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Economics Legislation Committee
31/05/2017
Estimates
TREASURY PORTFOLIO
Productivity Commission

Productivity Commission

CHAIR: I declare open, again, this meeting of the Senate Economics Legislation Committee. We have with us the Productivity Commission. Do officers of the Productivity Commission wish to make an opening statement?

Ms Chester : In keeping with the good practice of our Chair, no, thank you, Senator.

CHAIR: Thank you very much. We might kick off questions with Senator Ketter.

Senator KETTER: Thank you very much. Thank you, Ms Chester. I will start with your review of alternative default fund models. Firstly, can you confirm my understanding of the sequencing of the phases of the review. Number one is establishing the criteria to assess the super system efficiency; two, designing the alternative default model to the status quo; and, three, assessing system efficiency. Have I got that right?

Ms Chester : You have.

Senator KETTER: Thank you. In terms of the logic—and I think we might have touched on this in previous hearings—for the sequences when you have the design of the alternative default model occurring before the actual assessment of the system efficiency, can you explain the logic to us?

Ms Chester : Yes. We can thank David Murray for the logic, because it was his suggestion and his financial system enquiry report to the government. I think the Murray report was very cognisant that, while there have been reviews in the past of superannuation and pension fund systems globally, nobody had actually done a holistic review of the competitiveness and efficiency. Indeed, the FSR report touched on elements of efficiency when they were looking at the super system but it was really what we would call 'operational efficiency'. So 'are people getting best bang for buck', and they focussed very much on fees, which resulted in David Murray forming a view that there was potentially a lack of competition in the default space.

The recommendation was to have a series of three pieces of work that the commission would be tasked to do over a two-and-a-half year period. Stage 1, as you have rightly said, was for us to set up the framework within which to ultimately assess the competitiveness and the efficiency of the super system. We completed that piece of work last year. That set up a very, I think, thoughtful and considered framework for us to establish: 'What are the system level objectives that we would expect of a super system if it was competitive and efficient? What are the assessment criteria we would then want to apply?' and then 'What bits of data and evidence would we need to collect to form a view?' We have established that framework, which will apply in stage 3. The idea for stage 2 again goes back to the Murray report where there was a sense that something else might be needed to inject a level of competitiveness into the default component of the super system. So the thinking was, as an input to stage 3, for the commission to look at what might be some alternative models that you could introduce competitiveness within the default system. The best way of thinking of it is, at the moment we do have a lot of engaged consumer choice occurring in the super system, but it is only in the 'choice' segment. In the 'default' segment, people are not making a choice, they are defaulting into a default product. While there is competition in the market, in the choice sector, there is no competition naturally in the market for default, but there could be competition for default—so, getting super funds to compete for access to the default market. So we have come up with four alternative models that we have assessed against the only objective benchmark, which is: 'What if we were to have no default arrangement?' What we would view as unassisted member choice.

We have come up with four models. We have finalised our draft report. We have just finished our final consultations, which included getting another 60-plus submissions from interested parties, and we held public hearings across two days. We are now in the phase of finalising our thinking around those four models. Ultimately, that will be an input to stage 3, where, sometime after 1 July this year, we will be tasked by the government to review the overall competitiveness and efficiency of the super system. So we are taking the framework we developed in stage 1, using that as our framework for stage 3 and then taking what we learned from developing some alternative allocative models for default selection in stage 2 as an input to stage 3. Ultimately then in stage 3, when it comes to default, we would assess the performance of those models against the current arrangements, which indeed is something that most of the industry is very keen for us to do to compare it to current arrangements.

Senator KETTER: Can you see that there is an argument that one would normally test the strengths and weaknesses of the system before designing an alternative to replace it, and see how that process might inform a better outcome with the design?

Ms Chester : We are going to be doing it in any event. But—and this was actually quite thoughtful—at the end of the day, we are 25 years into what is now a maturing superannuation system, and the industry has advanced what members can do today with apps on their phones, with access to data for the millennial generation. It is time to pause and reflect. We moved to a default system 25 years ago, for good reasons. We know that, in a world of compulsion, cognitive biases and complexity, you cannot expect young members to be highly engaged. But fast-forward the clock 25 years. It is time to think, 'Well, have we got the right models in place for today's generation of new super fund members?' and assess it against the objective benchmark of a world of no defaults. So it is assessing today what would be the problems of a world of no default, which we assessed in this second stage, and then how these other allocative models perform against that. It sort of allowed us time to think through all of that and then have some options to inject into stage 3, which in and of itself will be quite a comprehensive piece of work.

Senator KETTER: You probably are in a position now to form a reasonable understanding of how the different parts of the super system work. Can you tell us where you think are the greatest opportunities for gains to be had in a redefined system. For example, where are the most expensive and poorest performing funds to be found?

Ms Chester : I think it is fair to say that we, being a very evidence based organisation, are yet to traverse all of that evidence base. We know what data and what evidence we need to go and seek and gather, and indeed we will do that for stage 3, and we have identified for the industry what that is when we outlined the framework in stage 1. I think, though, in terms of some initial thinking which we have shared as part of stage 2—indeed, we use these words very carefully—that one of the most egregious failures of the current superannuation system is the proliferation of unintended and multiple accounts. Indeed, we were very mindful of that egregious failure when we were designing the new default alternative models, where we recommended that young new job entrants today should only ever default once.

I think the other thing—drawing on evidence that we have received from many in the industry, including the CEO of one of Australia's largest superannuation funds—is that the biggest risk today for a default member, particularly a new job entrant, is that they are defaulted into an underperforming fund. We have the problem with multiple accounts, both accumulation accounts and insurance policies, and then we also have the risk of being defaulted into an underperforming fund or an underperforming default product. Nothing in the current arrangements fully mitigates that risk, and that is something that we were very mindful of when we were designing our alternative models. But, in terms of the evidence of what the costs of those risks are under current arrangements, we know where we want to go and look for evidence, but we are yet to gather that. Indeed, it would be premature for us to do so before we have the terms of reference for stage 3.

Senator KETTER: Have you been able to form a conclusion yet on the view that perhaps 85 per cent of retail sector assets in the choice segment underperform assets in the default sector?

Ms Chester : There is a lot of media coverage of the statistics in this field. At this stage, because we have not assessed that evidence ourselves, we do not have a view. That said, I look at the APRA data, which one would consider to be objective and unbiased. If we are looking at what the major risk is, and that is someone defaulting into an underperforming fund, my focus is kind of on the tail: which funds, over an extended period of time, have continued to underperform? That is the greatest risk that has been identified by the CEOs of some of our leading and largest superannuation funds. When you look at that tail in the APRA data across the MySuper products over a medium- to longer-term period of time, all of a sudden you realise it is jersey agnostic. There are industry funds, there are retail funds—indeed, in the very far reaches of the tail, there are six industry funds and six retail funds—there are corporate funds, and there are two public sector funds. That would suggest to me that, if we are identifying what we think is the largest risk, particularly for default members—those that are being compelled to save but are not making their own choice—and we are looking at performance metrics, one of our key focuses would be on that tail and why that tail has continued to remain in place. We do not see the exit through mergers of some of the funds that are featured in that tail performance.

Senator GALLAGHER: Could you provide that to the committee. You just mentioned a number of industry, retail and corporate funds that you are concerned about.

Ms Chester : This is APRA data that is on their website, but we are also happy to share with the committee where we cite it in the draft report we did for stage 2.

Senator GALLAGHER: It is in the report? All right.

Senator KETTER: Are you familiar with the finding of the Grattan Institute which found that choice superannuation was the most costly and the poorest performing sector?

Ms Chester : As I said, once we get to stage 3, that is when we will be traversing all of the evidence base. In doing that, we would look at work of people like the Grattan Institute, Rice Warner, Rainmaker, SuperRatings and Chant West. There is a world of difficulties of comparability here, but the way that we have established the framework in the study that we did last year will allow us to unbundle it so we are not comparing apples and zebras. In the choice world, people are electing sometimes to go into very different superannuation products, and we have to be mindful that, if they have chosen to do so, they have the knowledge of what their financial circumstances are, what their assets are and what their tax situation is. These are all the sorts of factors that we will take into account and consider in stage 3.

Senator GALLAGHER: Do you think it is the case, though, that those that go into the choice sector do have all of those things—the tax advice that you just mentioned—and that they are fully informed about those?

Ms Chester : I think the ultimate form of the choice market is probably SMSF. The statistics there do suggest that there is a higher incidence of people getting financial advice.

Senator GALLAGHER: I understand for the SMSFs, but outside—

Ms Chester : I do not know the answer to that question yet, but that is, again, something that we would be looking at when we get to stage 3. Indeed, some of the indicators go to: on what basis do people make those decisions?

