Someone’s gotta pay

According to the Coalition government, the ALP’s campaign over the privatisation of Medicare was somewhere between dishonest and outright lies. While it is true that the Coalition has frozen some Medicare rebates and eliminated others, attempted to introduce a $7 co-payment to see a doctor in the 2014 budget and set up a task force to examine the outsourcing of payments to Australians, the Coalition claims that these measures were nothing to do with the privatisation of the Medicare entity. Really, if the payment system was privatised, the Medicare rebate would still appear in your bank account at some point after the doctor’s visit. The election is over and Turnbull has promised not to outsource the payment services of the Medicare entity. We’ll see if his promises have more validity than Abbott’s did over time but at this stage let’s take him at his word.  

There is a larger issue here — privatisation. Despite the rhetoric of governments around the world that they are trying to emulate business operations, the prime purpose of government is to provide the services that the society requires and can afford. The ultimate aim of business is, frankly, to make a buck (or pound or euro or rouble) for the owners of the business. The business could be the school-aged boy walking dogs after the homework is done or as large as Wesfarmers, Microsoft or General Motors — the profit margin is what any business is looking for. New walking shoes cost; just like employment of engineers, purchases of inputs to the production process and marketing people.

Ross Gittens observed recently that one of the reasons Turnbull’s government was considering the outsourcing of Medicare payments was:
… the department's computer system is old and clunky and needing to be replaced — a prospect that always seems to frighten governments, especially those trying to keep their budget deficit low by postponing needed asset replacement.
A large computer system takes a considerable amount of time and money to replace. It’s not like you can go to your local ‘big box’ retailer, pay the money, take it home and plug it in. As Gittens observes:
For instance, one of the ways federal and state governments seek to retain their AAA credit ratings is by using "public/private partnership" agreements to have the borrowing for motorways and other big projects done by some private enterprise. This way, the debt appears on its balance sheet rather than the government's.

Small problem: hiding the government's debt in this way ends up being far more costly to taxpayers. The oh-so-holy credit rating agencies turn a blind eye.
So while the government doesn’t have the development and operational costs for the system on its books, it is locked into paying for the development, operation, staffing and depreciation over a period of many years.

In some ways it is like people who are moving into their first home away from their family. Rental of a new refrigerator is sometimes seen as an alternative to the only other affordable option — purchase of a second hand unit where the paint isn’t as shiny, there may be a few dents and a shelf or two might be missing. On the face of it, a few dollars a week is more affordable than a couple of hundred for the second hand one, but sooner or later the rental payments will exceed the cost of both the second hand fridge or even a new one. And that’s where the rental company makes its profit (which for the rental company is the major objective of the entire exercise).

Assuming Gittens is correct, the concept seems to be that a private company develops a computer system to handle the millions of payments that Medicare makes every week. They then get the right to operate the system on behalf of the Australian government for a number of years. While the government doesn’t pay up front for the development of the system (which will take considerable time, resources and intellectual property), included in the monthly payment for the processing of the claims would be the value of the claims made, the operational costs of the system (lights, power, staff, maintenance and so on), a proportion of the development costs as well as a profit for the company that operates the system. Assuming the system is large and complex it would be difficult for the government to change providers at the end of the contract as the initial provider would own the systems, processes and intellectual property associated with the system. If there was a clause to hand the equipment and intellectual property to the government, we’re back at square one with an obsolete computer system that needs to be redeveloped at the end of the contracted period.

A-ha, you say, governments have a lot of clever people who will ensure that they don’t get sucked into a scheme this simple to transfer public money into private profit. Well, they might not. In 1999, Coalition Premier Jeff Kennett privatised the provision of public transport in Victoria. The claim was that the granting of licences to operate trains, trams and buses in Melbourne and across regional Victoria would make the government $28.05 million per year in 2013 and more thereafter. The reality is somewhat different. The Victorian government paid the public transport operators around $2 billion in 2013.

The public elects governments to provide services. A lot of governments around the world provide subsidies to public transport services. Those that support public transport would argue that the subsidy is worth it as there doesn’t need to be as much ground covered in asphalt, space allocated for parking, oil consumed, traffic management costs and so on. Others would suggest that it is a waste of money as there should be more ground covered in asphalt, or they don’t get a direct benefit from the subsidy and so on. Regardless, governments around the world either provide or support public transport in larger towns and cities for the perception of benefit it provides to the communities serviced.

