Category Archives: australia

A Delicate Balance

Ever since Julia Gillard managed to wangle the support of two of the three country independents and scrape through to a second term in government, speculation has focused on how long the arrangement can last…and not only in the media but also on the Mule Stable.

Challenging though the road ahead may be for the new government, with so many different interests to juggle, I am of the view that Labor will do whatever they can to hold on to power. Even if they are unable to pass “crucial” legislation, they would be very unlikely to go to the polls early lest they lose the election. After all, if they did not have the courage to trigger a double dissolution when they failed to pass emissions trading legislation to combat the “greatest moral challenge of our time”, it is hard to see what issue could be important enough to them to jeopardise their power.

As for the independents, another election would risk their own new-found power. Furthermore, in siding with Labor they have not really promised very much. All they are committing to is to pass supply and to support the government in the event that no confidence motions are brought against it. On each and every particular piece of legislation they are free to horse-trade once more and potentially vote against the government. Also, as Bob Brown recently pointed out, there is nothing to stop the independents and the Greens backing legislation initiatives brought forward by the Liberals. So there really is no good reason for the independents to withdraw their support from Labor.

Without the numbers, the Liberals and Nationals are powerless to bring on an early election. So, this unlikely new coalition government is likely to be here to stay. The only scenario I can see that could undo Labor is a by-election. If one of the MPs supporting Labor were to fall under a bus, retire, disgrace themselves and resign or in some other way leave the Parliament, the Liberals would have the chance to win the by-election and chance the numbers on the floor. Failing that, I would expect to see Labor ruling for a full term.

What do you think? While it may take some time to see the result, this seems like a good opportunity for another poll on the Mule, so have your say!

More Informality

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Yesterday’s post on informal votes generated a lot of questions, both on and off the blog. One commenter was interested in understanding why there was so much variability in informal votes in New South Wales. It is a good question, and one I do not have an answer to. Presumably demographic differences across electorates (such as varying facility with reading English among non-native speakers) would come into play. But this still leaves open the question as to why the swing in informal votes varies so much across New South Wales. I will have to leave it to you to explore: the table below has the informal vote in all 48 New South Wales seats for your perusal. Let me know if you have any theories!

Division ID	Division	Informal (%)	Informal Swing (%)
107	Blaxland	14.22	5.33
251	Watson	13.57	4.48
119	Fowler	13.2	4.72
111	Chifley	11.09	3.18
315	McMahon	11.01	3.41
153	Werriwa	10.59	4.01
104	Barton	10.28	3.71
122	Greenway	9.47	3.29
144	Reid	9.21	3.63
140	Parramatta	8.73	2.11
103	Banks	8.55	2.79
127	Kingsford Smith	8.23	2.92
128	Lindsay	8	2.48
131	Macarthur	7.93	2.36
121	Grayndler	7.13	1.15
110	Charlton	7.11	2.44
150	Throsby	7.01	2.14
118	Farrer	6.85	3.02
124	Hughes	6.78	2.34
148	Shortland	6.58	2.42
105	Bennelong	6.51	0.29
117	Eden-Monaro	6.44	2.71
126	Hunter	6.23	1.96
146	Robertson	6.2	2.76
250	Riverina	6.11	2.22
115	Dobell	6.07	1.75
136	Newcastle	5.82	1.39
112	Cook	5.73	1.92
114	Cunningham	5.73	1.82
134	Mitchell	5.62	1.55
133	Macquarie	5.4	1.75
249	Paterson	5.37	1.77
149	Sydney	5.35	1.17
132	Mackellar	5.27	0.6
139	Parkes	5.25	1.17
120	Gilmore	5.24	1
145	Richmond	5.15	0.87
125	Hume	5.14	1.57
109	Calare	4.69	1.07
151	Warringah	4.66	1.22
137	North Sydney	4.62	0.9
138	Page	4.48	0.18
106	Berowra	4.44	-0.24
152	Wentworth	4.43	-0.47
113	Cowper	4.31	0.34
108	Bradfield	4.23	0.26
130	Lyne	3.67	-1.36
135	New England	3.6	0.63

