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ECONOMICS LEGISLATION COMMITTEE
04/06/2009
DEPARTMENT OF THE TREASURY
Productivity Commission

Mr Banks —Perhaps I could make some opening remarks?

CHAIR —Please go ahead.

Mr Banks —Thank you very much for this further opportunity. I thought I would give just a brief overview of things since the Productivity Commission last appeared in this place. As you know, the commission has a number of streams of work. It has commission inquiries and studies. It has annual reporting under its statute. It does supporting research. It supports those activities. It also acts as a secretariat for various COAG bodies, particularly in the area of performance monitoring. There have been considerable developments in all of those activity streams of the commission. I will just briefly give you an indication of those.

Firstly, in terms of the commission projects stream, since the last Senate estimates in February we have completed and the government has released three final reports, one on paid parental leave to which the government has responded, one on drought support and one on regulatory burdens on the upstream petroleum sector. We have eight projects underway. All of those are relatively recent projects. Only one of those has actually issued a draft report, and that has occurred since February. That is the report on restrictions on the parallel importation of books, which came out in March. We have received a lot of submissions to that draft report. We often get a lot of submissions to draft reports but as to this one I am not sure whether or not it is a record. Obviously we are thinking about all of those submissions and we are trying to finalise our report. As a consequence of those many submissions, we have had an extension until 30 June, so we are flat out doing that.

The other ongoing projects which have not yet released any draft report include some on diverse and nationally significant topics. The ones that will have draft reports coming out in September include the study on the contribution of the not-for-profit sector, an inquiry into antidumping, an inquiry into executive remuneration and a study into the performance of public and private hospital systems, on which we will release a draft in September and a final report in November. In addition, we have our inquiry into the gambling industries, on which we will be releasing a draft report in October.

We have also got two streams of work in the commissioned area which relate to regulation to look at more systemic issues. One is on business regulation benchmarking, which is in stage 2 and indeed the second year of that. It is looking at the different jurisdictions in relation to the regulatory burdens involved with occupational health and safety regulation and food safety regulation. They are two areas that are important to business and in which there is quite a bit of activity going on through COAG.

We have also got an annual review of regulatory burdens which is in its third year. It is looking at social and economic infrastructure, two really important areas of the economy to be looking at any issues to do with unnecessary red tape. We have a draft report coming out later this month. Another ongoing stream of work related to COAG has been announced and we are doing quite a bit of preparatory research on that. That is in relation to periodic reporting on the economic impacts and benefits of the COAG reform agenda. That in a sense is a follow-up to the work we did on the national reform agenda a couple of years ago.

The second stream is our annual reporting. Some of you may have seen that we recently released our trade and assistance review, which is a statutory obligation we have, to report on assistance to industry annually. That is that report.

The third stream of supporting research underpins a lot of the other work we do. We have had reports on public infrastructure financing. Another one on a more obtuse topic, intangible assets and productivity, focuses on some of the drivers of productivity. And there is a conference volume, picking up on a conference that we had last year, on promoting better environmental outcomes. We have an annual conference at the commission, which is a roundtable style conference, and this year’s topic is evidence based policymaking. We have some international visitors, including from the World Bank, who are attending that conference.

The fourth key stream of work relates to the secretariat support that we provide to COAG and other national officials groups. Probably the report you would be most familiar with is the so-called blue book which looks at the efficiency and effectiveness of government services. That came out just before the last meeting here. Since then we have produced a compendium of Indigenous data from the blue book that relates to service provision to Indigenous people. We have our two-yearly report, Overcoming Indigenous disadvantage, due out in early July which focuses very much on outcomes for Indigenous people in a strategic framework of indicators that will enable governments to understand whether there really is progress occurring. That will be the fourth report since 2003.

We have also been assigned some new tasks by COAG to assist the COAG Reform Council in overseeing and reporting on the national agreements between the Commonwealth and the states that replace the old SPP, special purpose payments. Our secretariat to the steering committee of the review of government services is preparing reports on performance indicators under those agreements in the six areas which will go to the COAG Reform Council which in turn will report to COAG. The first of those reports from us to the COAG Reform Council will be on the education and training areas and that is due in June. A second tranche of reports will be prepared at the end of the year.

The second new task for the Productivity Commission this time is as secretariat to the state and territory officials steering group that is developing a report on expenditure on services to Indigenous Australians, which is covering what has been a fundamental lack in data in Australia in terms of just understanding where the money being directed to Indigenous communities is going. That will be very important baseline data. It is happening late, but better late than never. The commission is helping as the secretariat prepares that work.

The three new COAG related tasks obviously imply significant resource requirements and the commission was fortunate enough to receive $13.7 million over the next five-year period in the budget to enable us to advance that work. That concludes the introductory overview. We are obviously happy to take questions.

Senator XENOPHON —In relation to the study that the commission is doing as to the performance of the public and private hospital systems, I think you indicated that there will be a draft report out in September.

—Is it September or October? Yes, it is September.

Senator XENOPHON —That report will look at the comparative hospital and medical costs for clinically similar procedures performed by public and private hospitals. It also looks at the rate of hospital acquired infections by type reported by public and private hospitals; issues of fully informed financial consent by patients—I am just looking at your terms of reference. I am also looking at the most appropriate indexation factor for the Medicare levy surcharge thresholds. You are aware that in the budget it was announced that there will be changes to the rebate, which will impact on the mix between the public and private systems. Will your study shed light on the efficacy or otherwise of the rebate in the context of what you are looking at in terms of the mix between the public and private systems and outcomes? To put it crudely, where do you get the best bang for your buck in terms of outcomes in the public and private systems?

Mr Banks —I think in broad terms we may be able to give some indication, but one of the great difficulties in any work like that is (a) getting really good data and then (b) being able to draw robust statistical relationships among different drivers. I think we will be able to provide some information which will give some sense of the relative performance of the two sectors. As to the impact of particular subsidies and so on that have occurred, that is difficult but it obviously has affected the landscape. I might ask Michael Kirby, who heads our Melbourne office and who has been a bit more closely involved in this, if he wants to make any comment on that.

