learning - and we're going to tax it! We've come up
with a system where we're going to put a great big tax just on the thing that we think is
going to be the huge productivity-enhancing part of our economy. It's completely insane. This doesn't seem to be the only area where
government policies may be well-intentioned and actually turn out to be counter-productive.
Why is it? Is it that the politicians don't listen to economists enough and don't think
through the incentive issues and so on? Why is it? We can go back to the recent fiscal
stimulus and think about the insulation fiasco and things like that. Why is it that even
well-intentioned government policies may fail so badly? Yeah, I think it's that... well, we're economists
and we both know - I won't ask the audience - we both know that economists have unique
and overarching wisdom for society. Unfortunately, politicians seem to have this view that they
need votes. They haven't read your book. They haven't read the book! If only they would,
they would be inspired and work out the truth. Politics is a process where... you're seeing
it at the moment... where the government's got to pretend it's not putting up taxes - so
it puts levies on. At the same time, there's more demands for government spending. It's
got to try and balance those from a political perspective and that's hard. What we see in
Australia is that attempt to balance - meaning that we try to hide a whole bunch of taxes.
That's just bad policy. Let's think about some other areas. Utilities,
things like electricity, and rail networks... I hit you on roads before, so yep! Okay, I'll try to do better! There's been a lot of privatisation in many
countries, as well as in Australia, but there are still people who argue that these are
somehow special industries and they shouldn't be fully privatised. What's your view on that?
People argue that about the financial system too, in many ways, and we might talk a little
bit about this in relation to the Global Financial Crisis (GFC) but what do you think about privatisation
of utilities? The first thing to realise about utilities
is - in areas like electricity transmission or distribution, gas transmission or distribution
- they're what we call natural monopolies. So, they're situations where competition isn't
going to work. And that's just not a theoretical argument - we have about two hundred years
of history on natural monopolies, attempts for competition on natural monopolies, and
that competition failing. So it goes back to the canals in Europe, early
transport networks - before you had even rail, far less cars, you built great big canals
and you had barges moving back and forth along the canals. And it was pretty quickly realised
that if you had one canal which was making a lot of money and someone tried building
another canal next door to try and get some of that money, all that happened was, once
you built the canal, the marginal cost of an extra barge on the canal was very low.
You had prices crash; one or other of the companies went bankrupt and was taken over
by the other company. So they were early natural monopoly infrastructure. And then you go through
roads, bridges, electricity systems, gas systems. The electricity system, for example, in a
number of countries wasn't originally publicly owned, it ended up being publicly owned or
nationalised because competition meant the companies were failing. So, natural monopoly occurs wherever the fixed
cost of building the infrastructure is too high? Where the fixed cost is very big relative
to the marginal cost, at least up until you hit a capacity constraint. And so, in the
case of electricity distribution, one set of wires down a suburban street is more than
enough to carry all the electricity for that street. Even if the company was charging a
monopoly price and making lots of money, if somebody else came in and strung up another
set of wires, that would just lead the price to crash. They wouldn't be able to make any
money. One of them would have to drop out, then most likely, the other company would
take it over and create the monopoly again. So there is a definite role in natural monopolies
for regulation. You have to have a regulator sitting in there, regulating the prices and
making sure that you have reasonable economic prices because competition isn't going to
work. That's a different question to the one you
asked. You said, "should it be government owned?", and that's a much more tricky question.
That comes back to this issue; you want regulation, what's the best way to regulate it? Now traditionally,
the best way to control one of these large companies - a large electricity company, or
a large gas company, a road company for example - was to actually have it under government
ownership and to directly control it through that ownership. But actually economics, and
this is one of the triumphs - if I can call it that - of the last thirty years: microeconomics
has come up with a whole lot of really interesting ways that you can design better regulatory
regimes. You can get over, or at least partially get over the issues that the person running
the company always knows much more than the person trying to set the prices. So, as that
regulation's improved, there's less need to have it under government ownership and you
can actually say well, we can put it under private ownership. That's got some good things.