Senator KETTER: Wouldn't you agree that the logic of trying to redesign the best performing part of the system rather than reforming the poorest performing part of the system is a little bit askew?

Ms Chester : We will be looking at the entire system to try to understand. At the end of the day, the default segment kind of needs to assume the higher moral ground. It is where government has compelled people to save. The default sector represents two-thirds of members but only a quarter of the assets within the superannuation system, so that tells you a little about the folk that we are dealing with—people on lower incomes and much smaller balances. By injecting some competition through some of the models that we have identified, there is potential to improve comparability and, indeed, to make better informed choice within the choice sector by allowing only best in show—which is really what our models were about—to be the funds that are eligible to have access to that default sector.

Senator KETTER: You may want to take this notice, but has the Productivity Commission ever before been tasked to inquire into and propose reforms of the most efficient parts of a particular product or services market whilst ignoring the least efficient parts of the product or service?

Ms Chester : We have not been asked to do that with the superannuation trilogy of work, so I am not sure of the basis for the question.

Senator KETTER: There is an argument there that, before you are looking at the efficiency of the system, you are getting into the work of criteria for redesigning the whole system. The redesign is not taking into account what part of the system is most efficient.

Ms Chester : I think the jury is still out on which part of the system—are you referring to the difference between industry and retail funds? The jury is still out for us, in terms of having done a comprehensive and objective assessment of that evidence base to have formed a view. That said, when you look at the performance across super funds, the one distinguishing characteristic against those funds that are underperforming—and I mentioned before that they are fairly well evenly represented across all different sorts of funds: retail, industry, corporate, and one or two public sector—is the size. So, again, for us, it is issues around the whole architecture of the super system and why it is that good new performing funds are not entering the default space and why underperforming funds, over the medium to longer term, are not exiting it.

Senator KETTER: So you have not formed a view about which is the most efficient part of the sector?

Ms Chester : No. That is the wonderful work ahead of us in stage 3.

Senator KETTER: That is the question. Without understanding which is the most efficient part of the sector, what is working well and what is not working well, we are already down the track of designing the new system.

Ms Chester : No, we have identified some potential alternative models, and they will be assessed against current arrangements. So the way that we have assessed the four alternative models in stage 2 is: we established a framework within which to do that. The industry is very happy with that framework. They are just very keen for us now to assess the current arrangements in the same way. So we will take the models that we have developed in stage 2 and assess them objectively against the current arrangements when we get to stage 3. Stage 2 was really a chance for some top-drawer work to then be an input to stage 3. It is unique that the commission has been asked to do that, but it is very helpful because it has allowed us to do what I would call thoughtful pre-work and have that ready to pull out of the top drawer, if we need to, in stage 3 and then assess against current arrangements.

Senator KETTER: But that 'thoughtful pre-work' that you mentioned is not informed by benchmarking alternative policies that are currently available, that are currently working.

Ms Chester : No. It is benchmarked against what we identified as the only truly objective benchmark here, and that is a system of no default. As I mentioned, we are 25 years into a superannuation system, and it is imperative that we go back and understand: 'Why do we still need a default system today? What would be the failings of having no defaults?' and then make sure that the models we develop as alternatives are best designed to address those failings. So we did form a view in the draft report of stage 2 that, as to having an unassisted member choice, all four models beat that objective baseline. So that would tell us that we need some form of default arrangement, and we will be taking how we have viewed those four models in stage 2 and then extending it to the current arrangements in stage 3.

Senator KETTER: I know my time is about to run out, but have you received the terms of reference for the third phase?

Ms Chester : No, not as yet.

Senator KETTER: When do you expect to receive those?

Ms Chester : That is really a matter for the government. The Murray report recommended, and the government agreed to, us being tasked sometime after 1 July this year, when all the MySuper and SuperStream changes have been in place. So we could be up and running from 1 July.

Senator KETTER: Will you be having discussions with the minister once you receive the terms of reference?

Ms Chester : Typically, when we get terms of reference for an inquiry, we will have an early stage consultation, and that would typically be with government departments and agencies. We would normally only meet with the minister once we have a draft report.

Senator GALLAGHER: Have you done that at the end of the reports you have released? You have released two, haven't you?

Ms Chester : Yes. For the most recent one, where we had the draft report on potential alternative allocation models for default, we briefed both the Treasurer and Minister O'Dwyer, just prior to her going on leave, so the timing worked out quite well.

CHAIR: Thank you, Senator Ketter. Senator Smith.

Senator SMITH: Welcome. I just want to get an update, if we could, as to the long-awaited Productivity Commission inquiry into horizontal fiscal equalisation. Some of the information around the process has been detailed, but can you just confirm for us the opening and closing dates and the draft reporting date? Have any commissioners been allocated to the inquiry yet?

Ms Chester : To answer your last question first: yes, two commissioners have been signed to the HFE—if I might use that, because it is a little more shorthand—inquiry, and they are me and my commissioner colleague Jonathan Coppel.

Senator SMITH: Excellent. Congratulations on what is going to be a very, very timely inquiry process and much watched from Western Australia. What is the average time between the terms of reference of an inquiry being released and then the closing date for submissions, normally, for a Productivity Commission inquiry?

Ms Chester : Typically, the sequence of events is that we get a terms of reference and, depending on how much pre-notice we have had on that and how much pre-work we have done, we would issue either an issues paper or a guidance note. Indeed, we have issued a guidance note for the HFE inquiry. What we try to do there is give guidance to interested parties—and we are dealing with a very informed stakeholder group here—as to how we are interpreting the terms of reference. It is basically saying: these are the questions we really feel that we need to ask and answer as we go about undertaking the work for this inquiry. So we have released the guidance note about how we are interpreting the terms of reference. We are well underway with initial consultations. I have been to Adelaide and the ACT; next week we are going to Sydney, Brisbane, the NT and Tassie and then circling back through WA, the idea being that we will meet with all of the key central agencies across state and territory jurisdictions well in advance of them providing us with their initial submissions.

Senator SMITH: Excellent. These initial consultations are not the public hearing process but an opportunity for the commission to share its perspective on the terms of reference, to draw attention to the guidance note and then to have a private discussion with possible submitters about the approach that they might take?

Ms Chester : Yes, with the end in mind of making sure that we get the most frank and useful submissions as possible from interested parties. Indeed, it is not just the state and territory governments that we will be meeting with; we are also meeting with the Commonwealth Grants Commission and some academics that we have identified in the area that have done some interesting work. We try to go a little bit further than the core stakeholder group when we have been asked to do something like we have here.

Senator SMITH: Can you share with us who you met on the South Australian visit and the ACT visit?

Ms Chester : On the South Australian visit we met with the Under Treasurer, David Reynolds, and about five of his colleagues; a colleague of his from DPC, the Department of the Premier and Cabinet; and a representative from the Economic Development Board of SA. In the ACT, we met with a senior member of the ACT Treasury at deputy secretary or division head level and one of her staff who has been working in HFE matters for many years and was very knowledgeable.

Senator SMITH: Do you expect any of the previous work of the Productivity Commission to inform the HFE inquiry—for example, the work that has been done around regional economies and transitioning economies?

Ms Chester : We like to think that, like Darwinian man, we evolve and we learn from the insights we glean. You are right in asking. There can be quite often some interesting cross-fertilisation across our inquiries and the work that we have done. Indeed, I think of the work that Commissioner Coppel and I did on natural disaster funding arrangements, which had some HFE—

Senator SMITH: Which I have read and quoted in opinion pieces.

Ms Chester : Thank you, Senator. I hope it was a nice opinion!

Senator SMITH: Just on that, just as a diversion: the points you make about the importance of investing in mitigation and the ongoing benefit to the taxpayer are very, very powerful.

Ms Chester : Thank you, Senator. So we learn from all of those other inquiries and look at bringing those lessons across, which means that is one of the great advantages of the Productivity Commission doing work. I know that there was very good work done back in 2012 with an expert panel—I think it was the Greiner-Brumby-Carter report—on HFE arrangements. For some, it might be that that was only done five years ago, but some of the insights we have gotten around benchmark pricing for infrastructure when you are looking at a mitigation bill post a disaster, so insights we have gleaned along the way, we will definitely utilise as we do this current inquiry.

Senator SMITH: In advocating for the Productivity Commission inquiry almost two years ago, I was specifically drawn to the Productivity Commission because of the transparency of the process; the draft reporting mechanism, so people can see where the thinking of the commission is; its truly independent and economically focused perspective; and the fact that I think that, more ably than the Commonwealth Grants Commission, it will be able to express an independent view around those sorts of broader national economic arguments that states like Western Australia and others are trying to prosecute. Is there anything about this inquiry that makes it more difficult, more intense, than previous inquiries that you personally might have participated in or the commission might have done?