Dr Kirby —I think the main thing is that it is early days in that project. We have only just got the terms of reference. We are in the process of developing an issues paper which will be released over the next couple of weeks. We will then be visiting relevant stakeholders and interested parties in that. It is early days in terms of the discussion to work out the key issues to be examined in the project. There are some very specific items in the terms of reference and they will be taking our priority.

Senator XENOPHON —To my knowledge there has not been a comparable study done like this before in terms of the efficacy and the outcomes of the private and public systems. Is that correct?

Dr Kirby —I think that is substantially correct. One of the issues here is data availability and comparability, and that will be a real challenge for the project. We will be having discussions with the relevant data providers, the ABS and the AIHW, in particular, to try to get the necessary data to do those comparisons. That will be a challenge for us.

Senator XENOPHON —Although one of the terms of reference is that, if there are limitations in the data, you may be making recommendations to improve the data set?

Dr Kirby —Yes.

Senator XENOPHON —So, you can get a like-for-like comparison?

Dr Kirby —Yes.

Senator XENOPHON —I turn to the issue of a study into water buybacks. When is that likely?

Mr Banks —These are very interesting tasks.

Senator Sherry —We have noticed.

Senator XENOPHON —The commission would say it has a competent minister.

Senator Sherry —Yes, I accept that.

Senator XENOPHON —You may be aware that the Victorian government announced that it was relaxing its four per cent cap in terms of water buybacks. I guess that is quite timely. Where is that study at and what are processes compared with an inquiry?

Mr Banks —I understand that study has been going through the various approval processes, which can take some time, as you probably now appreciate. We would anticipate receiving the formal terms of reference very shortly. The difference between a study and an inquiry in a formal sense really relates to the requirement to hold public hearings in an inquiry, but effectively the way the commission runs all of its work is very consultative. Increasingly, even in our public inquiries, we make much more use of roundtables, workshops and opportunities for informal interaction rather than obliging people to sit up and have a transcript in the very formal process of a hearing. It has its place.

Effectively, it will depend on the degree to which that kind of formality is seen as being important for the topic at hand. In this case with water buybacks I could see that we could have some very valuable roundtable-type discussions and allow people to come along, but also there is an opportunity to have forums where individuals can come along to tell their story as well as put in submissions.

Senator XENOPHON —Some of them would be quite fiery, depending on who you invite along. In relation to that, what is an approximate timeline? I know there is still a process. Are you hopeful of getting something out by the end of the year or sooner?

Mr Banks —I will have to be reminded on the time frame. I understand that it is a six-month time frame. For example, if it arrived shortly a final report would be completed by the end of the year. As with all of our commissioned studies or inquiries, there would be a draft report as well to give people an opportunity to respond to what we are saying and for us to take that into account before we do a final report to government.

Senator XENOPHON —Moving on to the issue of the inquiry into gambling, there has been some commentary that in the 1999 study there was an extensive survey of prevalence rates of gambling addiction and problem gambling around the country. I think it was a survey of about 10,000 people. It was the most extensive survey of its type ever conducted at that time. You are not doing that at this time? Is that the case?

Mr Banks —That is correct. The whole question of what sorts of surveys we would do was obviously a threshold issue for us and a very important one. As you said, that first survey that we did was the first national survey. At that time we fondly imagined that that would have put a stake in the ground, there would have been further national surveys conducted after that report, and we would come back and perhaps do another one ourselves, all with a consistent methodology and, therefore, be able to determine exactly what had happened. In fact, that was a vain hope. Methodologies changed and moved on. Other surveys were done, but they were not national surveys, they were state based, so we had to have a look at all of that. The conclusion we came to was that we did not see great utility in doing another national survey either to be able to determine whether things had got better or to provide a stake in the ground for the future.

What we were able to do was a meta analysis, as they call it, of all the various other surveys that had been done. We are in the middle of doing that right now. There has been some quite good work. A lot of it has been state based rather than national, but we can get some significant insights from that. In addition, we are planning to do, and are a fair way down the track of doing, our own survey or repeating the survey that we did last time in relation to problem gamblers who are receiving help from the different services that catered for that. You will probably remember from the last report that that was quite a revealing survey. My understanding is that a comparable survey has not been done since. That is one where we really can add value.

Senator XENOPHON —In terms of the robustness, not so much of your meta analysis but what you are analysing, some surveys might be face-to-face, carried out by the states or telephone surveys and at venues. There is the SOGS index, which is on the way out. You have the Canadian Problem Gambling Index. You have the Victorian index, which is a modification. Will the commission be able to sift through all of that and give a reasonable like-for-like comparison so that we can determine trends of problem gambling in the community and those at risk?

Mr Banks —At this point I should pass to the expert, Dr Lattimore, and get him to comment further.

Dr Lattimore —We are fortunate to have a reasonable number of surveys based on the Canadian Problem Gambling Index. That provides a degree of consistency in the application of a single instrument across the states.

Senator XENOPHON —The methodology might be different, though.

Dr Lattimore —Indeed. We are looking very closely at the exact methodology that is being applied in each of the states and we will be considering the implications of the exact design of that instrument and its application. You are absolutely right. We are also clearly looking at the degree to which you can draw a conclusion about how a SOGS score could be compared with a CPGI score. That is clearly going to be relevant in trying to assess what has happened to trends. We do have the Queensland data, where three surveys were done over time, but we are aware of the difficulties of just looking at that without taking account of, for example, the statistics and the precision in the results.

We are going to look at this very carefully and triangulate results by looking at help services and a variety of other questions that are not just being posed in relation to the CPGIs. There are questions that ask people: ‘Do you consider yourself having a problem?’—from one to 10—’Have you sought help? Have you ever tried to exclude yourself from a venue?’ There is a whole range of additional questions that are not included in the CPGI but which have been asked over time, which will also provide a guide. We will be looking at a range of evidence to try to get to the question that you are referring to.

Senator XENOPHON —Ultimately, it will be a meta analysis of other surveys. There will not be a survey, even on a smaller scale, of the national survey in 1999.

Dr Lattimore —The difficulty of doing that is that, if you look at the required precision to look at trends, you would need a very substantial national survey. To put it in context, the most recent Queensland survey involved over 35,000 people being posed that question for just one state. Accumulating the evidence across states is probably a more reliable way of getting a picture of what the current circumstance is. The second point to make in this area is that there is the issue of what has happened on the trend side, which is interesting. But the other issue is just the current quantum of the problem. At least in the issues paper, the way we presented this is that most people accept that the quantum of the problem is significant regardless of questioning the reliability of the existing surveys.