There's more incentive to lower cost, of course, there's more incentive to push up prices,
but because we've got better regulatory instruments, because we know so much more now about regulation
than we did thirty years ago, we can probably control the bad side of private ownership
and keep the good side of private ownership. So your view would be more towards full privatisation
with a good regulatory system? Well I think, again, by luck or management,
we've actually ended up coming out of the Hilmer report in the early 1990s, we had a
good process put in place to isolate out the natural monopoly, work out where the problem
is, the other bits, there's no need for government ownership under the other bits. So, you don't have government owned electricity
generators in Victoria anymore. Why not? Well it was realised pretty early on that you could
have competing electricity generators. So there's no need for government ownership.
That's not where the problem is. What about the transmission of the distribution system?
There is a natural monopoly. Well, there you have to work out what's the balance, do you
want to keep it under government ownership, where you have some issues relating to the
way that the system's run. It may not be run at least cost but is that better, or is it
better to have private, with an arm's length regulator? Now, that debate is still going on in practical
terms in Australia but certainly in electricity I think the 'privatise and regulate' model
has shown that it works, at least as well, or if not better. In fact the bizarre thing
about the last two years of debate in electricity is that the debate has all been about there
being high prices in electricity transmission. Where? Where the government still owns the
assets. So in Victoria the transmission prices under the private system looked like they're
considerably lower than in New South Wales and Queensland where they're still government
owned assets. So I think that's the final nail in the public ownership coffin - at least,
electricity assets - and we'll see those moving out into private ownership with arm's length
regulation. Let's move on to another area, and that's
education. We're on academic soil and you as former Dean at Monash University obviously
have a lot of insights into this area. You had a paper, I think in 2004, where you look
at the primary school system... Primary and secondary. Primary and secondary. You identify some problems
as well as some solutions and some suggestions for changes. Can you briefly tell us what
your story is in terms of this level of education before we move on to tertiary education? Okay, well, I guess we all follow our experience.
My wife and I had kids at primary school at that level, so you picked up well that it
was really focusing on the primary school level. Our starting point, and this started
off as some work for the Victorian Government, was to say: how should you think about schools
from an economic perspective? Schools are a classic case of what economists
call a 'club good.' So, it's something that we desire that's produced best by a community
or a group of people. So, you could have private tutoring for everyone, not very efficient.
What we'd prefer in general for educating our children is to have a community institution
- we call it a school, either primary or secondary school - and parents contribute to that school,
their children go to that school, and they're educated appropriately at that school. And
we have a mixture of public and private owned schools in Australia. The problem for the publicly owned schools
in Australia is that they're then put into very, very tight straight-jackets. In particular,
in publicly owned schools in Australia, even if ninety per cent of the school community
said we want some more resources, we want to be able to pay fees to hire a new science
teacher or to have a new gym or to have better facilities for our children, they're very
limited in their ability to do that, except through fund-raising type drives. So it would
have to be a 'charitable donation', it couldn't be treated as a 'fee' for attending that school.
And the reason for that is an equity argument. What about the ten per cent? If there's ten
per cent of impoverished or poorer families at that school, it may not be fair on them. How do you then get around that trade-off?
We want a school community to be able to build and have a real sense of investment and ownership
of a publicly owned school - or that school system. But, how do you protect the poor?
The way that we were thinking was to say, okay, rather than the government simply saying
every student is identical, the government can say we will have a certain contribution
to the school or the education of a particular child. But that contribution can depend on
the income of the parents. So, if you come from a wealthy family, we the government may
say, that's $10,000 for each student, whichever school they go to, that's $10,000 given to
that school to help the costs of educating that child. What about if you come from a
wealthier family? Well maybe the contribution from the government's only $6,000, or maybe
only $5,000. The school can then determine the level of fees up to the maximum. So let's
say the maximum's $10,000. So the poorer families, they're covered completely by the government.