Ms Chester : Not that I can think of, no. We have a terrific team. I have a great commissioner colleague. And so far, to date, the engagement that we have had with interested parties has been positive and constructive.

Senator SMITH: Finally, how would you characterise the reaction thus far to the decision to have an HFE inquiry conducted by the Productivity Commission, when you have gone around to South Australia and the ACT, in the private conversations you have had with people?

Ms Chester : As I intimated, it has been a positive and constructive engagement. I prefer to form views on people's attitudes based on their behaviours as opposed to things that are reported in the media.

Senator SMITH: Quite. Well done. There will be a public hearing process as well. That schedule has not yet been concluded or determined, has it?

Ms Chester : That will be after our draft report. I think we have intimated a time line in the guidance note that we circulated. I am pretty sure we are putting out a draft report in October. Typically, after a draft report we would allow another four to five weeks—here, given our time line, it is probably four weeks—for post-draft-report submissions so people can tell us what we got right, what we got wrong and what we missed altogether, and then we would go into public hearings. That sequencing is very important because going into public hearings is our last opportunity to test ideas and thoughts where people have challenged us and where they have challenged others. By having the benefit of their post-draft-report submissions, we then have a full information set as to where the cards are landing for everybody.

Senator SMITH: Do you expect to explore the issue or the merits or otherwise of a floor or floors?

Ms Chester : It is too early days for us at this stage to have views about what is in and out. Indeed, part of the advantages of having two rounds of submissions from people who have been living and breathing HFE for many years and academics who look at it through a slightly more objective lens is to get different and other ideas from people—and indeed looking internationally. I know we are not always comparable to other countries—indeed, we are little bit of a unique beast by equalising both on the expenditure and on the revenue side—but we can still learn lessons from other jurisdictions where they do things more simply, with greater accountability for taxpayers.

Senator SMITH: Yes, absolutely. So it is entirely possible that, in the draft report or indeed in the final report, the commission could explore the merit or otherwise of floors?

Ms Chester : If we get evidence that there might be merit in doing so, then we would do so.

Senator SMITH: Great. Thank you very much.

Senator WHISH-WILSON: I have a couple of questions more generally around trade and assistance, especially looking at industry assistance. I would like to ask how your work relates to possible loans from the Northern Australia Infrastructure Facility, the NAIF, for the Adani mine. What I want to know is about the loan that has been proposed. Would it be considered by the Productivity Commission to be a government subsidy?

Ms Chester : Senator, we have not looked or been asked by government to look at those particular loan arrangements. That said, I am minded of some work that we did, I think two years ago, as part of our Trade and Assistance Review. Indeed, I was the commissioner assigned to that year's Trade and Assistance Review. We had a chapter which was entitled something along the lines of 'When government becomes an investor' or 'Government as an investor'. We established some criteria there as to an arrangement—what form it took and whether or not it was efficient from our perspective, what sort of due diligence would be required from government and what sorts of accountability arrangements would need to be put in place. I think, Senator, the only thing that I could say to you at this stage is that I think you would enjoy reading that chapter—

Senator WHISH-WILSON: Okay.

Ms Chester : and perhaps it might be helpful for providing you with a bit of a framework to assess policies as they arise.

Senator WHISH-WILSON: All right. If you are not familiar with NAIF, if you are no longer using that term, it offers up to $5 billion over five years in concessional finance to encourage and complement private sector investment in infrastructure that benefits northern Australia: airports, communications, energy, ports, rail or water. Essentially, it offers cheap loans. It might just sound like a word, but, as you know, on planet politics words are quite important. The resources minister, Senator Caravan, recently said:

I want to make it absolutely and abundantly clear; any proposal, any investment from the Northern Australia Infrastructure Facility to any project is a loan, not a subsidy or a grant …

Are you able to perhaps take on notice whether the Productivity Commission would look at this facility more generally—perhaps putting aside any loan to Adani as being a separate thing—and determine whether it would be a subsidy?

Ms Chester : I think I can say fairly confidently from work that we have done over many years, including through our trade and assistance reviews to which you refer, that a concessional loan is a concession and thus it does constitute a form of assistance. That said, the merits of that form of assistance would depend on the basis upon which it was provided. Thus, I was intimating the chapter that we had that we had which looked at what due diligence would typically be required around such an arrangement being put in place. I think the answer to your question is: yes, it is a form of assistance. The next question to be asked and answered then is: is it an effective or good form of assistance to be provided? Indeed, if there were a case of market failure or if there were a case of positive externalities that were not being priced into markets then concessional loans, if done in a very robust due diligence way, could be a form of that assistance being provided. Perhaps I am giving you a few more questions than answers.

Senator WHISH-WILSON: 'Assistance' is certainly one word, and I think it is very clear that it was set up to provide assistance. But I am very interested in this word 'subsidy'. I will give you the World Trade Organization definition of a subsidy:

The definition contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be present for a subsidy to exist.

Given that this is a financial contribution and it is coming from a government and it confers a benefit, wouldn't this fall under the WTO's definition of a subsidy?

Ms Chester : I do not think it would be smart for me to enter into the world of saying yea or nay to a WTO definition. Having recently done a report on intellectual property and having met with people like the WTO, the degree of complexity around their definitions is not safe territory for me to stray into. That said, what I can comfortably say is that if it is a concessional loan—that is, it is not a loan made at arm's length that would be similar to what the parties would receive in the private sector today—then there is an element of assistance or subsidy, to use your word. I guess the word 'assistance' is a broader umbrella term.

Senator WHISH-WILSON: In this case, presumably the joint venture partners or the proponents of a private railway could seek finance in the private sector or the commercial sector, but they are relying on a government loan, so that is clearly a subsidy?

Ms Chester : Again, it depends on the terms of the loan. You presented it to me and, as I said, I am not familiar with the details, but you viewed it as being a concessional loan, so if it is a concessional loan I am assuming it is a better deal than what the parties would get in the private sector today. As such, that is an element of assistance—that is, in your terminology, a subsidy.

Senator WHISH-WILSON: I should probably ask Senator Canavan himself. He used to work at the Productivity Commission and may well have worked on your reports on industry assistance. I am also interested more generally in a letter to the Fin Review last week, titled 'Mining successes built on taxpayer support', in which the minister outlines billions in assistance given to mining companies such as Glencore and BHP over time. Do you agree with the minister that the mining industry is built on taxpayer support? Would that be a reasonable conclusion the Productivity Commission would draw?

CHAIR: I think that is an opinion, don't you, Senator Whish-Wilson?

Senator WHISH-WILSON: I think we have been through this before, Chair. I am not allowed to ask for an opinion on a government policy. I am asking specifically about an op-ed that the minister wrote. I am very clear about that. You are able to provide—

CHAIR: It is still an opinion.

Senator WHISH-WILSON: No, no. I have been through this in recent weeks. I am not asking for your opinion on a government policy. I am asking your opinion on Senator Canavan's statement in the media in an op-ed. They are allowed to provide opinions on some issues but not directly on government policy. In terms of what Senator Canavan wrote in the media—'Mining success built on taxpayer support'—would the Productivity Commission agree that that is a fair assessment?

Ms Chester : I have not read the article, so I would not want to proffer any views in a factual sense. That said, I can point you to our annual Trade and Assistance Review which will tell you the effective rate of assistance the government provides to different industry sectors, including mining.

Senator WHISH-WILSON: It is a fair enough assumption that any form of government assistance to commercial industry comes with risks and opportunity costs to taxpayers. Would you agree with that simple assumption?

Ms Chester : The way that we would view it is: there are benefits and costs of forms of government assistance. It depends on the nature of the activity that is occurring, whether or not the government is providing infrastructure which then benefits others in a state or territory. I am sorry, Senator, but there is probably no simple answer to your question. There are probably just a whole bunch of questions that we would need to ask and answer to then form a view on the evidence.

Senator WHISH-WILSON: Okay. But any dollar spent, even by private organisation, on one thing will, by definition, have an opportunity cost—it could have been allocated elsewhere. We are very interested in this issue because we are looking at how taxpayer dollars are spent. These things need to be considered. So a billion dollars—let's say the assistance component of that was $15 million/$20 million a year, that is still money that could be spent on schools and hospitals, or other.

Ms Chester : Absolutely. Indeed, one of my biggest lightbulb moments in life was in year 11 when my economics teacher explained the concept of opportunity costs. It has stuck with me to this very day.

Senator WHISH-WILSON: Me, too.

