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Joint Standing Committee on the National Capital and External Territories - 06/06/2014 - Economic development on Norfolk Island

YATES, Mr Julian Anthony, Private capacity

[09:46]

CHAIR: Welcome, Mr Yates. Although the committee does not require you to give evidence under oath, you should understand that these hearings are formal proceedings of the Commonwealth parliament and warrant the same respect as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament.

Thank you for your written submission. Do you wish to make a brief introductory statement before we proceed?

Mr Yates : I would like to make a very brief statement. The critical thing for me with Norfolk Island is that it has been an experiment in self-government that has been running for several decades. Frankly, the experiment has failed; that is my personal view. The expectation for a community of around 2,000 people to have the governance, the financial, and the skills base to run a semisovereign state, more or less, just is not practical. It cannot be done. They probably have not been financially viable from day one. There have been periods when they have been able to cover their operational costs, but I do not see any evidence that they really have been able to cover their capital investment or replacement costs. This is why we see the poor condition of roads, the difficulties they have with the new hospital building, their inability to repay the runway refurbishment loans and the continual Commonwealth bailing out. I do not see that changing, frankly. You could do everything to try to build the economy locally, and that needs to be done, but I do not see how a community of that size will ever be remotely self-sufficient in a funding sense, which is what the current governance model requires. Unless change is made, we will continue down the current path of degrading infrastructure, Commonwealth bailouts and no certainty for the community. That is where, from an economic viewpoint, things need to change. Business needs certainty to be comfortable to invest, and the current arrangements do not have a lot of certainty. It is also difficult for some types of businesses to invest because of the government's range. Until that changes and they get some certainty over the long term, you are not going to see a lot of economic change. Hence, I think this committee's role in trying to develop a long-term plan that has parliamentary support—and I guess I am talking about bipartisan support there—is really important.

CHAIR: Thank you. Can you for the record, could you give us a run-down of your direct experience with the island?

Mr Yates : Certainly. I had a number of years in the first assistant secretary role, looking after the territory's function in a range of departments, due to machinery of government change. That saw me put in the position of having a close look at: what did we need to try and do, from a Public Service perspective, to try and change the situation? It was very clear, from a number of reports done by this committee and other bodies, that there were significant problems.

My first visits showed significant problems; problems with the infrastructure and problems, frankly, with the outlook and attitude of a lot of the community. The community was quite insular, and very defensive of their culture—and I will come to that in a moment because I think that is quite important. They had a tax regime that was producing significant behavioural distortions; it was not allowing for innovation and new industry to come in. It was actually promoting a tax haven—that is my personal view—and was not promoting innovative ideas.

It was also very clear that their funding base was totally inadequate, and there was little, in my view, that they could do to change that themselves. Certainly they needed to charge rates; they do not have a rates system at the moment. They are relying purely on a GST, which I think has some problems; it is important in the mix, but on its own it is not enough. Even if you made all those changes, it was not going to change the fundamentals that 2,000 people cannot generate enough activity of their own to supply the services that a modern community expects. It was particularly clear that they were going to have problems literally keeping the lights on; they were not going to have the funding to be able to buy fuel to run the generators.

So we started a process with the team supporting me to do a lot more consultation with the communities. There was a lot of consultation with other government agencies—you will appreciate that I cannot go into that now; you would need to approach the other agencies for their views on that—with a view to getting some short-term fixes done. We were able to get some funding to support the Norfolk Island government to buy fuel, and to do some urgent repairs to fundamental things—like power poles, which were starting to fall over. We were able to continue the relief from repaying the loan for the airport resurfacing. If that loan was not there, the airport would have closed, and that would be a significant problem.

In return, though, we started to have a discussion with the community and with the government about what changes they needed to make at their end for this to work. That was very difficult for the community. They have a long and proud history. They have a unique culture. They were legitimately very concerned not to lose that. The observation I made was—and I think this remains valid—that, unless they have a vibrant economy on the island, the kids are going to leave. And the kids are leaving. The most productive people are leaving because they can get much better paid work elsewhere. That will inevitably cause their culture to fade and degrade as people leave.

The strongest way to have a strong culture was to have a strong local economy to keep the kids so they have that vibrancy and that renewal. I think it is important to accept that cultures are not static; they need to change; they need to renew. But to do all that you need a strong economy. I think we have had some traction with that. I have not been back to the island for 18 months or so, but my sense from my time in the role over several years was that there was an increasing acceptance by a lot in the community of the need for change.