The school can then work out exactly what resources it wants within that range between
$5,000 and $10,000 and can then work out where the resources are spent. Through the school
council, through the school principal, through the teachers and the broader school community. But it seems the effect it would have is to
push the wealthier families more towards the private sector. But the funding then has to be the same for
the private sector as well as for the public sector. So the private sector has a choice.
Private schools can either say no, we're just going to set our fees and give up our current
government funding. The private school system gets significant Federal government funding
at the moment. Or it can say, we want to be a part of that system, in which case we have
to play by the same rules as the publicly owned schools. Now, to a degree, one of the things we explored
in the paper was to say well if that's too much of a restriction on some of the schools,
should schools be able to pay more? So if the maximum amount was $10,000 for a poorer
student, should a school be able to set $12,000 or $14,000 as a scholarship? And our suggestion
there was you may want to allow that so long as you say, perhaps for every dollar over
$10,000 you raise in fees, twenty per cent or twenty five per cent has to be used to
support poorer students, or students from minority backgrounds, indigenous students
and so on. The whole aim of this is to set up an incentive
scheme so that students from less well-off backgrounds become the most desirable students
for schools. So at the moment you sort of have a bit of a race to the bottom in Australian
education where as you mentioned, the wealthier families leave. They get government funding
still, go off to a private school where there's no constraints on the fees that private school
can charge. What we want to do is create the incentives where schools - whether they're
private or public - say: "you know what, we want more minority students. We want more
students from poorer backgrounds." When you say "we" you mean... The school community. ...welfare of the society as a whole? Because
... Well in that situation we want the school
communities to actually say, "We want a more diverse mix of students." Again, I think what you have in mind is that
this is the interest of the whole society as such, it may not be in the interest of
that elite club. That's right, yup. So it's in the interests
of the individual schools, and my personal view is, and this is where economics starts
stepping over the line into social views, but my view is, it's also a good thing for
society. Let's move on to tertiary education. There
was a bit of a debate about this, given the last Australian budget that basically removed
the cap on student fees. Some people worry that student fees might increase two or three
times. So what's your view on this whole area of regulating tertiary education fees and
so on, lifting the cap. I think this is a classic situation where
the government, and some of its advisors, just haven't thought through the issues. So,
the first issue. There will still be a HECS, or what it's called - a fee HELP scheme - the
same as there has been for postgraduate study. We can actually use postgraduate study as
a bit of guidance as to what's going to happen in the undergraduate area with the freeing
up, or the ability to charge higher fees. What we've seen there is very big price dispersion.
All the fees will go up. There's not even any point debating that. England's the most
recent example where the government allowed higher fees. They set a cap on the high fees.
Surprise, surprise, every university just went up to the cap and it's coordinated on
the cap. So we will see fees go up for undergraduates. They basically removed all the subsidies within
that government loan scheme, right? Yep. Whereas in Australia we still have about fifty
per cent subsidy. Yep. And they're getting rid of some of the
subsidies. So the interest rate's going up from the CPI to the government bond rate.
There's still a non-trivial subsidy going on there. You're still able to defer it. It's
the sort of loan you wouldn't be able to walk into a bank to get, let's put it that way. So we would expect to see undergraduate fees
go up. We'll expect to see a big difference in fees. So, unfortunately Jan, La Trobe,
looking at the postgraduate areas is not the winner here. Who are the winners? The 'group
of eight'. The elite universities will be massive winners on this. Yes, I think you
will see some of the 'group of eight' universities fees going up - by three times is not out
of order. The way to see that is to ask where are their international fees? So the internationals'
undergraduate fees at the group of eight universities, in say a business course, which is the one
I'm familiar with, are around $30,000 a year. The undergraduate fee at the moment in Australia
for a domestic student is around $10,000 a year. Doesn't take a genius to work out that
when the university is saying, 'oh, $30,000, $10,000 - $30,000, $10,000?', they will choose
$30,000. Well in fact there are some people who believe
the fee for Australian students may actually be higher than the fee for international students
because of all the additional benefits of HECS. It's kind of low interest and that sort
of thing which increases the value of that education. Could be. And if universities were competitive,
well-run institutions, I would agree that that's a possibility. My view though is politicians
haven't really thought through what the fees will be. They haven't thought through the
implicit subsidy in HECS. That's all fine. My big problem is, they haven't actually thought
through the way that universities are governed. The universities in Australia are all public
institutions. Their ownership is a bit grey, but they're all set up under either state
or federal legislation. They are run by their councils. The councils are sort of appointed
by a mixture of people, but the Vice-Chancellors have a fair control of who gets appointed
to the councils. And they're run day-to-day by Vice-Chancellors and an administrative
team. But there's very little in the way of a line of responsibility and a line of control.