Mr Banks —One of the services that we can probably provide in this report is the detailed analysis that we are doing of existing surveys which, to some extent, are being misused in public debate.

Senator XENOPHON —I think I have been accused of that, as has the industry.

Mr Banks —Even surveys that, for example, use the same broad methodology, like a SOG screen or the Canadian screen, when you delve into them you find that certain questions have been changed in the way the screen may have been used in one jurisdiction compared with another or over time. We are delving into that. The account that we will provide of the extent to which these surveys can provide useful information or useful comparisons will be helpful in itself. Having done that, we will probably be in a better position than almost anybody to stand back and take a national perspective on what this all adds up to. As Mr Lattimore said, at the end of the day even those who are sceptics nevertheless would accept that the number of problem gamblers as a proportion of the population and of the gambling population, in particular, is such that it would still be seen as a significant policy problem.

Senator XENOPHON —Finally on this, is the fact that there is not a full survey this time around compared with 1999 in part a function of the efficiency dividend in a sense and other work pressures? You can only stretch your budget so far. I am not making a value judgement. You have to be prudent; you have a lot of work on. Is it the fact that things are a little leaner than they may have been 10 years ago by virtue of the volume of work you have now creating a resource issue?

Mr Banks —Ten years ago we were in a different situation in which there was no baseline data. There was no national survey. As I said, we had a goal for that work that, in a sense, was probably unlikely to be realised simply because the methodologies are changing. Even if we did the survey now with 50,000 people Australia wide, the cost of that would be huge, but the cost-effectiveness would be relatively low because we would get some insights for today but we could not guarantee that even that information would provide a baseline for the future. That is the problem. We will be able to provide lots of insights about what is happening today from a range of other sources without the need for such a large survey. That is where we are up to. It is not just a matter of dollars, but clearly we have to think about what is practical and cost effective.

Senator XENOPHON —Has the efficiency dividend made a difference in the sense that things are a little bit tighter than they would have been before the efficiency dividend?

Mr Banks —The amount of resources and the number of people we employ relates to the budget that we have. As I indicated, we have been given supplementation so I would be the last one to be critical of that. We are throwing the resources at the inquiry that we believe it needs, and we would do that even if it meant that we did less supporting research or something. We are quite confident. We have a large, strong team on that and we are doing surveys that are targeted and that we believe will add real insight this time to our report. When you see the draft report, hopefully you will feel that that decision has been vindicated.

Senator XENOPHON —Finally, I turn to the emissions trading scheme. In your annual report you were critical of the free permits that were to be issued. My question is not so much about that, but in relation to the economic impact of the current design of the CPRS. Is that something that the commission has done work on both in respect of this particular scheme and also any alternative models that have been floated in the course of this public debate—an intensity model, the McKibbin model, the Carmody model of a consumption based carbon tax? Has the commission done work on this and can you comment on what you consider to be the potential significance, adverse or positive, of an ETS to the economy?

Mr Banks —The commission has done some work in the past. It has typically been in the form of inputs to decision making through submissions to taskforces that have been doing work, including the Shergold taskforce and then later the Garnaut study. Even that work was probably more principle based rather than based on any modelling. We have not been able to do any separate modelling from that conducted by the government. We are not in a position to make any independent judgment of a detailed kind based on modelling in relation to different models. The point that we have made in the past is that the best way to go in responding to this issue is through pricing carbon. There are differing ways of doing that and that is where the debate is going now. We have not had a call to do any further detailed analytical or quantitative work to look at the relative merits of different pricing mechanisms.

Senator XENOPHON —In terms of the protocols, if the Treasurer asked you to look at that, that would be something the commission has the capacity and expertise to do?

Mr Banks —I will ask a colleague, Mr Gretton, about the modelling capability. The commission has a lot of experience in modelling, but the modelling demands of that particular issue probably go beyond the capacity that we have in terms of the technology in house at the moment.

Mr Gretton —In terms of the modelling capacity, there are a number of agencies that have developed specific models to analyse the climate change problem. They have been very substantial undertakings. At this stage, the commission’s modelling capacity has not incorporated a number of the features that have been included in those modelling efforts. I will just elaborate a little bit. The focus of much of our work looking at, say, national reform issues has been on the impact of a policy relative to the case of the economy without that policy. You might be referring to electricity reform or transport reform. However, in the case of the emissions trading and the climate change policies there is an additional dimension and that is the time dimension and how the economy might evolve over time and how the economy might respond to different policies and the cost to those economies. That is a matter that was addressed, for example, in the Treasury modelling, but at the moment those technologies have not been brought into the commission. I will add one point. The Treasury modelling was built on work that was previously done by the commission, so in this case the general modelling capacity of the community is developing all the time.

Senator XENOPHON —So, if it was something that you were asked to do, say, I have a question for the commission, you could do it if there were appropriate resources or you could outsource some of the modelling work, say, to Professor Adams at the Centre for Policy Studies or under his wing?

Mr Banks —Clearly, if the government wanted us to do something we would do that. If that meant gearing up and improving the modelling resources we have or drawing on others, we could do that as well.

Senator XENOPHON —Thank you.

CHAIR —Senator Fisher.

Senator FISHER —Mr Banks, you commented that in the past you have provided advice as to inputs into decision making. You gave a couple of examples and said that your input has been principle based rather than figures based. I gather from that that the Productivity Commission has not provided or did not provide to Treasury any inputs in respect of real wages in terms of the Treasury’s modelling of the impact of a carbon pollution reduction scheme; is that right?

Mr Banks —Yes. Everything the commission does is public. When I say ‘inputs’, these are public submissions that we have made at the time when other taskforces were doing work in this area. We drew on earlier work that we had done and also conceptual work about the strategic approaches and the different instruments available. It was to inform the work of those other taskforces. We would not be in a position to provide that kind of base data, anyway. The Bureau of Statistics and other institutions would be better placed to do that.