To be fair, there are still significant people who are not supportive of that. And that needs to be accepted and understood. I can say, from my experience dealing with territories—particularly Christmas Island and Cocos Keeling Islands, which are not self-governed but both have strong local cultures, unique local cultures—that the argument that changing self-government will lead to the destruction of the Norfolk Island culture is not actually valid. I think the reverse is true; if you have a stronger economy and a more appropriate governance structure for the community, you will have a better chance of retaining your culture.

I should say too that I am not arguing that you replicate what is done in the Indian Ocean Territories on Norfolk Island. They are different. A unique solution for Norfolk Island needs to be found, but I think it is one that would have the Norfolk Island government doing less, focusing more on the things it does well, and getting in external expertise to run the other things that it cannot. I have made some suggestions in my note that the New South Wales or Queensland state governments probably do state services better than Norfolk does, and they certainly probably do it better than the Commonwealth can do.

CHAIR: Obviously there is no template that can be thrown over Norfolk, and no replication from another external territory or another island. Are you proposing a local government model, and how would you see the economic benefits flow through to people on the island?

Mr Yates : The traditional local government model would enable the government to focus on those local government things that are important, like rates and typically the roads. A lot of local governments also do power and sewerage, so they can deliver those types of things fairly effectively. I think the style of government needs to be very closely linked to how you fund it; most local governments in small communities in Australia have a rate base, but it is not sufficient to fund all of their activities and they receive a significant Commonwealth funding as well as some state stuff, through a local governments grants scheme. One model to normalise Norfolk Island which would have an economic benefit would be to have that government operate a lot like a normal local government in most of Australia and receive similar benefits to those a normal local government receives.

Across Australia there is a lot of variation in local governments; it is not one-size-fits-all. The capabilities that Norfolk Island has demonstrated suggest that it is a local government that could do more than some of the others that really only relate to purely municipal matters. The question there is—where is the funding side of things? But I think the direct economic benefit, if the government operated like a local government, under the same funding regimes as most local governments, would be an immediate increase in the funds available to the government.

CHAIR: A slight diversion from the terms of reference, on our last visit to Norfolk, there were some questions raised about the impact of the Australian minimum wage on the island awards. Basically, we currently have a situation where people do many different jobs; that promises to bring quite a significant change to life over there. Have you any thoughts on that?

Mr Yates : Absolutely. This is one of the critical things we looked at when we were in discussion with the Norfolk Islanders. It is on the roadmap. It is probably not at the level of detail that is needed, but you clearly have to have a transition; you could not just turn it from one system to the other overnight. We were not able to achieve the level of work needed to detail precisely how to do that transition. One of the things we looked at was that, as you transition from their very low wage system with virtually no social security, you would lead with the Australian social security system so that people start getting the normal benefits that all Australian citizens receive through the Commonwealth social security system, and have some of the tax side of things lag by a year or two so that there is that period of adjustment. There would have to be significant support provided to the community, because some businesses will go broke, as they do in all communities. That is a part of the renewal process.

CHAIR: Some might say they are not too far from it now.

Mr Yates : You could. I think one of the problems is because of the barriers to entry of small businesses, you have had unviable businesses running for a long time, absorbing resources, if you like. Whereas in more normal communities, sadly, some go broke and are replaced with new ones. That is the innovation-creation side of things—which is very important. Obviously, you need to have suitable support systems so that those people who are affected by the businesses and other things going broke are appropriately supported. Norfolk does not have that side pretty much at all at the moment, other than by delivering food and vegies to people's front doors which, in 2014, is probably not a way I would find acceptable as a social security network. It is a great question. It is one that needs a lot of work and it has to be done in consultation with the community.

Senator SESELJA: I have not had the benefit of visiting the island yet so I speak with a degree of ignorance still, and I hope to address that in coming months. I am interested in a couple of points, one that moves to an Australian welfare and social security system. Is the flipside of that a potential danger if the economy does not grow in the way that we would like to see? Is there a danger that you could see real pockets of welfare dependency where you are imposing a welfare system on a fairly remote location—and that can have negative implications, can't it? How would you guard against that if you shift over to Australian social security?

Mr Yates : The Australian social security system has its own guards against that at the moment to try to deal with that, and those things need to remain in place. I think that the critical part though is the other side of this, and that is the infrastructure side of things. A big barrier to new investments to efficient operations is the state of the infrastructure on the island. In addition to making a good and effective social security system with its own internal measures against welfare dependency, there needs to be adequate investment in the infrastructure to enable businesses to succeed. That is the really important point I just heard at the end of the presentation by Carnival. Who should be responsible for doing that? How much should it be led by government? How much should be led by private industry?