Ms Chester : When you are looking at the relative merits of different forms of government assistance, this is why we are very passionate at the PC about benefit-cost work being done—so looking at the benefits of the costs of how taxpayers' money is being spent. At the end of the day, the benefit-cost ratio will tell you what that means for the wellbeing of all Australians. I do not disagree with you that we do need to be mindful of how forms of assistance are provided. Indeed, is it as well steeped in the DNA of the Productivity Commission, the Industries Assistance Commission, the Industry Commission and the Tariff Board. That is the raison d'etre of the work that we do. What is interesting today is that what was relatively easy to analyse in the past, tariffs and quotas, is now more complex because we are dealing with very modern-day forms of assistance—concessional loans and the like. But we set out the methodology that we think people should follow in making those assessments and we advise government to that effect. We remind them annually with our Trade and Assistance Review,which is, perhaps, not our best seller, but it has a loyal following.

Senator WHISH-WILSON: I have a copy right here in front of me—2014-15. So the next one is landing in July this year, is that right?

Ms Chester : Yes, that is right.

Senator WHISH-WILSON: It would be interesting if you could look at the structures. Obviously, we have had the Clean Energy Finance Corporation and other specific initiatives for some years now, but the Northern Australia Infrastructure Facility, I think, is a fund that will come under increased scrutiny from parliament in times to come. Just lastly, on EFIC: the NAIF is supported by Australia's export credit agency. In 2012, the Productivity Commission wrote—if you do not mind me reading it, as it is not that long:

While few, if any, markets conform to the competitive ideal—

market failures, as you mentioned—

there is no convincing evidence of systemic failures that impede access to finance for large firms or for resource-related projects in Australia.

- EFIC should not continue to provide facilities to large corporate clients or for resource-related projects in Australia, including suppliers to those projects, on the commercial account.

Is this still the view of the Productivity Commission?

Ms Chester : It was definitively the view of the productivity commission at that time. Even more recently, when we looked at the issue of business entry and exit in Australia—which I think was the year before last—our views are really formed on, and our policy advice is based on, a current evidence base. That being, the principles that were established in the earlier 2012 review that you referred are still principles that we would abide by. In the more recent business entry and excerpt, we again affirmed, based on the evidence at that time, that there were no systemic failures for access to finance for small, medium and large-size businesses in Australia.

Senator WHISH-WILSON: Based on the advice you provided previously in 2012—I accept that with new information any logical person or organisation can change their mind—would the NAIF providing facilities to resource-related projects in Australia on the advice of the Efic be contrary to this advice you have provided?

Ms Chester : I do not know enough about the current arrangements to form a view and then extrapolate back to some work that we did over five years ago. Unfortunately, I am not able to give you a simple answer there.

Senator WHISH-WILSON: Perhaps if you could take that on notice—

Ms Chester : I am happy to.

Senator WHISH-WILSON: on whether, in your view, anything has changed. The clear idea that you have stated there is that Efic should not continue to provide facilities to large corporate clients or resource-related projects. Certainly, I know that when we looked at the Asian Development Bank when it came to the Senate, my party supported it conditional on exactly the same kind of stipulations around that money going to large commercial entities, particularly for resource-related projects. I would be very interested if you could take that on notice.

Ms Chester : Yes, Senator.

Senator POLLEY: My questions are around the Commonwealth Grants Commission and dealing with GST. Do you want to do it now?

CHAIR: Yes—no, hang on. The Commonwealth Grants Commission are up next.

Senator XENOPHON: Ms Chester, if I could ask you a question in relation to whether the ACCC has been asked by the government to inquire into the relevant joint marketing arrangements for gas in this country, as recommended by the ACCC in its 2016 inquiry after the current ACCC inquiry. Can you tell us what is happening in relation to that?

Ms Chester : I think what you are intimating there is that we do have an anticipated project where the government is on the record as saying some work—

Senator XENOPHON: It is an undertaking that the government gave to me. I am trying to see where that undertaking is at.

Ms Chester : It was recommended by the ACCC in its 2016 inquiry and expected after the current ACCC inquiry into the Gippsland Basin joint venture that the ACCC will provide six months of reports. We know we are in the sights of government to do some follow-up work on this but we will be tasked to do that after the ACCC have completed their work. We see it on our horizon, but we do not know the exact timing of it.

Senator XENOPHON: So that is using over-the-horizon radar? How close on the horizon are you anticipating?

Ms Chester : I am happy with GPS tracking in a car that works. When we look forward for the next 18 months, that one is on our dance card as one that we would expect to get.

Senator XENOPHON: So nothing is likely to come out until the end of next year or sometime next year?

Ms Chester : I would be speculating. I do not think that is—

Senator XENOPHON: But we will not get a report on that this year?

Ms Chester : It depends on when the ACCC finishes its work. I am not sure whether you got more line of vision on that when you worked late last night with its chair, Rod Sims.

Senator XENOPHON: I was too busy talking about some other issues with Rod Sims. From the time the ACCC completes its report, how long would you anticipate on your dance card, so to speak, to complete this report?

Ms Chester : Again, that is a matter for the Treasurer and when we get a terms of reference.

Senator XENOPHON: If the Treasurer said that it could be done with some alacrity, do you think that it could be done within six months?

Ms Chester : Depending again on the terms of reference, the Treasurer decides the scope and the time lines.

Senator XENOPHON: So you try and cut your cloth accordingly. I will go to the issue of the Future Submarine project. In your trade and assistance report—I think it was last year—you raised concerns about the purported inefficiency of a local submarine build. We will agree to disagree quite vehemently in relation to that, and I think my office has provided you with copies of reports, including the macroeconomics.com.au report that refutes this. I think Defence's own studies and the RAND Corporation, which is a continuous build, give you all sorts of assessments. I am not trying to lecture; I am just trying to defend South Australia's position on this. I do agree that the idea that this project, being the largest procurement project ever undertaken, deserves outside scrutiny. In the ANAO's audit on the Future Submarine, they expressed a concern about the down-selection to one provider well before a design has been settled, thus forever removing competitive tension from the program. Does the Productivity Commission have a view on that and whether this whole process of down-selecting and removing the competitive tension for a project as large as this is something you would be examining in the future?

Ms Chester : It is not something that is immediately in front of us, in terms of something we have been asked to do. That said, we do take the opportunity each year in our Trade and Assistance Review to do some work and analysis around developments. Efficient and effective procurement is one that has been near and dear to our heart, as it is to yours. If there have been material developments that the ANAO has identified such that the settings have changed, then that is something that we would probably look at in the context of doing our annual—

Senator XENOPHON: There is some of that could come up in your report.

Ms Chester : That is right.

Senator XENOPHON: It is at your discretion. There has been some discussion in respect of some sort of office or monopoly supply being set up for these sorts of sole-source contracts, and the Minister for Defence Industry has suggested that the ANAO is the right body to provide independent oversight of this project. Am I correct in saying that the ANAO can only do post facto reviews, not preventative reviews, and their function is performance as against process documents of standards? It is a fairly narrow remit. It is not a criticism of the ANAO, but it is post facto rather than something being rolled out that you can try and steer in a more efficient direction.

Ms Chester : I am not familiar in enough detail with what the ANAO is allowed and not allowed to do, or whether the government can task it to have an ongoing monitoring role or not. I am not able to answer that question.

Senator XENOPHON: The premise is that it is post facto. Do you consider that, in terms of major procurement such as this, there is benefit in having an independent and continuous review so that you can continually ensure that, rather than saying after the event: 'Oops, we spent $5 billion more than we should have. We could have done this more efficiently.' That was the case with the Seasprite helicopters, where I think $1 billion was spent on choppers that never actually went into service because of some bad decisions made by Defence. Is there any role for an independent continual review of procurement projects, and does the PC have any particular views in respect of that?

Ms Chester : I think it is fair to say that the commission would have the view that, with such a large government spend and procurement involved here, we go back to beating our all-familiar drum of due diligence having been done, performance assessment requirements being established—

Senator XENOPHON: And being monitored.

Ms Chester : and detailed design work, and then ongoing evaluation linked back to those performance metrics.

Senator XENOPHON: Which is different from what the ANAO does.

Ms Chester : As you say.

Senator XENOPHON: As I say? Okay.

Ms Chester : I just do not know whether or not the government could task the ANAO to do that on an ongoing basis. I do agree in principle with you completely that you would want it to be independent. I am just reminding us that we need to make sure that all the belts-and-braces work has been done leading up to that evaluation.

Senator XENOPHON: I understand. It is something I can take up with the minister, who is the great enemy of red tape on these things.

Senator McGrath: That is a really good idea. I look forward to that! We will talk offline.

Senator XENOPHON: Finally, in terms of water bills in South Australia, there was an article by veteran reporter Miles Kemp in The Advertiser on 24 May, just a week ago, titled, 'Water bills may be about to surge if SA Water loses subsidy funding'. It made reference to:

SA Water warned it will be forced to recoup $107 million if "postage-stamp" pricing—a universal fee—is abolished by the federal Productivity Commission.