Senator FISHER —In Senate estimates last night Treasury indicated that its modelling, in respect of the Carbon Pollution Reduction Scheme, in concluding constant employment also assumes real wages will fall over time relative to what they otherwise would have been. Treasury noted, ‘They will be higher than they would be today.’ That is economist-ese for saying, in my terms, there will be a fall in real wages. From the perspective of the Productivity Commission, Mr Gretton indicated that some of his work has been more on the economy without the existence of a particular policy. Given that Treasury is saying that its modelling assumes that real wages will fall over time relative to what they otherwise would be—but nonetheless would be higher than they are today—it seems that Treasury is essentially saying that without the CPRS real wages would rise. That begs the question: how much faster would they rise compared with what they now will not rise by if the CPRS is implemented? Do you have a Productivity Commission perspective based on looking at the CPRS from an economic perspective in terms of where the economy would be in any of the models without that policy, and particularly in respect of workers’ jobs and more particularly in respect of workers’ wages?

Mr Banks —We have not done any analysis of that kind. One point I would make—and it is up to Treasury to talk about its own modelling—is that there is often a confusion between forecasts and projections. This is a nerdy thing that statisticians talk about every day.

Senator FISHER —You are very good nerds.

Mr Banks —Basically the modelling, as I understand it, does not involve forecasts but rather projections of the nature ‘what if’, holding everything else constant. The real world changes in all sorts of ways. We do a lot of modelling ourselves, as you would be aware, which is an important point to make.

I should say that in relation to the Treasury modelling, we are not in a position to comment on that work. We have neither done modelling of the same kind ourselves nor been required to analyse the Treasury modelling itself. There is probably no further comment I can make.

Senator FISHER —Thank you. Mr Gretton indicated that the Treasury modelling regarding the CPRS was built, to some extent, on previous Productivity Commission modelling. You perhaps mean in terms of systems rather than content, but can you explain what you meant?

Mr Gretton —Senator Sherry mentioned the Centre for Policy Studies at Monash University. That institution develops what we call benchmark models. The commission, as part of its work, supported the Centre for Policy Studies to develop a new benchmark model for analysis of the national reform agenda, and the work of that was published in 2007. Using that benchmark model, which you might regard as a major development in the modelling field, the Treasury then requested Professor Adams to develop that model further to supports its research. I think that development was described in a report that was published by Treasury. That is, in a sense, the evolution of the process.

Senator FISHER —Thank you.

Senator ABETZ —Once again, I thank the Productivity Commission for appearing. Mr Banks, in a speech—I am not sure how recent—you refer to the head of Infrastructure Australia secretariat recently commenting in the following terms about many of the infrastructure proposals submitted to that body:

The linkage to goals and problems is weak, the evidence is weak, the quantification of costs and benefits is generally weak.

You then state:

It is very welcome, therefore, that Infrastructure Australia has stressed that any project that it recommends for public funding must satisfy rigorous cost-benefit tests.

I assume you still stand by that?

Mr Banks —I do.

Senator ABETZ —What is the Infrastructure Australia Fund worth? It is slightly over $8 billion, as I understand it. Of course, that is split down to a number of projects, clearly less than $8 billion. You can have, if you like, a cost-benefit analysis on everything, but chances are it would not make much sense to have a cost-benefit analysis as to—let’s pick something ridiculous—whether I ought to get paperclips into my office. At what financial point is there a trigger where you would suggest that a cost-benefit analysis does start to become a worthwhile investment? Do you get my drift?

Mr Banks —Depending on how many staples you would require in your office.

Senator ABETZ —No, paperclips.

Mr Banks —You might even want to do it there. Essentially, a cost-benefit analysis sounds like an impossibly difficult and complex thing to do, and it can be difficult to the extent that some things are harder to measure than others. The framework is surely one that you would apply to decisions large and small, just because it requires you to think about the costs relative to the benefits, the different options for achieving something and going for the one that has the best outcome.

Senator ABETZ —It is a good discipline to have.

Mr Banks —It is a fundamental discipline to have. The commission is on the record over many years in arguing that in a whole range of areas it is a good framework for decision making, particularly in the infrastructure area, where you have investments that will endure for many years if not decades.

Senator ABETZ —Not that I am an expert in these things, but it appears that you would quite rightly have welcomed Infrastructure Australia’s approach in relation to its assessment of projects. Is that how I would read it?

Mr Banks —I am on the record as saying that I approve of those sentiments. That is right.

Senator ABETZ —It would not be too much of a leap of logic to then say, if it makes good sense to have it as a discipline for small and large projects, the larger the project gets the more important that sort of discipline becomes?

Mr Banks —That is correct.

Senator ABETZ —I will just pluck a figure out of the air at random here. If we were to have a $43 billion project, what is the Productivity Commission’s view about the need for a cost-benefit analysis in relation to an infrastructure project of that size?

Mr Banks —I think I have already answered your question in general terms. I think a cost-benefit analysis is an appropriate framework and discipline for thinking about these kinds of large-scale investments.

Senator ABETZ —Time flies when you are having fun at estimates, but I think it was yesterday that we were advised that no cost-benefit analysis, for example, had been done in relation to the NBN proposal, which just happens to be also $43 billion. The Productivity Commission is of the view, without trying to put words into your mouth—and if you think the NBN is a different consideration tell us—that in principle it would be good practice to have a cost-benefit analysis. Is there anything unique, as you understand it, about the NBN that would suggest that it is not worthy of a cost-benefit analysis?

Mr Banks —We have done no particular study of that, so I would have to retreat to the general principle that I enunciated earlier.

Senator ABETZ —Yes. Is there nothing that you understand about the NBN proposal that would suggest to you that the NBN proposal should be an exception to the rule? It is always the exception that proves the rule, as I have been told, and I am just wondering whether there is anything about the NBN proposal that would suggest that it is not worthy of such an analysis?

Mr Banks —I have nothing further to add.

Senator ABETZ —Has the Productivity Commission, for example, been asked to look at the benefit of sticking pink batts into everybody’s roof around Australia? I withdraw that—not everybody’s. The pink batt proposal supposedly is an economic stimulus. As a bang for the buck does the Productivity Commission have any views on that?

Mr Banks —Clearly, we were not asked to do a report on that, otherwise you would have seen reference to that.