Not just compared to the private sector but even compared to standard public organisations.
When we were at the ACCC, as a receiver of tax payers' money, as a public organisation,
we had to send out estimates. At least two times a year. A senior team of the ACCC were
up there being grilled by the senators, and believe me, you got a grilling on your performance.
They knew well and truly what you were doing. Vice-Chancellors don't go up before senators.
They don't get grilled in that way. They just have to answer to a council, which is part-time
members drawn from a very broad community, some of them recommended by the Vice-Chancellors.
This is a very odd and bizarre and quite frankly, I think, a dysfunctional ownership and control
arrangement. So, you're now going to say to these institutions
- and it's not clear who actually runs and controls them - you're going to go out there
and say to them: "you have to compete by setting prices as if you were a private firm. You
don't have any of the private firm incentives and nobody's getting a dividend from this.
Go out there and compete and pretend like you're a private firm, but we're not going
to check up on what you do!" So given this ownership structure, you think
lifting the cap was a bad idea? I think unless you fix the ownership structure,
a large number of Australian universities will be getting a massive, great big windfall,
and I think the Australian community may not see a lot coming out the other end. So, what we've really got to ask is, if we're
giving more money to our universities, which is what this fee change is going to do, who's
responsible for making sure it's spent appropriately? Where is that money going to be spent? Is
it going to be fed back into undergraduate education? You and I are both academics. I
don't know about your views, Jan, but I wouldn't be betting on much of that money going back
into improved undergraduate education. It may go off into more very expensive toys for
science and medical research, that might be a good thing, but we're talking about billions
of dollars here. Where there seems to be, within public institutions, but without even
the controls that you normally have on public institutions. And I think that that's a recipe
for disaster. Well let's hope there will be an improvement. Let's move on quickly because we're running
out of time. Let's briefly look at some other areas. One of the areas where there seems
to be a need for regulation is credit card fees. There was an inquiry by the Reserve
Bank of Australia (RBA). You have a paper on this. It was about ten years ago, there
were some changes implemented to reduce the fees that credit card companies charge. Can
you just briefly tell us about this and what your suggestions were and what the outcomes
were? So the RBA did part of what we suggested,
but then didn't do the rest of it. So again, Joshua Gans and I looked at this particular
issue. It's a really interesting issue. It's what we call a two sided market. So you've
got merchants and you've got consumers. Consumers want to carry a credit card that merchants
accept; merchants only want to accept credit cards that consumers carry. So there's a coordination
issue going on there. They each have a bank and they interchange fees, the fee that the
banks charge each other. In credit cards, the interchange fee is positive, so the merchant's
bank pays the fee to the customer's bank. Interestingly in EFTPOS, so taking out through
your debit card, it's a traditional debit card in Australia, the interchange fee actually
runs the other way. So there's no reason why the fee has to run one way or another way.
It just depends on how the system's set up. There was a problem in Australia and around
the world and Australia was one of the early leaders on reform in this area. The credit
card systems had rules that made it impossible for the merchant to say: "hang on, this card
is costing me a lot more than if you paid with another card or if you paid with cash.
I'm sorry, but you're going to have to pay an extra two dollars or an extra one per cent,
or whatever, if you want to pay with that card." That option was not available to merchants.