Brisbane’s Airtrain is not subsidised by the Queensland government and from the Brisbane Airport to just south of Toombul Station runs on a track constructed and owned by a private company. The cost for a trip from Brisbane Central Station to the airport is $17.50 one way (peak period on a weekday) with a trip time of 24 minutes. For comparison, a 24-minute trip from Brisbane Central to suburban Geebung, which uses similar rolling stock and the same tracks from near Toombul to the CBD as the Airtrain is a subsidised $4.66 (peak hour with a ‘Gocard’. Airtrain makes a profit on the $17.50 it charges to take an adult to the airport. The operator has to pay for the train (operated by Queensland Rail under contract), maintenance, staff and all the other business expenses. While Queensland Rail may have a different formula for cost recovery on its own services rather than as a contractor to Airtrain, it’s hard to believe that the formula is so vastly different that the $4.66 charged to travel to the delightfully named Geebung is profitable to the operator.

Medicare is also a government service that subsidises Australian residents who need medical attention. While Australians theoretically pay a levy on top of their income tax for the service, not all Australian residents are taxpayers. As Turnbull admitted soon after the election, the ALP’s Medicare campaign was successful because Coalition governments over the years had provided evidence that they were not averse to disadvantaging those without private health insurance on top of the universal ‘free’ Medicare coverage.

Should the outsourcing of Medicare rebates go ahead (and Turnbull reneges on a promise) the Australian public will again be accepting the conversion of public money into private profits for a considerable period of time into the future. While it’s a cheap shot to suggest that this process is broadly supported by the Coalition and its business backers, the rest of us are paying considerably more than we should for the provision of a service the Australian public demands for years into the future.

Problems with outsourcing are not solely related to computer systems. Apart from the failure of outsourcing of Victorian public transport discussed above there are the considerable costs that the Tasmanian, Australian and New Zealand governments incurred to restore the Tasmanian and New Zealand rail freight networks after the sale and operation of the networks by private enterprise. ABC Learning is an example of what happens when a private service provider (childcare in this case), reliant on a business model involving considerable government subsidies and taking the place of the various government and non-profit service providers, fails. The current problems with a number of private providers permitted to replace the state-owned vocational education and training providers is fast becoming a case in point where the ‘make a buck’ ethos outweighed the requirement for appropriate costs and services to ensure the education of a considerable number of young Australians in trades, which will potentially lead to those caught up in the scam not being able to repay training debt (they can’t get a job if the training wasn’t delivered to the appropriate level) and for the rest of us, a shortage of qualified tradespeople for the next few decades leading to poor service and higher prices.

Governments argue that passing the risk and potential for profit to private enterprise is more efficient — as well as running government like a business. The problem here is that government is not a business, as a government should be providing services, not making a buck. For a start, one of the main reasons that business will contract out ‘non-essential’ services (transport and refund payments to name two) is that the cost of the service is an operational cost, written off the cost of producing their major products and therefore tax deductable. The cost of new assets (such as new computer systems) is deemed under taxation rules for business to be a capital expense and depreciated (the cost is recouped) over a number of years. There is a debt on the financial books of the business for the cost of the capital asset until it is depreciated in full, which is considered to be a poor leverage of available capital. The fundamental problem with the logic is that governments do not pay income tax — and therefore don’t need to maximise their operational expenses or leverage their capital.

It is also a fallacy that the private sector is always able to do the work cheaper over the long term (look at the Tasmanian and New Zealand rail systems where government intervention and rehabilitation was required after only a few years). Private enterprise has to do the work paying similar rates of pay and cost of overheads effectively for less to ensure they make a buck and will probably take shortcuts to achieve this apparently contradictory task.

Governments raise taxes and charges to facilitate the services they provide. In the case of state governments (which do not issue currency), they have to have a conversation around raising taxes to pay for the requirements of the society that they are supposed to be supporting. The federal government is in a slightly better position in that it can issue currency: however, this is not politically attractive at present.

If ‘big ticket’ items, such as the computer system owned by Department of Human Services is obsolete, one has to ask how many other major government assets across Australia are well beyond their use by date and there are no funds available to replace them?

In 1983, then Prime Minister Hawke called employers, unions, non-profit groups and state governments into a room and explained the need to restructure our economy. As a result, some taxes were increased, there was wage restraint and employees and governments co-operated to work together for the benefit of all. Hawke remained prime minister for nearly a decade.

If Turnbull is the smart politician he claims to be, maybe he should sit down and have the conversation with Australia about why there is a need to find a different way to fund the services required by our society (in part due to the extravagance of the Howard/Costello years) and ensure that Australia can continue to support these services into the future. Who knows business and employees sitting in the same room as government may come up with a better plan than cutting services and converting public funds to private profit. It worked for Hawke.