Senator ABETZ —Once again this was a project—and somebody will correct me if I am wrong—of about $4 billion, about half the size of the Infrastructure Australia fund of $8 billion. The general principle of a cost-benefit analysis, you would say, may have been worthy for that proposal?

Mr Banks —We could look at a whole lot of particular examples of the general proposition I would make. I guess I would say that in general it is a very good framework for decision making. It is also true, as I said, that some components of that framework—elements of it—can be quite hard to calculate, particularly when you are looking at environmental externalities and so on. Nevertheless, the advantage of that framework is that it requires an articulation of the values imputed to such subjective elements that may not have a price in the market.

Senator ABETZ —I dare say you would respond in similar terms if I were to ask you about the boom gate proposal, although I cannot quite recollect the total figure for that particular aspect of the stimulus package.

Mr Banks —I am clearly a fan of the cost-benefit analysis framework. I probably will not go much further than saying that.

Senator ABETZ —Are there any general studies on cost-benefit analyses that you might be able to point to in relation to these matters? Another one that I am considering is the proposal for every school to be given a new building. In the Productivity Commission’s experience has the one-size-fits-all approach indicated that productivity benefits can vary substantially from project to project?

Mr Banks —We are probably not in a position to comment on specifics like that. If you ask me in general terms whether the cost-benefit ratios could vary from one infrastructure project to another I would have to say, yes, that is likely to be the case.

Senator ABETZ —We have got schools that are brand new, just opened, with all the facilities and, guess what, they are going to get an extra room whether they need it or not. There are schools that once housed 600 students and now have only 200 students and are in need of maintenance. But no maintenance; they are just going to get a new separate building on the same school building allotment, which would suggest that the productivity value and the multiplier effect of those sorts of proposals would be marginal at best.

Senator Sherry —That is your observation and statement.

Senator ABETZ —It is.

Senator Sherry —I do not know if there is a question there.

Senator ABETZ —I think it was agreed by Mr Banks that the productivity of these various projects would vary, and I have just given two examples of where the productivity would be marginal.

Senator Sherry —That is your claim.

Senator ABETZ —Of course it is, and I think logic would dictate that. There is a favourite project of mine of which the Productivity Commission has been somewhat critical, and that is the Commercial Ready program. I forget when that was. I think it was about 12 months or so ago that we may have discussed the Commercial Ready program here. As a Productivity Commission you do see the importance of having government support for R&D?

Mr Banks —Yes. In fact, I recall an interesting conversation we had along these lines before. That is true.

Senator ABETZ —You would not see that necessarily as business welfare?

Mr Banks —No. In fact, in the report on trade and assistance, to which reference was made earlier, we explicitly state upfront that the fact that we are documenting the amount of money that goes to industry in different ways does not mean that that is a social cost—all of that net social cost. Research and development, with the spillovers and broader benefits that that generates, is obviously an area where there is a strong case for public support.

Senator ABETZ —As to the $6.2 billion car plan, do you know what I am referring to? The name escapes me at the moment.

Senator Sherry —The Carr car plan?

Senator ABETZ —Yes, that is right.

Senator Sherry —Senator Carr’s car plan.

Senator ABETZ —That is right—$6.2 billion. I understand the Productivity Commission in the past has undertaken work in relation to assistance to the auto sector; is that correct?

Mr Banks —Yes. In fact, having looked at some of the transcripts from earlier presentations here I note one of those Senate estimates was just after we had done some modelling work that fed into the Bracks review that in turn informed the government’s decision in that area.

Senator ABETZ —You did some work for the Bracks review?

Mr Banks —We were commissioned by the Treasurer to do some modelling work that would help inform the Bracks review and indeed others—the government itself ultimately—making a decision in this area.

Senator ABETZ —There were some people calling on the Productivity Commission to undertake that review, but my voice was not heeded. Just so that I understand it, the Productivity Commission cannot go out doing projects that it thinks are important. It operates on the request of the Treasurer to look at a particular issue; is that right?

Mr Banks —The constitution of the commission is the same as it was under the previous government. Clearly, policy relevant work deserves to be commissioned formally by the government, which in turn responds to the commission’s report. As I said, we do some supporting research, but typically that is research that can provide inputs to the commissioed studies that are our main bread and butter.

Senator ABETZ —What is it about the auto sector that you refer to as the lure of the automobile in a speech titled ‘Interstate bidding wars: calling a truce’, which, if I might say, as with your other contributions is very interesting and stimulating? Is it a male thing, do you think—you know, boys and cars?

Mr Banks —I would not just leave it at cars—

Senator Sherry —I think it is territory.

Mr Banks —That is a very old speech. I am impressed that you have gone back so far. This country, as everyone here knows, has a long history of assistance to the automotive sector, as do other countries. There is a range of reasons for that. I think the important thing is that over time the nature of that assistance and its level has changed in ways that have enhanced the productivity of the sector.

Senator ABETZ —I am sorry?

Mr Banks —The nature of that assistance and its levels have changed in a way that has probably enhanced the productivity of that sector.

Senator ABETZ —But value for dollar? That has enhanced productivity, but could it have been enhanced in cheaper ways?

Mr Banks —We are on record as saying that there was a case for further reducing tariffs and the government accepted that in its decision.

Senator ABETZ —I think I quoted to Dr Henry part of a speech that he made in relation to that, that whenever tariffs go down the monetary support seems to go up, and we reflected on that. It is a vexed area. In my not so new role now as shadow minister for industry I am trying to absorb as much information as I can from learned commentaries in these areas. Have you done any work in the area of—you might imagine I am being lobbied on this—government funding for what is seen as the new area of biotechnology and information technology. I hasten to add that I do not necessarily ascribe to this view, but some say the automotive sector was a sunrise industry, let us say, 100 years ago, whereas now biotech is and we should be funding biotech with government support—the sorts of arrangements that may have existed in the past. If you are free to comment on that I would be interested in your perspective.

Mr Banks —I suppose I would comment in general terms. There is a range of areas where the markets will not deliver what is required. Those areas tend to be research intensive areas where there are failures in incentives for adequate research from a social perspective. We conducted a study into science and innovation—to which I think you were referring earlier—in which Dr Lattimore was involved a couple of years ago. He might like to comment.