I am not sure if you were asked for a comment in relation to that story. It also said:

Presently, water users in the country are subsidised for the expensive cost of transporting and producing water in regional areas.

And there was a submission made to the Productivity Commission about keeping the price equalisation. What work has the Productivity Commission done in relation to this?

Ms Chester : I suspect that is probably related to the national water reform inquiry that we have underway at the moment. Indeed, if we look back to the terrific work that was done with the National Water Initiative previously, which is what has resulted in Australia being considered to be—

Senator XENOPHON: Was this that report done several years ago on water—

Ms Chester : There was an urban water report done many years ago by the commission, but, with the recent changes, the commission has been given additional responsibilities in the area of water. Indeed, we now have an associate commissioner for water, John Madden, and we now have an environment commissioner, Jane Doolan; and John and Jane are undertaking a year-long inquiry, actually going back and reviewing what progress has been made—

Senator XENOPHON: You won't call it 'the John and Jane inquiry', though, will you!

Ms Chester : To make matters worse, the assistant commissioner's name begins with J as well. So we have 'triple J' happening at the Productivity Commission! But work is underway now on that water inquiry, and submissions are coming in, and it is probably in the context of submissions around urban water—which is not metro; it is very much a regional story, Senator, as you would know in South Australia—that it has come up. The draft report for that is due to be released in September, with a final report to government in December this year.

Senator XENOPHON: Okay. But you understand the concerns of consumers who live in a regional area or a remote area? If you lose that cross-subsidisation—that so-called postage stamp pricing—it would have a very profound impact on residents in those country areas.

Ms Chester : Yes. I am also mindful that there are roles here for state regulators in water pricing, particularly in regional and remote areas.

Senator XENOPHON: So, effectively, you can only make recommendations, and ultimately it is a matter for the states to determine the pricing of their water—or is there a role for the Commonwealth in respect of the subsidies that are paid?

Ms Chester : This is very much a Commonwealth-state inquiry, the water inquiry. The two commissioners involved have been cantering around the country, just as much as I am about to do on HFE, and they will be very much looking at the role of the state based regulators in the setting of efficient prices and, where governments make decisions around efficient pricing or subsidies, how that is managed from an overall water management perspective.

Senator XENOPHON: I am nearly done. You can understand, though, the concern of country residents that, if those subsidies are removed, that will have quite a profound impact on them.

Ms Chester : If their water bills go up, it will impact consumers, yes.

Senator XENOPHON: Yes. But it is within the purview of the commission to make recommendations to the Commonwealth to remove those subsidies or to remove the funding for those subsidies?

Ms Chester : There might be elements of the current NWI agreement that would translate to activities a state can and cannot do. That might be an area that would be relevant here, but it is not an area of my expertise.

Senator XENOPHON: Finally, when can we expect the triple-J report to be prepared?

Ms Chester : You can look forward to the triple-J draft report in September this year and in the final will be with government before Christmas.

Senator XENOPHON: Can't wait! Thank you very much.

Ms Chester : You are welcome.

CHAIR: Senator Ketter.

Senator KETTER: I come back, Ms Chester, to your review of default models for superannuation. In terms of your consideration around the design features, will you be taking into account that funds that are run for profit have a structural conflict of interest in the sense that, in performing their duties on behalf of the members of the fund, they have to balance competing duties to shareholders?

Ms Chester : The good thing about our work here is to ask and answer the question, 'Is the super system competitive or not,' because, at the end of the day, shareholders' interests are aligned with those of consumers or members if they are working within a competitive environment. Our review is agnostic about governance, except to the extent that there is poor governance. And so we have identified some indicators in our stage 1 study in terms of some of the things that we will want to look at and examine as evidence in stage 3 around good and bad governance arrangements in super funds.

Senator KETTER: When you say you are 'agnostic about governance', are you agnostic about good performance?

Ms Chester : At the end of the day, the Holy Grail, particularly for a default fund member in accumulation is a fund that delivers the best net investment returns over the medium to longer term. That is the Holy Grail, so that is not something that we are agnostic about at all. Indeed, it is something that we would want a competitive super system to deliver. We just need to ask and answer the question, 'Is the current system delivering that,' which we look forward to doing shortly.

Senator KETTER: Is there any evidence that the for-profit funds are delivering consistently better returns over time and are operating more efficiently?

Ms Chester : I think I may have answered this question earlier this afternoon. We are yet to objectively look at the full and comprehensive evidence base, including unbundling it a little bit as well, in terms of performance by asset classes. I do not think there is any argument, if you look at it over the medium to longer term, that the average performance of what people refer to as industry super funds is better than the average returns for what are called retail superannuation funds. Nobody is disputing that.

One of the areas of focus we have is that averages do not matter to a lot of members. If you have a lot of default members that are being defaulted into underperforming funds—and I mentioned the long tail of small, underperforming funds—when we look at the composition of that tail, it is jersey agnostic. We have all of the brethren of the super fund industry in that tail. That is an issue that concerns us. It is certainly something that was brought to our attention as part of our stage 2 study. The stage 2 study, in terms of the alternative allocated models, is, at the end of the day, if you are competing for access to the default market, you need to be best in show. If you are not best in show then you do not get default money, and if you do not get default super money then you need to compete in choice. This would actually be a way of hastening up the exit of the smaller underperforming funds, thus mitigating the greatest risk in the super system today for the default members, and particularly younger default members, and that is that they are defaulted into an underperforming fund. Current arrangements do not address that.

Senator KETTER: I am trying to deal with your consideration for alternative designs. That is why I am focusing on this particular issue. The fact that you are saying you have not conducted the analysis of the industry properly I guess impedes our discussion, but I think that highlights the point I was trying to raise earlier. Have you looked at default pension funds on a global basis at all?

Ms Chester : For the default allocative models, we have looked at the good, the bad and the ugly, internationally. We have looked at jurisdictions in Europe and we have looked at North America, Canada, New Zealand and Chile. We have tried to be informed about what has worked well and has not worked well, albeit those pension systems are not directly comparable to our own, as you would understand.

Senator KETTER: Sure. With that limitation in mind, would you say that the best performing default funds are in the not-for-profit area?

Ms Chester : In which jurisdiction?

Senator KETTER: Is that your analysis of the international information that you have looked at?

Ms Chester : The work that has been done to date in looking at assessing pension systems globally has been through the lens of the Mercer index, which you may be familiar with. It has never really looked at, truly, the competitiveness and efficiency of those systems, which is the focus of our inquiry work. That said, it is difficult to form a view on whether or not a country in Europe's public sector pension plan fund is best in show when they are the only offering. That is why it is very difficult to form views. That said, you will really enjoy our stage 3 inquiry where we will not only unbundle the performance of the Australian superannuation funds in the system as a whole but also compare it, including by asset class performance, across global comparators. We should be able to draw some insights for you at that stage.

Senator KETTER: Have you found any evidence that in the for-profit sector they take advantage of scale and investment horizon of super to pool members' assets and invest on a wholesale basis more cheaply and with optimal asset allocation?

Ms Chester : That is a good question, and, indeed, it is one of the big ones that we will ask and answer in stage 3, because big is only beautiful if it results in the realisation of economies of scale and then the benefits of those economies of scale transfer through to members. That has never been asked and answered in Australia around the super system. We will definitively be doing that in stage 3. That said, I think there is a false bifurcation that has occurred here in the media commentary around vertically integrated operations. If you start to look at some of our larger industry super funds now, they are starting to become vertically integrated themselves, in terms of a lot of the activities that they are beginning to insource. It is actually very good timing for us to look at undertaking that analysis.

Coming back to the point that you raised about international jurisdictions. One of the areas where there are the greatest economies of scale is around administration, within the superannuation system. Regardless of what you do with default, one of the areas we identified in stage 2 where we think that there could be greater benefits is the ATO playing a greater role in the administration, connecting the dots between employees, employers and super funds. When we went to New Zealand we learned lessons about things that had worked and had not worked. One of the things that had worked was the ATO playing a clearing house role there. Effectively the government was ensuring a large economy of scale was being realised and passed through to all members in New Zealand. Because that economy of scale had been addressed by government doing it well and efficiently, it then allowed other new entrants to come in that would not have otherwise come in to the superannuation system. When we are looking at encouraging the entry of high-performing new funds and wanting to jettison underperforming super funds, we need to make sure we are focussing on the entry side as well. So economies of scale will be equally important there.

Senator KETTER: Has any evidence been brought to your attention about how for-profit funds might exploit low consumer engagement and cognitive biases?