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totaram

24/07/2016Very well argued, right upto the last paragraph, which I completely disagree with. 1. What worked for Hawke was based on the then emergent "economic rationalism", now known as neo-liberal macro-economics. In fact, at that time, Australia had not even floated the dollar, and gone off the gold standard. Since that time, much has been learned about how the current system of fiat currencies operates, and we now know that the "gold-standard" type of thinking no longer applies. So what will work now will be a little different. 2. The assumption in the last paragraph is that Turnbull and his govt. (of which he is but a part) are actually interested in doing what is in the best interests of all Australians. There is lots of evidence that this is simply not true. They are just the paid footsoldiers of an ideology propagated by the IPA, whose sole aim is to ensure that govt. intervenes less and less in economic matters. This would leave the way open for complete exploitation of the people and resources of this country by wealthy individuals and corporations, without regard to the damage done to the people and the environment. These 1% are the donors of and the real beneficiaries of the IPA ideology. That about 50% of Australians continue to somehow believe in the benevolence of this ideology and vote for it is a testament to the power of propaganda, as carried out by the entire "free" press, now including the ABC.

Ad astra

24/07/2016totaram Thank you for your comment. Apropos your remark about how the conservative (IPA) ideology is propagated via propaganda, you may be interested to read George Lakoff’s piece [i]Understanding Trump[/i] in [i]Common Dreams[/i], posted a couple of days ago: http://www.commondreams.org/views/2016/07/22/understanding-trump It’s a long article; I think you may be interested in these paragraphs: “[i]There is no middle in American politics. There are moderates, but there is no ideology of the moderate, no single ideology that all moderates agree on. A moderate conservative has some progressive positions on issues, though they vary from person to person. Similarly, a moderate progressive has some conservative positions on issues, again varying from person to person. In short, moderates have both political moral worldviews, but mostly use one of them. Those two moral worldviews in general contradict each other. How can they reside in the same brain at the same time? “Both are characterized in the brain by neural circuitry. They are linked by a commonplace circuit: mutual inhibition. When one is turned on the other is turned off; when one is strengthened, the other is weakened. What turns them on or off? Language that fits that worldview activates that worldview, strengthening it, while turning off the other worldview and weakening it. The more Trump’s views are discussed in the media, the more they are activated and the stronger they get, both in the minds of hardcore conservatives and in the minds of moderate progressives. “This is true even if you are attacking Trump’s views. The reason is that negating a frame activates that frame, as I pointed out in the book 'Don’t Think of an Elephant!', It doesn’t matter if you are promoting Trump or attacking Trump, you are helping Trump.”[/i] Lakoff shows how his Parenting Model, in the case of conservatives the ‘Strict Father’ model, acts so powerfully in Trump’s campaign.

totaram

24/07/2016I might add, for those interested in the complete failure of privatisation; The case for re-nationalisation – Part 2 http://bilbo.economicoutlook.net/blog/?p=34043#more-34043

Jaquix

24/07/2016I dont think Turnbull's got it in him to prosecute a summit, such as Hawkes. He has no genuine commitment to the good of the country, or the interest of ordinary people, is merely there for his own egotistical gratification. The summit you propose is more Shorten's style and plays to his talents. Turnbull is not a negotiator, and in my opinion basically lazy. His energies go to protecting his own precarious position, nothing more.

totaram

24/07/2016Thanks for that link Ad. Yes, I remember his example of how Nixon said "I am not a crook", and just reinforced the impression that he was a crook. Unfortunately, this leads to a serious problem. One cannot engage with an idea in order to argue against it. The only solution is to ignore it completely. Can we really expect this to work? I doubt it, and would love to have another approach.

2353NM

24/07/2016Thanks for the comments totaram & Jaquix. Sadly, you are both probably correct and I have a better chance of winning Lotto than Turnbull doing anything different - like hosting a summit. The suggestion of the summit was made as the Hawke variety got the best people in the room, who made a better fist of the economic problems that beset the country at the time and we all benefitted. In short - it broke the deadlock and set the course for a considerable period of prosperity. Turnbull does have a bit of time available to do something against the party's will and watch it pay off - the pity is he probably won't.

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25/07/2016totaram Thank you for the link to Bill Mitchell's piece on privatisation, which I have bookmarked. It is a fine reference. It puts paid to the neo-liberal obsession with the notion that the private sector always knows best, and that privatisation benefits society. He shows otherwise.
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