Senator ABETZ —If he would like to comment, I would appreciate it.

Dr Lattimore —We did not identify particular areas that were particularly promising for government support. As indicated before, the view was that there are significant spillovers to everyone from high-technology, high-risk activities that provide information for other parties. That would include biotechnology and IT, but also a whole range of other areas. In particular areas where there is a national priority, of course, biotechnology might have a particular application, but that would be led by that national priority rather than the technology itself.

Senator ABETZ —If I were to ask you to go back about 25 years, would you have been supportive of government assistance to a company such as Cochlear? That is a hypothetical, but do you see the point I am trying to make? With some of these activities it is difficult to get fully private funding, so a bit of government investment not only adds to the general body of knowledge but sometimes has huge commercial spin-offs as well.

Dr Lattimore —We have accepted that in the past. The challenge for R&D grants or any mechanism for funding R&D in the business sector is to get R&D that was not going to happen otherwise. You want to be fairly sure that they were not going to fund it themselves or through third parties anyway, and that it is likely that the knowledge they generate will be useful to other parties, not just appropriable by the firm. The higher the risk, the more unusual the research, the more likely you would accept a grant being given to a firm—subject to the likelihood that it is going to be beneficial.

Senator ABETZ —Can you tell me about the status of the Indigenous report. I think you mentioned it in your opening statement, but could you please flesh that out a bit.

Mr Banks —There are two streams of work that relate to Indigenous disadvantage. One is the Blue Book, where we look at the efficiency and effectiveness of government service provision. As I said earlier, we produce a compendium of data that relates to government services to Indigenous people. But the other report we do for COAG, the Overcoming Indigenous disadvantage report, has its origin in a COAG meeting in 2002. That report provides indicators in a strategic framework that relates to the outcomes for Indigenous people in a lot of areas that are particularly important and are now attuned to the Closing the Gaps objectives that COAG is committed to. The rationale for that is to provide baseline data initially so that we can tell as a society whether things are getting better or not. One of the problems that has bedevilled Indigenous policy is that we have not had the data to really understand what policies are working and, as I said earlier, what expenditure is occurring and where, and whether things are getting better over time. Finally, I think we are in a position where we can start to understand that in more detail. That is what that report is trying to do. It is effectively a report to all governments.

Senator ABETZ —How long has that been underway?

Mr Banks —That latter report, Overcoming Indigenous disadvantage, has been going since 2003. The fourth edition will come out in July.

Senator ABETZ —In one of your speeches you had the example of the tragic circumstance in Alice Springs of young Aboriginal children deliberately taking up petrol sniffing so that they would get the benefits the others did, which was an unforeseen consequence of undoubtedly very compassionate and though-out policy in Canberra that had terrible consequences on the ground. I think you made the point in your speech that, had there been consultation with some of the Aboriginal elders in that community, those sorts of consequences may have been foreseen. All I would say to you and to whomever else is working on it is: all strength to you in assisting governments—Liberal or Labor, state and federal. The Indigenous issue is one that all sides of politics have tried to grapple with. We get all sorts of wonderful new theories, ideas and mantras and try to implement them, and nearly all of them have had unintended and difficult consequences. I am sure that any assistance you can give to governments of any persuasion will be most appreciated. All the very best with that.

Mr Wonder —You might be interested in table 313 in our portfolio budget statement, which is on Australian government Indigenous expenditure. In particular it identifies what the Productivity Commission is spending in that area. There has been a significantly increased response to the budget initiative that Mr Banks referred to earlier. The commission in 2009-10 will spend over $2 million of its budget in relation to Indigenous related activity.

Senator ABETZ —It is one of those things that I think at the time people may have questioned: why would you get the Productivity Commission to look into these things? But good intentions ain’t necessarily good policy. Having a very rigorous analysis of what is happening on the ground and the consequences is very helpful. Can I finish on one last issue. It was some years ago now that you talked critically—if that is an incorrect descriptor tell me so—or commented about the use of multipliers in analysis of projects. I think it would be fair to say that it was not only the use of multipliers but also the misuse of multipliers. Can you tell us something about the ‘magic’ of using the multiplier? How rigorous is it? How beneficial is it? It gets bandied around a lot. We are told about stimulus packages and putting pink batts in people’s roofs and all sorts of things, and everybody seems to have their own multiplier effect. Would you like to comment generally on that aspect of what the Productivity Commission might consider?

Mr Banks —I guess our work going back a long way has tried to get in behind multipliers to look at where resources are coming from and so on. But of course the multiplier arithmetic depends upon the degree to which an economy is capacity constrained or not. Obviously an initiative that might be in a region that has very high unemployment may have quite different effects to one that is in a region where the labour market is quite stretched. I would just make that general observation.

Senator ABETZ —As I understand it, part of your thesis was that, if you have government support for, let us say, a major building project, it may draw personnel and labour force out of where they were in the private sector, thus increasing the cost of labour for everybody else in the sector. So whilst that is a stimulus and creates wealth within the community, it is also a cost to the community—a bit like the mining boom was in Western Australia. Diesel mechanics who used to work for the Metropolitan Transport Trust over there, or its equivalent, all of a sudden had to be paid big dollars to keep them from going up north, and government projects can potentially have that impact as well. Is that your thesis?

Mr Banks —There is a range of examples where we have seen those diversions that have occurred. As I said, it really does depend on the state of the labour market to some extent. The modelling that the commission has been involved in, the so-called economy-wide modelling or general equilibrium modelling, is explicitly designed and has been used over many years to get more of an acquittal in the sense of the costs and benefits of such initiatives. In an economy everything is joined up to everything else. It is often very hard to make a judgment based on a particular initiative unless you know how that it relates to the wider labour market or the wider economy. Again, I am speaking in general terms, but that is the way it is.

Senator ABETZ —For example, if there is a fair bit of building activity occurring in the residential area and there are school projects in combination with that, that might put extra pressure on the price of houses. That might be seen as potentially a downside, whereas, if a government were to invest its money in widening a road or redoing a port, that might add to the country’s capacity to export more quickly, because we would not have bottlenecks with our coal exports and so on, and there would potentially be a substantial multiplier effect. Are they two examples that make the points of differentiation?