There was a 'no surcharge' policy, so if you accepted say Visa, you were not allowed to
charge a different price to anyone with a Visa card than if they had a MasterCard, Diners
Club, or cash. So what were the RBA's reforms? The RBA was
worried about these fees. They saw the fees as being too high and they were correct, they
were too high. The reason they were too high was because of this 'no surcharge.' What was
happening was, merchants have to cover their costs, so if credit cards are costing more
than cash, what happens? You set a price that balances out. Those paying cash pay more,
those paying with credit card are subsidised. Who pays cash? Well actually the statistics
are quite clear. The poorest parts of the community pay cash. So we had this bizarre
situation where the credit card company rules were meaning the poorer people were paying
for richer people. And you don't want this regressivity. It didn't sound very good. What were our recommendations?
Easy! Change the rules. Once you change the rules, once you allow surcharging, that interchange
fee, it's just a price, it's not going to matter very much. If a Reserve Bank really
wants to regulate it, it can regulate it, but you can show that the effects of a regulation
are second order. Fortunately the Reserve Bank did the goods
things. It did require the credit card system to change their rules. And we've had some
surcharging, we've seen some differentiation. We now have merchants who quite clearly - on
the very expensive cards, Diners and Amex - will say, "hey if you want us to pay those,
it's five per cent extra," because essentially that's what the merchants are charged. The Reserve Bank also actually tried regulating
the interchange fee. I think there it was wasting its time. Once it fixed the rules,
it should have stepped back and let the market work. Another area of regulation is - and this is
a broader issue of piracy and intellectual property - I often travel and this is very
annoying when you have these regional restrictions on your DVDs. DVDs that you can watch in Australia,
you can't always watch in Europe, and so on, and this is linked to a big area of piracy.
Do you have any insights about what we should do? Who's right? The people who download music
and say that the companies charge too much money for all the products, or is it the owners
of the property rights, all the big studios? Who's right here? Well I was going to make a joke about "you
buy DVDs?", but I won't just in case there's anyone watching this - I always buy DVDs and
don't know what torrent streaming services are, thank you. Normal programming will now
resume. This is just price discrimination. This is
something we teach our first year students, our undergraduate students. If you can charge
a price to the people who have less sensitive demand, less elastic demand to use the economic
term, if you can charge them a higher price, and a lower price to more price sensitive
customers, you want to do that to maximise your profits. So that's all these inter-regional
DVD restrictions are. DVDs are actually a minor part of it now. The big area that we're seeing it is with
electronic goods that can be downloaded through the internet or the physical goods that you
buy over the internet. Don't believe me? Get on to Amazon and try ordering some of the
stuff with an Australian credit card. You'll suddenly find out "I'm not allowed to buy
this stuff." There's a price, you've got the goods, I want to buy them, why won't they
let me buy them? Well because the suppliers have got rules in place saying look, Amazon,
it's okay for you to sell to the US at that price, but there's no way you can sell to
Australia at that price because we want to charge them a higher price. So this international price discrimination
is occurring more and more. The days where it was just DVDs we could ignore it. Now it's
becoming a real problem. How do we solve it? There was a senate inquiry last year and it
sort of came up with results that "we're not sure how to solve it". Hopefully a bit of
pressure will get the companies like... Adobe, is a classic example where what you can download
here for $4,000, you can download from the same server, but if you're based in the US
and have a US IP address you can download it for $1,000. Same server, same software.