I think the reality on Norfolk is that the state of a lot of the infrastructure means that private enterprise is probably not going to be able to raise the funds to do it themselves. For example, the roads, the port—the port particularly. The port is a real issue. Serious investment will be needed and a lot of thought about innovative solutions too, on that one. It is not a place that lends itself to a quick and simple solution. I am not a port expert, but I have seen the benefits, for example, on Cocos where we did a change there to the ports. We turned efficiencies around in container movements from delays of three weeks in getting goods to the people after the ship arrived, to three days. So innovative solutions can deliver some real economic benefits there. But there has to be a capital investment and, unfortunately, I think that can probably come mostly from the Commonwealth.

Senator SESELJA: If you were to get a lot of these things right, if you were to get infrastructure improvements and if you were to see a better model of governance in your opinion in terms of the island's future and you did see the economy grow, is it possible or is it desirable in your view for the population to grow in Norfolk? Are we talking just a little bit, say, 10 or 20 per cent, or could you see it grow more significantly? Obviously it has been around the same sort of population for a long time. Is that a desirable outcome, do you think, a feasible outcome?

Mr Yates : Great question again. I do not have direct answer on that. The best way to answer that is through a good town planning scheme—to use those sorts of words—the sort of stuff that local governments do all around Australia, the sort of stuff that state governments do well because they have the skills and expertise to do that sort of thing. I think you need to do that sort of work before you can get that answer. So I would not like to try to say whether it should be more or less. It should not be more at the moment because the infrastructure is not suitable. How much more, while retaining the nature of the island, is best done through the town planning processes. We use those very successfully in the other islands; it is a normal local government-state government function. There are heaps of expertise available. I am not one of those experts so it is better to ask someone like that for that sort of answer.

Ms BRODTMANN: Thank you very much for your presentation and also your candour in your new private capacity. Congratulations on your retirement. When I saw the documents I thought that you seem too young to retire. You are an expert on external territories and you have had that broad view across all of them particularly in the Indian Ocean, and you were involved in the road map and coming up with that as an idea. When we talk about the integration, including the integration of the benefits and also the tax, as you know there has been significant resistance in some pockets in the community, so I would be interested in your views in terms of what they would think of your local government model.

Mr Yates : I think it would be fair to say that there are numbers in the community who do not like it at all, and they are perfectly entitled to that view. My response to that is: what is your alternative that is going to work, given the current model is not working? Now I think that is the difficulty. As someone said, democracy is a bad system but the others are all worse. If you are not going to take that much change, what is your alternative that is going to work? I could not find any credible ones being put up. There are incredible ones: the Commonwealth should just pay lots of money with no change. That is simply not acceptable. Benefits and taxation are two sides of the same coin. You have to have both.

Ms BRODTMANN: There is a view amongst some in the community that it is, in a way, a sovereign state and, in a way, a Pacific Island nation and that, rather than integration or relying on constant one-off or ad hoc grants from the Commonwealth, they should be the recipient of international assistance in terms of aid. What are your thoughts on that?

Mr Yates : I think the easy answer to that one is they are a part of Australia from a sovereignty viewpoint. I know there are a few people who do not agree with that. The High Court has held a rather different view. The Australian government has held a rather different view for a very long time. So I think that is simply not a credible answer. Technically, I suppose, the government could decide to divest itself. I suspect there are some constitutional problems with that. I do not see that as being a credible answer, nor do I see, if they were to becomes completely self-sufficient, how on earth they could fund it anyway.

Ms BRODTMANN: Through aid, I suppose. That is the view of this particular group. In the 90s, the model was proposed by the Liberal—what was the gentleman's name—but it was scratched in terms of the move to integrate. That had a really long-term, transitional view. I would be interested to in getting your thoughts on that: whether we should dust that off, whether we should merge it with our road map. It did have a very long view, and it was a very realistic view in that this dramatic change would take time. I would be interested in your thoughts on that.

Mr Yates : I have to be a little careful here because some of this gets into what we actually did within government with the road map. What I can say is we were informed by that. There is no shortage of reports that show the problem. There are various ways you can go about doing it. None progressed—including the work that I did, sadly—to the level of detail of how you actually make the transition happen. But as I said in my opening, a critical thing is long term. We cannot, I think, with Norfolk have a policy that changes relatively regularly. There have been numerous announcements by ministers over the years that have not, for one reason or another, progressed. There needs to be, for the island's future, the direction the Australian government is going to take over 10 years or more. The community and business needs that level of certainty. There is no shortage of ideas on how to deal with it, but a decision needs to be made that is going to be supported for the long term, accepting that not everyone is going to be happy—that is going to happen. But it is a long-term thing that is needed.