Mr Banks —I would not get into the detail to that extent.

Senator ABETZ —Very wise.

Mr Banks —I would just make the general observation I have made. Again, I am not quite sure what reference you are making to an earlier speech because everything I have said is on the public record. There were references made earlier to an inquiry we did into the gambling industry. I recall that in a report we did 10 years ago we looked at the gambling industry’s claim that the deregulation of gambling had been very good for jobs and very good for the economy. The work we did at that time showed that, over the longer term, the deregulation had not really done anything for jobs at all, simply because over time it had diverted labour from other industries, including the hospitality and retail industries, into the gambling sector. Again, apart from the conditions of the labour market and so on at the time you are looking at it, it depends on the time frame over which you are considering some of these policy initiatives.

Senator ABETZ —I have it right in front of me. At the bottom of page 7 of your speech entitled ‘Interstate bidding wars: calling a truce’ you say:

This will mean either that the wage rates of such employees increase, raising the costs of other firms within the local economy, or that some other potential projects will be stymied.

It was under the subheading ‘Jobs Creation?’. I just thought I would explore that with you. Thank you very much. As always, it was very interesting and I am always the beneficiary when I have had discourse with the Productivity Commission at these hearings.

Senator FISHER —I have questions about water restrictions and, in particular, domestic restrictions. I note your report in March last year about the cost of water restrictions. Your report addressed the hidden costs of water restrictions—for example, the costs of dying gardens, replacement equipment, replacement fauna, the impact on buildings—such as cracking in an Adelaide backyard in my South Australian electorate—and the impact on pipes and infrastructure. Do you have any plans to update that work? We have now had at least another 12 months of water restrictions across the nation as a tool to manage water use, particularly in Adelaide. It is arguable that there are further hidden costs to be felt now as our trees start to feel the fact that they have been starved of water. There is a potential for trees to fall over and, at the very least, hurt people in ways that the community has not experienced before. Do you have any plans to review and update your work?

Mr Banks —That study was undertaken as a discussion paper to raise issues that we thought were quite important in relation to the urban water sector, because there was a lot of work going on in relation to rural water but not so much in relation to urban water. The extent of the restrictions and so on meant that that was obviously an important policy area. Quite a lot has happened since then in different jurisdictions, but the issue remains important. We are not proposing to take that particular study much further. What we have been doing, and it is indicated on our website, is some modelling of urban water systems to try to understand how they operate and how different policy instruments could impact on the efficiency of those systems.

Senator FISHER —As part of that, do you have a view about the effectiveness of water restrictions as a management tool? There has been evidence given to other Senate committees from the likes of Ken Matthews, the boss of the National Water Commission, that water restrictions are a blunt tool and that, over time, communities experience what he called ‘reform fatigue’ and there is a hardening of demand for water. Do you have a view in that respect, and are you able to investigate that aspect as you have done with part of the work you have just referred to?

Mr Banks —That earlier study talked about different instruments and about quotas and water restrictions being quite blunt instruments. In a sense, restrictions like that are equivalent to a price that you might apply; it is just that the price is not revealed. It has costs.

Senator FISHER —Is a transparent price not better?

Mr Banks —The whole area is a vexed issue of optimal urban water policy and management. We do not observe any country in the world that would have a free market in urban water, just because water is so important to people. The point we were making was that you cannot control the amount of water that comes out of the sky, but you can control how that is managed, allocated and so on. Indeed, you can influence the incentives for investment in water storage. All of those things are obviously very important. We did not have answers. We had questions. We did a bit of analysis to indicate that it was worth doing more work in that area.

To come back to your original question, we are proceeding to do some modelling work that we think could help governments understand different policy approaches and their pay-off s, but the bigger question of taking that earlier work forward in relation to looking at different reform options and so on is not something we would initiate ourselves. That may well be an inquiry that the government at some point in the future will consider.

Senator FISHER —I take those points. Are you able to factor into the work that you are already doing the question about the cause and effect of water restrictions in the sense that it seems to be accepted lore that if water consumption reduces after the imposition of water restrictions it is because of the imposition of water restrictions—without any testing of that theory. Are you able to test the theory that water restrictions actually have the effect of reducing consumption?

Mr Banks —With these different policy instruments and their relative merits, it depends on how important it is to achieve a particular target. The merit of water restrictions is that you establish a target that relates to the supply and you enforce that by law. If people obey the law then you have met the relevant target.

Senator FISHER —There is merit if, indeed, those restrictions achieve that target rather than something else; for example, consumer education with people becoming water wise and wanting to be water wise, irrespective of what your organisation has already pointed out are cost-destructive, cost-causing or restrictions that impose hidden costs.

Mr Banks —Yes, that is true. People do want to do the right thing. In the area of Canberra where I live you do not see any green nature strips anymore. It has gone from being a badge of pride to a badge of shame if anybody has one. People’s sentiments change and so on. I guess the big question just comes back to how important this issue is. Some of the work that we did suggests that there could be billions of dollars of national income or GDP at stake in getting this right. I think it is worth doing some work to advance that, just in the way that the rural water policy agenda has been a very important one for Australia. We are mainly an urbanised society. Seventy per cent of water gets used in rural areas, with the balance of it in urban areas. There are a whole lot of questions about how we make best use of that resource.

Senator FISHER —Indeed.

Mr Banks —Watch that space.

Senator FISHER —Thank you.

CHAIR —Senator Cameron.

Senator CAMERON —This is a role reversal. I would like to ask you about a few things. In relation to the Richard Snape lecture series—let me say that I do not do this with any criticism of the format you have set up or the recognition of Richard Snape and his contribution to Australia—could you advise me how much the Productivity Commission has spent on the Richard Snape lecture series? I think it started in 2003. You can take it on notice.

Mr Banks —I will just comment on that. We certainly will come back with the detail of that. I could say that it has been quite a cost-effective lecture series.

Senator CAMERON —I would expect nothing else from the Productivity Commission.

Mr Banks —Our first lecturer, Professor Max Gordon, had come back to Australia from the United States. He was happy to give the lecture for nothing. In other cases we have paid travel costs, but everyone who has been a lecturer has been happy to provide the lecture for no fee. We will get back to you with the detail on that.