The senate sort of hoped something would fix it up automatically. I think their hope is
not well based. The Canadians have got so annoyed about this
because the Canadians sit there looking below the border and saying damn, why are we paying
so much more than those guys south of the border. They're actually thinking of bringing
in a new rule into their competition laws to say that you're not allowed to sell it
cheaper in US. If you sell it in cheaper in the US, you must sell if for that price in
Canada. That's probably going to be a complete nightmare. How do you enforce something like
that? I think what we need to do in Australia is
think carefully about the rules these companies are using to be able to price higher to us,
and make sure that we're not supporting rules that enable it. So what rules? Well, the obvious
one is copyright or IP laws. Why can't I just go to the US, download a copy of the Adobe
software, bring it back to Australia, copy it a thousand times and sell it? Well, because
I'd be breaching Adobe's copyright over that material. But hang on, this is the same company
that wants to charge us $4,000 and refuses to sell it to us - the same product, at the
same price, from the same server in the US. So we've got to think about well, we're using
our own rules, our own interpretation of copyright to allow them to rip us off! That seems to
be bizarre. So I think we need to think about things like 'use it or lose it' rules. If
you don't sell a product in Australia, and you're selling that product overseas, there
should be no barrier to anyone legitimately buying it overseas in any quantities they
like and bringing it into Australia and if you try to stop them, that's a violation of
competition laws. We need to think about our copyright laws and say well actually, if someone
buys a legitimate copy of your good anywhere in the world, they can resell it in Australia.
And you know what? They can buy it fifty times, or sixty times and resell it fifty or sixty
times in Australia. So at the moment, I think our own laws are
our worst enemy in this. Fix up the laws and then the market will work. A similar area to copyright is obviously the
patent system, which seems to be badly broken. I know that you were in court as an expert
in one of the recent cases. Was it Samsung and Apple? Samsung and Apple, yep. Okay, can you tell us a little bit about this
and what's wrong with the patent system and how we can maybe fix it? I'll be very specific because I'm not an expert
on the patent system but I do know more than I ever thought I would want to know about
patents, intellectual property and things like mobile phones, the devices we've got.
The starting point to realise is that when you pull out a mobile phone, you're pulling
out a mass of intellectual property and the standard, so let's say, the 4G standard, which
is essentially the main standard for any new phone that you buy in Australia, that standard
is set on an international basis. It's set by a standards-setting organisation for phones,
who are actually based in Europe. The standards setting organisation is actually
a group of market participants who get together and decide okay, what intellectual property,
what features are we going to include in this standard, in terms of how signals communicate
with each other, how signals go in one way and come back another way, how signals get
downloaded to a phone, how signals get uploaded from a phone. All of that involves intellectual
property and intellectual goods. And they basically come to an agreement about what
intellectual property will be embodied into that standard. And all the parties to that
standard, all of the parties that have some of that intellectual property have to put
their hand in the air and say: "yes, I have patents; I have intellectual property that
you will need to make a 4G phone. You can't make a 4G phone unless you've got my intellectual
property somewhere there in it. And I guarantee that I'm going to licence my intellectual
property on a fair, reasonable and non-discriminatory basis." FRAN it's called. What does that mean? That's a really good question. Why are these
companies like Apple, Samsung, Google, fighting each other all around the world? Well, certainly
in the case of the Apple and Samsung matters, the basic case is, Apple looked at Samsung
and said, "hang on, you're copying our phones. You're taking some of our IP." Samsung, which
had intellectual property as part of the 3G and 4G standards then came back and said,
"you, Apple, you're violating our intellectual property by selling phones that are 3G phones
or 4G phones." So the Samsung claims related to these standard essential patterns. And
the fight's been over, well, Apple then came back and said, "okay - fair, reasonable and
non-discriminatory." And they've been fighting ever since about what that actually means. They had like fifty court cases around the
globe. All around the world. And in some situations
you've had... the extreme is the US where, at one end, they basically said, "look for
God's sake just go away and sort it out for yourselves," to the other end where there
are some authorities, I think it's the Dutch or the Germans in Europe, that have said that