Ms BRODTMANN: Just going back to my earlier point of the response to the island in terms of what could work on governance and on funding and revenue raising, another idea that came up when we were on island just recently holding the hearings—and you would have seen the transcripts from that—is this notion of offshore banking and that being an option in terms of a revenue source. I think your submission addressed that.

Mr Yates : I would not claim to be an expert on it. My recollection is that there are some concerns in our financial regulators about ensuring that it does not turn into money-laundering operations. That is probably quite manageable. How much actual revenue it will raise remains to be seen. I think you need to find as many strings to the economic bow as you can with somewhere like Norfolk. Cruise ships will help; they will not be the total solution. Offshore banking may help. There were some attempts by Norfolk Island to do some things along that line, but they broke down because they did not have the infrastructure for the IT communications, and no capability of raising the money to put the equipment on the ground—the satellite dishes, the fast links and so on. I understand that, ideally, they would probably need an undersea cable to get the speed and reliability; but technology moves on, and that may have changed since I last had anything to do with it.

Senator LUNDY: You are as familiar as, arguably, I am with the ideas that have come forth over many years now to stimulate the economy. Given your experience and that you are not appearing in an official capacity, what would you put at the top of the list? I know there is not a silver bullet; you just said that. But what do you think could make the quickest, most cost-effective change to the island's economic prospects—whether it is tourism, or something else—that could be done right now?

Mr Yates : Get a governance model that the community, by and large, can accept—not everyone will—and that the Commonwealth government can accept, and start getting the right services and environment on the island for business activity. At the same time, get the social security in so that the individuals who are in a bad state—and I know of some really tragic stories there—start getting proper support. That can be done quite quickly. Some of the big infrastructure, like the port investment, is going to take a long time to work out—big dollars. Just getting the governance right and getting commitment to a long-term future in that respect will start getting other things done. That is necessary. It is not sufficient of itself. If you did the port, for example, without governance, it would not work.

Senator LUNDY: Why won't it work?

Mr Yates : Because you still will not have the environment for proper investment; you will not have the business renewal.

Senator LUNDY: So external business people coming in will not have the commercial confidence to make that investment?

Mr Yates : Why would you when you are at risk of the immigration officer saying, 'Go away'?

Senator LUNDY: What about expanding the interests of local businesses? Do you have any concerns there?

Mr Yates : It would be great to see local businesses doing more. As I have mentioned, I think one of the problems will be that some of the local businesses should fail; they are just not viable. You need that renewal and you need a process to assist those people in that situation. But if you can have some of the local businesses doing better, particularly on the tourism side of things, then that will be great. It is essential. Again, I think a better governance structure will help that happen. There is nothing like some competition coming in to smarten people's ideas up.

Senator LUNDY: We have seen examples of public investment as a stimulus for weakened economies. If those governance pre-conditions were right, in your opinion, do you think an investment in the form of some stimulus—whether it is tenders for cruise ships, or something else—is warranted?

Mr Yates : We certainly saw it working on Christmas and Cocos islands, without any doubt. Getting away from all of the immigration-driven issues, the Rumah Baru port project on Cocos generated a lot of local business activity, as well as delivering a significant efficiency dividend in port operations.

Senator LUNDY: What was the Commonwealth investment into that Cocos project?

Mr Yates : The dollars to make it happen—about $26 million. It also has a huge Commonwealth pay-off. We could not have done the runway resurfacing without it, because otherwise everything would have gone over the beach, a la D-day. That is simply not a credible solution. So it had some significant Commonwealth benefits, too. That port facility has a notional life of 50 years, but it will last a lot longer, so it will continue paying back. More than 100 years from now it will still be giving a return on that original $26 million investment.

Senator LUNDY: There no return of that character to Norfolk Island for the Commonwealth, though, is there?

Mr Yates : No. All of the studies I saw show that Norfolk Island would be a net recipient of Commonwealth funding, just like most remote mainland councils are. So it is a question that if Australia wishes to have a sovereign territory in a remote island territory, or remote communities in the middle of Australia, they are going to receive net benefits from the Commonwealth. Norfolk Island is receiving significant net benefits at the moment from the Commonwealth, and paying nothing. I do not think that is right, frankly. I cannot see how that can change without a change in governance arrangements.

Senator LUNDY: You mentioned innovation and that some of the practices and structures inhibit innovation. Could you expand on that point?