Ms Chester : For all the super funds in stage 3, we will be assessing what intrafund advice is provided by superannuation funds. Also, getting to the issue that I think you are raising, one of principal agent problems, particularly when you are dealing with the world of compulsion, people being compelled to save through super, and then you have some that are not engaged with default, we would want to make sure that those principal agent problems are being well managed. That is across all super funds, regardless of jersey. We will be looking at the governance arrangements, and looking to see how marketing spend occurs. Issues like that—are those things occurring and are they in members best interests?

Senator KETTER: I do get a bit concerned if you are agnostic to the different types of funds when there is evidence there of persistently poor returns, slow transfer of accrued default amounts, flipping members to more costly products in the vertically integrated model, and failure to pass on scale. I understand why you might like to be theoretically pure, and look beyond the structure, but when there is evidence there, and there is detriment to the members, is that not something that you should be taking into account?

Ms Chester : We will form views during stage 3. The reason I use the term 'agnostic' is where we have looked at a piece of evidence based around the long tail of underperforming funds, that would make me suggest that I should be jersey agnostic at this point in time until I have seen all the evidence base across the entire system.

Senator KETTER: You keep referring to that long tail. You have looked at APRA figures, and that is very good. I come back to that statistic that 85 per cent of retail sector assets in the choice segment of the industry underperformed the default segment. That suggests that one should not be overly agnostic about the different models.

Ms Chester : I think we agreed earlier on that if we look historically, industry super funds, on average, have performed better than retail funds. But for us it is the experience of all members. We want to look at variability of performance. Variability of performance means going beyond averages. It means looking at the distribution of those funds, and in particular not whether or not a fund performs poorly relative to others for a year or two. Indeed there is an issue of peer risk, where people cluster to the lowest common denominator because they do not want to be in the bottom quartile whereas it might be overall a better investment strategy over the medium or longer term to appear in the lower quartile some years, but then to be in the upper quartiles for six out of seven years. It is really when you see superannuation funds that remain in that bottom quartile year after year—they are small in size, they are not exiting and they are not merging. That evidence base is very clear, and we will be looking at it further in stage 3. But looking across it all, I think the answers to your questions post the draft of our stage 3 report will be a lot more helpful to you.

Senator KETTER: Can I just finish up on this particular topic: what do you think are the design safeguards that could, possibly, be built into the default model that would mitigate the risks I talked about earlier—persistently low returns, members being transferred into more costly products and those sorts of risks that we see?

Ms Chester : They are important risks. Indeed, all of our four models would mitigate those risks by requiring that, in competing for the default market, you go through a competitive process with an expert panel appointed by government, and that would occur every four years. So, unless you continue to be best in show, you would no longer have access to that default market. I think that is the ultimate way to mitigate that risk. Indeed, Choice—you would be aware of the advocacy group Choice—are in support of one of our models, what we call assisted employee choice. We were fortunate enough that we discovered a unicorn within the midst of Australian superannuation funds. We did have one industry super fund who came out in support of model No. 2—one of our largest industry super funds, not the largest, but one of them—saying that for them it is all about members' best interests, they think that they are competitive and to bring on the competition. They liked our model 2, assisted employer choice, which is probably the closest to current arrangements, but now requiring competition for access to the default market.

CHAIR: Who was that?

Ms Chester : Find out who was the award winner in the Chant West awards this year, and you shall find our unicorn.

Senator KETTER: Just going back earlier, you mentioned that there are developments in the industry funds sector with vertical integration. You say that is not unique to the for-profit sector. Is the more important issue whether or not the institution is seeking to leverage that vertical integration for or against members' interests? That is the issue, isn't it?

Ms Chester : I think it comes back to a much broader issue than that. At the end of the day, regardless of the governance structures and the terminology of for-profit and not-for-profit, if we do not have a competitive system, economies of scales will not be realised and will not be passed through to members. But you are right—there are distinct principal agent problems. Some of those principal agent problems, to the extent industry funds are now becoming semi-vertically integrated themselves, mean that the way that we will be examining that in stage 3 we will be examining as well in some of the industry funds.

Senator KETTER: Could I just quickly move to another topic: we were talking about phoenix activity and your recommendation to adopt a direct identification number. Can you tell us why you have come up with that recommendation?

Ms Chester : I think that was from our report from the year before last on business entry and exit. Indeed, there has been a lot of recent media commentary and some of the regulators have developed a view on this as well. It just makes it easy to stop bad behaviour if you have a DIN. The commission was presented with fairly robust evidence to that effect from looking internationally, such that we felt, in principle, there was an overwhelming case of the benefits outweighing the costs.

Senator KETTER: How does it assist small business?

Ms Chester : I will have to take that question on notice. It was an inquiry of two years ago, and I was not the commissioner on it. I am happy to come back to you with a more fulsome answer.

Senator KETTER: Has the government or Treasury sought additional information from the commission about this recommendation?

Ms Chester : The government has our report; indeed, it is in the public domain.

Senator KETTER: But my question is: have they sought any additional clarification or information from you?

Ms Chester : Not to my knowledge, no.

Senator KETTER: All right. Thank you very much.

CHAIR: Perfect timing, thank you, Senator Ketter. And, just for the record, the super fund of the year in 2017 according to Chant West was Sunsuper. Senator Bushby.

Senator BUSHBY: Thank you for assisting us today. First off, some time ago the Productivity Commission conducted an inquiry into disability care and support which, to a significant degree, informed the construction of the NDIS. That inquiry noted that, when it comes to funding the NDIS, many candidates for funding sources were not acceptable. One in particular that it mentioned in the report was raising corporate tax to cover the cost of the NDIS. Are you in a position—given that it was some time ago, and I am not sure of the extent to which you were involved—to outline why the Productivity Commission believed that it would not be appropriate to fund the NDIS using an increase in company tax?

Ms Chester : I will take a get out of jail free card on that question, simply because neither was I at the commission and nor, therefore, was I a commissioner on it, and I am also mindful that we have got a current cost study review underway on the NDIS at the moment. So I am not in a position to answer that question.

Senator BUSHBY: Then you may have the same answer to the next question as well. In the same report, the Productivity Commission called for disability funding to be predictable and funding that must not vary substantially from year to year. Would it be fair to state that a permanent increase in the Medicare levy would meet those criteria?

Ms Chester : I am not in a position to comment on that question.

Senator BUSHBY: The only other question I have got is a general one. What additional resources did the Productivity Commission receive in the budget, and how are you going to use those resources?

Ms Chester : That is a good question. I am very glad that I have my colleague Nina Davidson, our head of office, with me. There are probably two elements there in terms of additional roles and responsibilities the government has given us.

The first one relates to Indigenous related evaluation work, and the Senators might recall that this is an area where the commission has had an ongoing role, through our work with the Commonwealth-state steering committees where, every few years, we do a very important report called Overcoming Indigenous disadvantage, and we do an Indigenous expenditure report. When we did Overcoming Indigenous disadvantage last year, I was the commissioner fortunate enough to do some work on the end of that and, indeed, to play a role in conveying to the broader public the findings of that report. Near and dear to the commission's heart is: if you have a policy problem and you spend a lot of money on it and you do not get the outcomes you expect, you need to know why. When we looked at Indigenous expenditure—on the over 1,000 policies and programs across Commonwealth and state—only 34 of those had been evaluated. So the key theme for the Overcoming Indigenous disadvantage report last year was really about the absence of any, let alone robust, evaluation. I think that prompted some further thinking within the corridors of government. Indeed, I think there was some very good work underway in Prime Minister and Cabinet around better evaluation of Indigenous policies, such that we have now inherited a role that was announced by the Prime Minister earlier this year in his Closing the Gap speech on 14 February 2017. So we—

Senator BUSHBY: Just for the record, on that, though: better evaluation is not an end in itself.

Ms Chester : It is a healthy circuit-breaker when we do not see the progress on closing the gaps in some of the very critical areas. Indeed, even though we have got an ongoing reporting role in Indigenous matters, with Overcoming Indigenous disadvantage and the Indigenous expenditure report, we occasionally are allowed the prerogative of doing some of our own self-initiated research. We do that when we do not have a full dance card of inquiries from the government of the day, which we did not have the year before last and so we did some self-initiated work. One of those projects of research was around Indigenous primary school educational achievement. This segues to our recent work in the data field as well. When we finally got access to data across all of Australia on student and school level characteristics for Indigenous and non-Indigenous students and linked it up to NAPLAN results, all of a sudden you could tell a lot from some very considered econometric analysis about why there was such variability in Indigenous student achievements.

So, again, it was the 360 degrees of identifying a policy problem, working out the objectives to resolve it, designing the policy, designing what outcomes you want from the policy and how you are going to measure and evaluate it; implementing the policy, evaluating it as you go; and then circling back to make sure that, if the policy needs to be refined, it is. What I am saying is: evaluation to us seems to be a circuit-breaker to a wheel that is not working at the moment.

Senator BUSHBY: Yes. You do not get to the other half if there is a hole in it. You cannot get all the way around.