Samsung's broken the anti-trust law, it's abusing market power by not giving what the
court thought was a fair, reasonable and non-discriminatory licence to Apple. So you've got this huge
range. It's clearly a system that's broken. It's clearly a system that's shown it can't
work. What's been the defensive mechanism, by the way? Well, Apple has realised it needs
a seat at the standards-setting table, so it brought somebody with some intellectual
property relating to mobile phone standards, just so it could get a seat at the table so
that this wouldn't happen to it in the future. Google - same situation. Buys Motorola, takes
out the patents, sells on the rest of the business. All it wanted was the intellectual
property so that - Google was a producer of mobile phone operating systems and mobile
phones - it could get a seat at the table to set the standards. I once read that Microsoft are actually adding
more than a thousand patent applications every month in the US alone. And apparently the
cost associated with all this patent bureaucracy for most of these high-tech companies is actually
greater than the money they spend on innovation itself. There really seems to be something
wrong with that. I mean when it gets to that point, clearly
the system is broken and we need to work out a way of fixing it. Now there's a big debate
about "how should FRAN be interpreted?"... there's a lot of economists particularly in
the US involved in this debate. I think the underlying issue really has to be, is this
the best way of setting standards? At the moment, you set the standard and then ex-post
you start talking about the price. That doesn't seem very sensible! I would've thought you
talk about the price before you start buying the thing or making it essential. It needs
a whole rethink. I don't think there's any easy answers by
the way, because these are very complex products. And by the way, 4G is built on 3G, which was
built on 2G. So even if you came up with a new system for fifth generation phones or
sixth generation phones, then you're still going to be sitting there with a whole bunch
of parties who are say: 'Well, sorry, you're still using our intellectual property, and
we're not playing by the new rules. We're still covered by the old rules.' So this isn't
a problem that's going to go away, it's going to get worse. Okay, it's time for the audience. Are there
any questions? Just a quick comment, then a question. Thanks
for your elucidation of the university ownership and responsibility for accounting. That was
quite enlightening for many of us. The question I ask is, in Australia, what is it about Australia
that makes it more amenable to having monopolies in the supermarket industry? Oh, okay. Supermarkets are really interesting.
Are we more concentrated in Australia than around the world? So that's the first question.
So is your assumption that we've got higher concentration correct? As a broad rule, yes, but be very careful
how you interpret 'more concentration'. Australia's big too, Coles and Woolworths, have about
eighty percent of the dry grocery market. As soon as you then broaden it out though,
the share comes down. Because once you start getting to fresh meat, fish and fruit and
vegetables, the market share is a lot lower. Australia, unlike some European countries
for example, buy a lot of their fruit and vegetables from fruit and vegetable stores,
a lot of meat still from butchers, a lot of fish from fish mongers, so once you get down
to that level, you're talking more like forty to fifty per cent of Coles and Woolworths
share. It's still a lot, but you do have to be careful. The second area where you have to be careful
is to look at Australia versus other countries, and remember that our population's low. So
if you look at Australia compared to the US, we look very concentrated. If you look at
Australia compared to, say Florida, then our supermarkets don't look that concentrated.
All of that's really just background to say, you've got to be a bit careful. Yes, we are
concentrated in my opinion, so not wanting to avoid the premise but just to clarify it. Why has that occurred? Very easy - logistic
chains. It's happened all around the world by the way. The real difference is population.
If you've got a bigger, denser population you can support more supermarkets. But the
reason why the mum and dad stores have tended to disappear is just that integrated logistic
chains have developed, and the infrastructure, the software to drive those changes became
so much more sophisticated that big supermarkets are now much more efficient than smaller supermarkets. Where do we get to in Australia? Australia
is sort of odd. I was involved in the ACCC's grocery inquiry in 2008 and that inquiry was
driven by the concern that the supermarkets were pricing too high. We looked at that.
Wesfarmers had just taken over Coles. Coles was competing quite badly. Woolworths essentially
had the game to itself. We said look, there's some problems here, but if Coles can actually
get its act together... Metcash was actually growing quite substantially at that stage.
It's pulled back. They're the IGA (Independent Grocers of Australia) stores. It's pulled
back since then. There are some issues in the industry but they're not detrimental.