Mr Yates : This is changing because Norfolk Island has accepted the need to change some of their barriers, and they are coming down, which is great. They need full credit for that. But the process that I saw at the outset—and this is a personal view—was that if you were a high-wealth Australian individual and you wanted to reduce your tax liability you would go and buy a business. Pick a figure—$200,000. You did not really care whether or not that business worked. As long as the doors we open you would get a temporary permit and then a residential permit and once you got that you were no longer liable for any Australian tax income, other than what you earned on the mainland, so you needed to restructure things. You would then sell that to the next person trying to get a residential permit. So you had a series of businesses that appeared to me to be open purely for the sake of—

Senator LUNDY: Getting a residential permit.

Mr Yates : Yes. You could not open a new business. You had to buy an existing business. So there are barriers. Someone who wants to bring in competition cannot, because they could not set up a new business. They could only buy existing businesses. Then there was the bed cap. I forget the number, but there were something like 3,500 beds. You could not build a new facility unless you bought.

Senator LUNDY: These are anti-competitive practices at the heart.

Mr Yates : I would have said so. That was my view. They were for various reasons but they do not allow innovation. They do not allow successful businesses to come in and unsuccessful ones to fail and be replaced by new ones. So you had this significant barrier. Someone put a great comment in The Norfolk Islander. They had visited the island five years before and had come back on another visit and the same stuff was on display in the shop. Nothing had moved—and 'could they please dust it'! To give credit, the Norfolk Island government is changing that. We put a lot of pressure on them to make that happen, and they have started to change it, which is great. It is a step, but more steps are needed.

Senator LUNDY: The witnesses prior to you, those from Carnival Australia and TTF, are suggesting that one of the low-hanging fruits the Commonwealth could choose to pick at this time is the purchase of let's say, for the purposes of this discussion, three tenders, at the cost of $800,000 each. Relatively speaking, it is a smaller investment than any major physical infrastructure. What are your instincts telling you about that being a useful way to stimulate part of the economy on the road to economic improvement?

Mr Yates : If it is done in the reform framework, it is probably appropriate. If it is a gift of three boats, no, because then you are just putting more bandaid money—

Senator LUNDY: So there should be strings attached?

Mr Yates : Absolutely, as was done with many of the other funding supports.

Senator LUNDY: What strings would you attach to such tenders if they were purchased by the Commonwealth, to put them in that reform framework?

Mr Yates : The tenders are aimed at increasing the ability of cruise ships to visit. The boats will help the people on the cruise ships to come off. That is critical. Then it is a matter of what they do on the island. I made some points in my submission about this. The experience-seeker tourism market is the one to go for. That is what the cruise ship people are after. They are after bragging rights. They want to be able to say, 'We went here and we did this and it was wonderful. It was unique. You cannot get it somewhere else.' Norfolk Island's tourism industry is still stuck as a cottage industry. So the strings attached to the investment in the boats would be tourism industry reform. There are some experts around who can talk about that.

Ms BRODTMANN: In terms of the governance, as you know the roadmap has introduced a range of changes on governance. I would be interested in your views on how well that has gone, what has been achieved and what still needs to be achieved? You talk about governance and the fact that we all acknowledge that we need to get that framework in place. You need a strong framework for everything else to be successful. I would be interested to get your views on what has been successful to date in terms of the governance changes that have been made, and what still needs to be done.

Mr Yates : I think the most significant success has been the acceptance of the need to remove some of the immigration barriers—perhaps a bit through gritted teeth. More work needs to be done there. I think the areas of the roadmap that need to revisited and have more work done on them, cannot be done until you get a clear agreement on the governance change. You need to know what the future is going to look like, in a governance sense, and how you transition to it. The community legitimately needs more engagement on that. We had some success early on. I remember going to a community meeting. The Chief Minister at the time, David Buffett, and I talked about how to do this. We took a lot of questions and there was a lot of interest. Not everyone supported it. Some did. That sort of thing needs to be done to a greater degree.

I think the Australian government needs to be saying that this is the direction. Norfolk Island is a subordinate part of Australia—they might not like it. In the end the government has to take the lead on this, because I am not sure you can get a complete lead from the community. It is probably still too divided. There are some fairly entrenched opinions as to which way. This is where I think this committee's work is important. It should then go to the Australian parliament and say, 'We have heard the views and this is the direction.' Because I am a little out of date I would be reluctant to say much more on where the roadmap has got to, because I do not know all of the details.

CHAIR: Thank you for your evidence. If the committee has any further questions for you we will send them in writing through the secretariat.

Resolved that these proceedings be published.

Committee adjourned at 10 : 22 .