Ms Chester : Yes. If you rewind the clock to 25 years ago, programs did not get funding beyond four years of the budget forecast if they had not done a robust evaluation. We seem to have moved on from that world.

Senator BUSHBY: Okay. Sorry, I interrupted you.

Ms Chester : No, no. So we very much welcome this new role that the government has given the Productivity Commission. We have been given funding over four years of $2.9 million to do two things. Firstly, the government will appoint, sometime in the second half of this year we hope, an Indigenous commissioner, and that is something that we welcome very much, not just to oversight this evaluation work but also because nearly every inquiry that comes to a commission desk now has Indigenous policy issues that have to be addressed. If you think of human services, water inquiry, post-retirement super, our agricultural inquiry, our fish inquiry, they all had aspects of policy that needed to be tailored for Indigenous communities, particularly in remote and very remote areas. So we will have an Indigenous commissioner, which will help us do that work better in a more generic sense, and then will lead the evaluation work. The evaluation work is really the commission setting up what is best practice for evaluating Indigenous policies and programs in very disparate geographical locations in Australia.

Senator BUSHBY: Okay. Very good.

Ms Chester : So that is the first. Secondly, we have been given a COAG dashboard role. By way of context, the Productivity Commission, as I mentioned before, is the secretariat for the Steering Committee for the Review of Government Service Provision. We already provide some cross-jurisdictional reporting to the Council of Australian Governments, COAG, on the performance of government services and indicators, like the Indigenous disadvantagereport. What we have now been asked to do is the COAG performance dashboard. You might want to know what the COAG performance dashboard is; I wanted to ask that question myself! In 2015-16, the Department of the Prime Minister and Cabinet produced what is called the COAG performance report. This is actually a dashboard that assesses the progress against the national agreements between the Commonwealth and the states, of which there are six.

Senator GALLAGHER: The COAG Reform Council used to have that function, but it was abolished.

Ms Chester : Exactly. It went from the COAG Reform Council to the Department of the Prime Minister and Cabinet, and now it is coming to rest at home with us.

Senator GALLAGHER: Good luck with that. There will be furious disagreement over that dashboard, I predict.

Ms Chester : We look forward to it, Senator! The government is going to provide us with $4.4 million over four years to undertake that ongoing role.

Senator GALLAGHER: Sorry, how much money was that?

Ms Davidson : I will just add to that. It is $4.4 million over the four years, in addition to—

Senator GALLAGHER: To do the COAG dashboard?

Ms Davidson : No, that is just where I wanted to add to that—

Senator GALLAGHER: I was going to say!

Ms Davidson : We are taking on the operation of the COAG dashboard, which replaces the performance reporting which Prime Minister and Cabinet has been doing over the last couple of years. In addition, the budget measure included us doing some independent reviews of nationally significant sector-wide agreements with the states and territories. So that is another dimension of the functions that were announced in the budget.

Senator BUSHBY: Okay. So, overall, how much extra money was provided to the Productivity Commission in the budget?

Ms Davidson : It is $4.4 million and $2.9 million—

Ms Chester : Over four years.

Ms Davidson : Yes, over four years.

Senator BUSHBY: Presumably, to make use of that, you will be adding to your personnel to be able to do the additional work required?

Ms Chester : Yes.

Ms Davidson : Yes.

Senator BUSHBY: How many extra people do you think you will need?

Ms Davidson : Once we are into the forward estimates years, it is about nine people.

Ms Chester : Plus a new commissioner.

Senator BUSHBY: Yes, the Indigenous commissioner.

Ms Davidson : Including that role, yes.

Senator BUSHBY: Thank you.

CHAIR: Senator Macdonald has some questions to finish off Senator Bushby's time.

Senator IAN MACDONALD: I am interested in the inquiry you are doing on transitioning regional economies. Are you able to talk to me a little bit about that?

Ms Chester : Happy to, Senator.

Senator IAN MACDONALD: In the interim report, I just note in the section on initial findings—and I appreciate they are initial findings—the very last item is 'information request 5.2', which says:

The Commission invites participants to comment on where a regional community could benefit from a trial exemption from regulations that are unnecessarily inhibiting transition or development.

Is that possible in Australia? Can you have different regulations for different geographic parts of Australia—for those geographic parts, for example, Townsville and North Queensland, at the present time that are experiencing record unemployment of 11.9 per cent? What regulations are you thinking of when you ask that question?

Ms Chester : Maybe just to go back to the context of the report that we have been asked to do. We have been given a 12-month study. We have recently released the initial report in April—to which you refer. I guess this request came to us as part of, I guess, the longer and larger than usual commodity cycle that the Australian economy has seen in the last five or six years, along with a lot of structural transitional pressures that that has brought to bear.

The government really asked us to form a view and develop an assessment of the relative adaptive capacity of regions across Australia. And I will come back, maybe, to what we did in a moment. But just to answer your initial question, you might recall work that was done by the commission about business entry and exit, new business models and business disruption and interruption. Indeed, the ASIC chair has talked about running a project around what they call 'sandboxing'. So you have a new business entrant, you put them in the sandbox and you do not apply the same regulatory requirements that you would, say, require of a bank. So it is done in a careful and considered way in terms of trying to make sure that consumers are not exposed to any risks that they would otherwise not be exposed to. It is pulling back a little bit on the regulatory bells and whistles that are required for larger entities. So I draw that just as a parallel.

When we did the work as part of Transitioning Regional Economies we identified a couple of areas that we called some 'no regrets policy thoughts to have'. If you were to identify regions that were, perhaps, assessed as less adaptive and going through a lot of transitional pressures, one of things that you could trial would be carefully dialling down some the regulations that are required. Indeed, informed by a lot of the work that we did recently on our agricultural inquiry report—where we found that there were areas of overregulation or areas where the costs of those regulations, as you would well know, senators, outweighed the benefits—and in a careful and considered way, perhaps that is something we could do as a pilot project against those regions that have been identified as less adaptive than others.

But you are right, Senator: the extent to which we could do it, we would require it to be done with the agreement of the respective state and territory governments.

Senator IAN MACDONALD: I like the idea, but there is always, as I understand it, some sort of constitutional difficulty if you are making regulations for a certain area that do not apply in another part of Australia.

Ms Chester : It would not be a regulation not applying; it is a regulation being adjusted for a particular geography that is identified as—so assessed as relatively low risk from a regulatory respective and where it has been identified that some of those regulations may be situations where the costs outweigh the benefits. But, also, in a no-regrets way—and think of it as a pilot project. What would be the counterfactual? If for some of these regulations that we feel are inappropriate or ineffective—and, indeed, there are many that are detailed in our agricultural inquiry report—if we were to pull back on those regulations in a region that would benefit the most from it in terms of being less adapted to transitional pressures and change.

Senator IAN MACDONALD: I like the idea but I have become increasingly concerned in recent years about the two Australias—those who live remote from the capital cities and do not have the same services, and whose cost of living is greater. It always seemed to me that the fairest way to do that was a solution in 1946 by the then Labor Prime Minister of a zoned tax arrangement. But governments since then seem to have shied off that at a thousand mile an hour for fear of constitutional difficulties or otherwise. Is the zone tax arrangement being adjusted to address some of the issues that you are finding? Is that something the commission has ever had a look at? Or have you been told not to look at it?

Ms Chester : No, we can occasionally dare greatly where we need to, when we think there is a policy imperative. I think it is fair to say that the focus of this study—and it is a study, not an inquiry, so we have focused recommendations around what we would call, perhaps, 'no regrets' policy changes—was really to identify what has happened across Australia in the last five to six years with the very much longer than usual commodity price cycle, and to what extent the benefits and costs of that commodity price cycle and transitional changes have impacted across regions. The reason I say that is that there is a little bit of myth busting in our initial report here. When we assessed the regions—there are some 2,000 of the geographical SA2 ABS regions that we identified—of those that are the least adaptive, 50 per cent of those Australians actually live in metropolitan cities.

Senator IAN MACDONALD: Do you know why? Because it is too expensive to live out there. Why? Because there is no realistic zoned tax or other similar arrangement that compensates people who live out of the capital cities for living out there, because it is much easier to fly in and then slip back to the lovely lifestyle, the cheaper prices and all the services there.

Ms Chester : You are right in that, at the time of that commodity price cycle occurring, which resulted in a higher exchange rate, the transitional pressures, particularly for manufacturing and also the increases in productivity with much better technologies and the like for agriculture, sort of accentuated the degree of those transitional pressures, largely on manufacturing and some agricultural. When we look at the representation in those least adaptive regions, it is actually manufacturing, so that is why there is—

Senator IAN MACDONALD: With respect, Ms Chester, you will do a proper assessment, but I could tell you in three lines what the problems are and what has caused them, and I am not an economist or very clever at all. You will do it properly, but some of the reasons and some of the solutions are very obvious. I hear you say this is not a report with recommendations as such, but it is a study that the government has asked you to do. I am just wondering where it goes. For example, you say in initial finding 5.5:

There is scope to achieve better outcomes for regional communities by better targeting existing expenditure.