Senator CAMERON —That is good. I have a list here of your lecturers over that period. How do you determine who the lecturer will be?

Mr Banks —We publish each of the lectures. In the foreword to that I indicate the criteria that we have used. Typically we have looked for people who have international standing, who have addressed global economic issues, and fortuitously so far there have been people available. Mr Snape, himself, was well known in those circles, so people who have known or been colleagues of his come to us. I am sure that you would agree that the standing of the lecturers has been very high. We have been trying to get a range of people involved from different countries and cultures so that they are not all necessarily people from the United States or from Australia.

Senator CAMERON —You have done countries and cultures. What about different points of view, such as challenging the orthodoxy?

Mr Banks —We are open to suggestions.

Senator CAMERON —I am not suggesting anything. I am worried about the Productivity Commission in terms of the orthodoxy that drives a lot of your analysis and I am wondering if you may get a bit stale. Why do you not use this Richard Snape lecture series to try to get some challenging views to the orthodoxy of the Productivity Commission?

Mr Banks —We could certainly do that. As I said, we seek people of international standing in the profession. We had a conference that you might be interested in a couple of years ago on behavioural economics, which is an example of the commission creating a forum to challenge the orthodoxy. That was quite a successful conference that we had. We produced a conference paper and we had people from overseas who were putting quite a different line to the normal line that economists would put, based on psychological analysis, laboratory work and so on on how people behave in certain circumstances. That proved to be a very good conference. We are not closed at all to providing opportunities for alternative points of view.

Senator CAMERON —What about recruiting Nobel laureates who would have different points of view from what would be the Productivity Commission’s view on a range of issues?

Mr Banks —The problem with those sorts of people is that they are hard to get here and hard to get here with the cost-effective budget that we allocate to these things.

Senator CAMERON —Have we tried?

Mr Banks —In the case of those two gentlemen, no, we have not, but if we could find a way to encourage them to come they would be excellent candidates for that position.

Senator CAMERON —Have any of these lecture series that occurred between 2003 and 2008 informed the work of the Productivity Commission on an ongoing basis?

Mr Banks —We have a number of functions as an institution. One of them is just a broader public information role. The lectures that have been given have been published. We had one lecture from Martin Wolf, who writes for the Financial Times.

Senator CAMERON —I might have even come to that one myself if I had known it was on.

Mr Banks —Again, to make this a cost-effective venture we do not have unlimited numbers, but we are looking to what extent we would do it as an in-house thing, or whether we would open it up and have it as a major public lecture where anybody could come along. Again, we are open to that.

The point that I was going to make is that the one that Martin Wolf gave was actually prescient because he was talking about global imbalances and the possible implications for the global financial system 18 months or two years before the crisis actually happened. The debate that was engendered through that and the publication of that report was quite prescient, although it was not necessarily picked up and acted upon at the time.

Senator CAMERON —Obviously I looked at a number of your Productivity Commission reports when I was the national secretary of the MWU. I certainly do not agree with some of the outcomes that you proposed. Given the sort of orthodoxy that in my view drives the Productivity Commission, why should the government not think about having some competition there and using the market to get some advice, as distinct from the Productivity Commission?

Mr Banks —We welcome that. In fact, the government, as you know, gets a lot of advice from the market and consultants have provided many reports. Probably more so today than ever before we find that the work we do is contested, and that is all to the good. I guess the niche that we occupy is one of independence and always taking the big picture. You might differ with us as to some of the methodologies we use or the perspectives we bring to bear.

Senator CAMERON —I am not looking at just the methodologies but maybe some of your conclusions as well.

Mr Banks —Again, as you well know from the past, those conclusions are floated in preliminary form in draft reports, and anybody in the community can come along and debate those with us. We learn from that. Our final reports often differ somewhat from our draft reports.

Senator CAMERON —Do you want to take that on notice and tell me where you have changed? I am only joking! This is about the power of arguments. What arguments have you heard that might change some of the orthodoxy of the Productivity Commission arising from the global financial crisis? Have you learned any lessons from that or is everything as it was before the financial crisis?

Mr Banks —I guess it should be said that we mainly do our thinking in relation to the tasks that we have been asked to do and the circumstances that apply to those. The issues that might arise in a gambling inquiry, one into consumer policy or one looking at the charitable organisations sector would be different ones than if we are looking at infrastructure. We are open to changes and developments in thinking which typically get brought to bear in those particular inquiries that we are doing because of the people who are involved. As you would remember, we have quite wide participation in those inquiries.

Thinking that relates to different areas, no matter how new, is thinking that we take on board. For example, many years ago the old Industry Commission did a report on research and development and we brought Paul Romer to Australia. He was one of the stellar performers from the USA who was actually willing to come at a modest price. He talked about the new growth theory, which was a very new thing at the time. My colleague, Dr Lattimore, was involved in the report on consumer policy, and behavioural economics was a feature of our thinking in how we would reshape consumer policy.

My answer to what I think is your implied question is that we are open to different ways of thinking about things, but the way in which we tend to do that tends to be through the tasks we are given, which these days range very widely compared to the earlier years of your organisation.

Dr Lattimore —Is it worth me talking about consumer credit? This report came out in April 2008, but, of course, it had a gestation which was rather longer than that. We recommended quite widespread changes to the way consumer credit should be regulated in Australia, in particular a more national approach. It also included the regulation of parts of the industry that had hitherto not been significantly regulated in the advice area for credit brokers and so on. That was ahead of the crisis, but clearly we did not take the view that any system of regulation in the market would go; we had in mind relatively stringent regulations in that area because of the interests of consumers. What we did there was, in a sense, take analysis to the issue of whether consumers would be better off or not under a particular regulatory arrangement. There was no assumption that the market necessarily would deliver the right outcome.

Senator Sherry —I might say on that particular report that it was a great inspiration to the government because we picked it up and we are implementing it.

Senator CAMERON —I am not criticising everything, just some things. Thank you for that. I look forward to your next appearance. I will be better prepared for that.

Mr Banks —I look forward to that, too. Thank you.

CHAIR —I thank the Productivity Commission for appearing. The committee will resume after the dinner break with the Australian Securities and Investment Commission.

Proceedings suspended from 6.20 pm to 7.31 pm