Let's see what happens next. Well, what's happened next is Wesfarmers with
Coles started a discount price-war. It's usually beneficial to the consumers but is clearly
having some problems for suppliers. So the issue in Australia has now flipped on its
head, where the concern is now not that consumers are being ripped off, but the suppliers are
being ripped off. What can we do about it? There's no point wishing for smaller grocery
chains in Australia. You can only do that if you had big inefficiencies in the logistics
chain. Metcash supplies all the IGA stores. It finds it hard enough to run an efficient
logistics chain for its market share. So that's not a great way of going. That's going to
mean higher prices to consumers. I think the current ACCC case is really interesting and
I think it's a good idea to start making sure that the boundaries of those relationships
between suppliers and the supermarkets are very clear. During the grocery inquiry we
heard lots of stories about the way that suppliers were treated. Most of them, or a fair number,
unsavoury. At that stage, you didn't have the current law, so 'unconscionable conduct
for business-to-business transactions' wasn't available. That was changed a couple of years
ago so the ACCC was given a new stick and they're now using that stick. I think it will
be really interesting to see what happens. Hopefully the outcome will be fairer transactions
between suppliers and the big supermarket chains without destroying what's been very
beneficial competition for consumers. So, if we can get a fairer landscape but still
keep the competition then we're all going to be winners. Excellent talk by the way. So I guess here
is one thing. When you're talking about the solution, it often gravitates around regulatory
outcome. So in Australia do you feel that regulatory capture is not a problem as it
is, I think, in the United States? The idea that the regulatory agencies generally hire
executives in firms, or at least are sympathetic to the firms in the industry. Yep. We have regulatory capture but it's different
to the States. So as you'd know, there's a Harper view or the written branch of view
of competition reform. One of the things that I think they should be looking at is the structure
of our regulators, and in fact we've got a Monash business policy forum paper that's
been written on exactly that. In Australia at the moment we don't have a lot of individual
company type regulators. So, we used to have for example, AUSTEL, which was the telecommunications
regulator and it just dealt with telecommunications. It's now part of the ACCC. We used to have
individual electricity and gas regulators, a bit like the UK and a bit like the public
utility regulatory authorities in the US. They've now been rolled into the Australian
Energy Regulator and overall that's a good thing and it's helped prevent that sort of
capture. Where has there been capture? Interestingly,
in Australia the capture tends to be from the new entrants and the customers, not from
the incumbent. So we don't have a long history of people leaving the regulators and going
and working for the incumbent, or people from the incumbent moving into the regulators.
That's not been traditionally a path in Australia. Certainly in the old AUSTEL days, who had
captured AUSTEL were probably the new entrants. So AUSTEL went from being, in a sense, an
arms-length regulator, the referee, to sort of being a bit of a participant. Go Optus,
go entrants, go Optus, go entrants! And that was also a problem. That's not a good result
for regulation either. A bit of that, I think, spilt across to the ACCC. And we have seen
- and when I was at the commission I was trying to fight this from the inside, and I still
see it from the outside - a bit of a culture within the telecommunications group to say
Telstra is the enemy, not the firm that we're regulating. So there has been some capture
but it's sort of a different type of capture in Australia. I do think we need to rethink how we structure
our regulators. I think the idea of having a utility regulator, like the telecommunications
group within the ACCC, the rail and water groups within the ACCC, the AER is actually
connected to the ACCC, I think they should actually be separated out from the competition
regulator. They have very different roles. The utility regulator is all about interfering
in the market. That's their job. Their job is to come out and set prices to set standards.
Their whole raison d'etre is to manage the market. A competition regulator, they're more
like a referee. They've got a set of rules and they have to enforce those rules to make
sure we have fair and equitable behaviour in the market place. It's the last thing you
want with the competition regulator - is for them to get in there and say, "Let's start
designing the market. Let's think about... maybe we'll break up Coles today." That would
be a disaster for the way the economy works. Unfortunately they have very different cultures,
and having those same cultures in one body means that the ACCC has a bit of bipolar disorder
and has sort of got a competition hat, an interference hat, a competition hat, an interference
hat. It needs to have those hats separate and I think in separate bodies. I'm afraid this is all we have time for. Professor
Stephen King, let me thank you very, very much for your interesting views and for your
ongoing contribution to the Australian public policy. I'd like to wish you all the best
for the future and the contribution to continue in the years to come. Thank you. Thanks Jan.