That follows a comment saying that not all programs devoted to the regions have had their effectiveness evaluated. How could you achieve better outcomes for regional communities by better targeting existing programs? Can you give me an example so that I can understand what you might be referring to there? Perhaps it is purely hypothetical and not factual, but I am just wondering how you could better target existing expenditure to a particular region.

Ms Chester : Stepping back for one moment, while it is difficult to form definitive views, there is one universal truth in the area of regional development policy, and that is that there are a lot of policies and programs and a lot of money spent but again—and I sound like I am beating a drum here—very little evaluation.

Senator IAN MACDONALD: Yes.

Ms Chester : Indeed, my first commission inquiry when I joined the commission 3½ years ago was on Tasmanian freight and shipping. We wanted to get a better understanding. Were Tasmanian citizens getting best bang for buck from what Commonwealth and state governments were spending for regional development? We could not even get a list of all the regional development policies and programs that are available to Tasmania, let alone whether any of them have been evaluated.

We then have a look at this: from the sporadic work that has been done, what do we know works well? There were four things that we identified that work well: where the policies are identified and led by a local community with good partnership at the right levels, aligned with the region's strengths, and—this is the one that you have raised, Senator—supported with targeted investment in developing the capability skills of the people to be able to transition, adapt and have economic security, with clear objectives and measures of performance indicators. The third one is the one that you raised, Senator. If we are spending a lot of money trying to make regions have economic security over time, perhaps a good way of looking at it would be to make them adaptive and resilient so they can get through cycles. As you would well know, Senator, there seems not to be sufficient targeting on the capabilities of the workers of those regions, as opposed to, at times, assistance to particular businesses that may not have comparative strengths in the future.

Senator IAN MACDONALD: But you may have heard the Treasury secretary saying he is having trouble getting people to go and do three months work in Darwin. Darwin is quite civilised compared to some of the places that are experiencing real difficulties in Australia. One of the problems, of course, is that the facilities, services and lifestyle choices are not there, but the costs—because naturally you are the furthest away from the capital cities and the ports where goods come in—are enormously more expensive, so that frightens people away from that. I do not know what a study can do to address that, but I will look for your final report with some interest.

Ms Chester : I do not think this is a study for solutions. I think this is a study to help inform better policy development, and that is why it is a study.

Senator IAN MACDONALD: Well, getting better policy is a solution.

Ms Chester : It is. So to some extent, even though we have been asked to do something that has never been done globally before—and that is to do a single metric of the adaptive capacity for regions across Australia, which, as I mentioned before, we did for 2,197 regions—we have assessed them across all the sorts of things that you are talking about: people related, educational achievement, employment, skills, incomes, community cohesion, the degree of remoteness, accessibility to infrastructure and services, natural endowments and diversity of economic activity. So we have done that for the first time to see what policy themes emerge from those regions that are less adaptive.

Senator IAN MACDONALD: My time has finished, but can I just put a question on notice to you: have you ever looked at the zone tax rebate in connection with this or other inquiries that you have done? Do you have any thoughts on it? That would be a question on notice, because I have run out of time.

Ms Chester : I am happy to take that question on notice.

Senator IAN MACDONALD: Thank you.

Senator KETTER: I just have one further question, Ms Chester, going back to my discussion about your study about default superannuation alternatives. You volunteered the finding that, in the long tail of underperforming superannuation funds, it is not sector specific. You said that was an APRA finding. How does that stack up with another APRA statistic, which is that 93 per cent of all funds in the bottom quartile of performance are in the retail sector?

Ms Chester : I am not aware of that metric. All I know is that I am looking at APRA data for the 76 MySuper products over the medium term—so five to six years. When you look at the very furthest end of that tail over that period of time, there are five corporate funds, six industry funds, six retail funds and two public sector funds.

Senator KETTER: I am talking about the bottom quartile of performance.

Ms Chester : That is the bottom quartile. That is my tail. I am referring to the bottom quartile as well. I am saying that the numbers that we have cited in our report, which are on the APRA website, do not align with those numbers. Perhaps you would like to give us a question on notice with the specifics of those metrics.

Senator KETTER: Sure.

Ms Chester : We could get back to you and explain how they coexist with the other metrics that APRA has shared with us.

Senator GALLAGHER: They are the funds I asked for on notice, and you said it was in your second report, I think. You said that you had outlined that.

Ms Chester : We do not identify the funds; we just reference the fact that there are five corporates. But I think it would be best if I take you to the horse's mouth, the regulator itself. We will direct you to the metrics that we have cited on the APRA website.

Senator KETTER: Okay.

Senator GALLAGHER: Yes. I imagine it was around the numbers of members in those funds. It would be small industry funds.

CHAIR: I have one question following up on that particular issue. I think superannuation is a bit of a hobbyhorse in this committee. Can I ask you whether in that study there were any factors in the current default superannuation system that might be delivering competitive advantages to one part of the industry over another—one jersey over another, to use your terms.

Ms Chester : I think at the moment it is fair to say that the current default arrangements are based on workplace laws and industrial arrangements in enterprise agreements, and they thus relate largely to industry super funds. We are looking at it through the lens of: what is the best way to have competitive dynamics within the default sector? The best way to do that is to have people compete for the default sector. So I say I am jersey agnostic. If someone is prepared to compete and is best in show, I do not mind what jersey they wear; they get the gig. So that was very much at the heart of the design of our models.

Senator McALLISTER: I just want to follow up on the conversation you have been having with Senator Macdonald about the regional assessment, Transitioning regional economies. It is not clear from your terms of reference whether you are required to examine the impact of public sector employment. I know Senator Macdonald was asking you questions about public sector employment in regional areas. Is that something that you are looking at?

Ms Chester : That would be something that would be captured in the index that we are measuring around employment, but I suspect the issue you are intimating is around the provision of government services being reallocated to the regions. We have a little bit of commentary on that in our report, based on some of the evidence that we had received in the process of preparing the initial report.

Senator McALLISTER: What sort of insights do you have about, I guess, the dynamics associated with public sector employment? You will be aware that within the Senate we are having a conversation about decentralisation and, in particular, a wholesale move of functions from one place to another. I am not really asking you specifically about that; I am more interested in whether public sector employment, in general terms, has a different effect to private sector employment in terms of this question of regional resilience.

Ms Chester : I think there are a couple of things. Firstly, when we look at what is effective—and again the overwhelming objective here is to do what is in the best interests of ensuring the economic security of those regions and making them adaptive—employment is one of the key drivers of the indicators, regardless of whether it would be private or public sector employment. It is important, though, that if you are looking at reallocating a government role to a regional area we do not have a firm view either way on whether that is a good or a bad thing. It really depends on the individual case and whether—again, boringly—the benefits outweigh the costs. Indeed, when I chaired an expert panel doing the ASIC capability review a couple of years ago, we saw a very good example of where the ASIC registry was reallocated to Traralgon, because the skills that were required to perform that role were skills that people living in Traralgon or people who wanted to move from the city and live in Traralgon could actually provide. So it is really making sure that, if that is to occur, it is not at the expense of the provision of that service and that the skills that are required either would be happy to relocate there or would be available there.

Senator McALLISTER: Often we hear from regional communities that they are looking, I guess, for variations on traditional cost-benefit analysis. This is something that is presented frequently. They feel that cost-benefit analysis does not capture the benefits that come about from investments in regional communities, for a range of reasons. Are there any sorts of methodological insights that you think we ought to be aware of in that regard in your work?

Ms Chester : Maybe one way we could help out is that we do—

Senator McALLISTER: You do start by saying there is no widely accepted method to define and measure the economic resilience and adaptive capacity of regions, which I guess is a good start on the methodological questions.

Ms Chester : No. Indeed, it is very intangible, as we all know. There are a lot of idiosyncratic factors: specific community cohesion and leadership in a regional community. We try to come up with some proxy measures, and the senators can satisfy themselves by looking at some of the regions that they know and are well familiar with and see how they have been assessed using proxy measures. So you are right: there are a lot of caveats around us coming up with a single metric. What we then try do, though, is look at it for what themes might emerge and what might be some common areas or common features across those that are less adaptive and what would be the best role for government to address that directly.

Senator McALLISTER: Thank you very much.

CHAIR: Thank you, Ms Chester and Ms Davidson. That was fascinating—so fascinating we have run significantly over time. But hopefully we will call you back for some more time next estimates. Thank you very much.