An email correspondent asked whether it was in fact the 2007 election that was anomalous rather than the 2010 election, so I have also compared the 2010 informal vote to the 2004 election. Interestingly, the uptick in informal votes from 2004 to 2010 is indeed smaller. In fact, Western Australia had a lower rate of informal votes in this election than in 2004. New South Wales still shows significant increases in informal votes in a number of electorates, which helps drive a national trend. Overall, compared to 2004 there does still seem to be something going on with informal votes, but the effect is certainly less marked.

I also received various questions about whether correlations could be seen between informal votes and Green votes, whether the increase in informal votes was greater in more marginal seats and so on. Unfortunately, as yet my data mining has not revealed anything of substance. Here, for example, is the increase in the rate of informal votes versus the absolute two-party preferred margin. The regression lines show no simple relationship.

Informal Vote versus Two-Party Preferred Margin

Comparing Green votes to informal votes is just as unenlightening. That, at least, seems to make sense. While it is reasonable to consider some of the Green vote as a protest vote and some of the informal votes likewise as a protest vote, it may be that in some electorates more voters were inclined to protest by voting Green than informal, or vice versa. This would mean that there would be negligible correlation between the Green and informal swings at the division level.

So, despite my efforts, I am yet to squeeze further insight from the data. Of course I remain open to further suggestions! If you would like to do your own analysis, the current 2010 data is available from the AEC as is past data.

UPDATE: If you sort the table at the top by informal vote, you’ll see that the two electorates with the lowest rates of informal voting were New England and Lyne, the seats of the independents Tony Windsor and Rob Oakeshott respectively!

Also, here is a national table of informal votes (just to avoid being to NSW-centric).

Dress: Informal

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While Australia still waits to see which party will manage to scrape into power, the Australian Electoral Commission (AEC) has announced an investigation into the unusually high rate of informal votes. Veteran ABC analyst Antony Green observed that the rate of informal votes was the highest since 1984. Some are attributing the rise to the “Latham effect” following the exhortation by former Labor leader now professional provocateur, Mark Latham, that voters should spoil their ballots to thumb their noses at both major parties.

It will be interesting to see what conclusions the AEC draws, but there is no doubt that the informal votes in this election were significant.There are more votes to be counted and the trends in postal votes may differ somewhat from votes cast in person, but enough of the votes are in to get a reasonable picture of what has been going on. The figures here are based on the AEC data for the House of Representatives as at 23 August 2010. Informal votes rose in every state from the rate seen in the 2007 election, increasing by a margin of between 1.0% and 2.4%.

State	2007	2010	Change
NSW	4.95	6.87	1.91
NT	3.85	6.07	2.21
QLD	3.56	5.63	2.07
SA	3.78	5.54	1.76
WA	3.85	4.80	0.95
ACT	2.31	4.73	2.42
VIC	3.25	4.54	1.29
TAS	2.92	4.20	1.27

Informal Votes by State (%)

One way to visualize the changes is to plot the informal vote rate in 2010 against that of 2007. The chart below does this at a state level and also adds in a 45 degree line. Points falling above this line (as they all do) show an increase from 2007 to 2010, while points below the line would indicate a decrease.

Aggregating to a state level hides a lot of the interesting detail and can be misleading. For example, the ACT shows the biggest increase in informal votes, but with only two electorates, these figures have less statistical value. A more interesting picture emerges when the changes are shown by division. The chart below groups the changes by state, but plots points for each division*. Once again, 45 degree lines provide a guide as to whether informal voting rates increased or decreased.

Leaping out from this picture is the extraordinarily high rate of informal votes in some divisions in New South Wales. It is also striking that the rate of informal votes has increased in almost every division. At this point, there are only 4 divisions in the whole country (one in Victoria and three in New South Wales) to see the rate of informal votes drop.

It is hard to escape the conclusion that the increase in informal votes reflects a protest vote arising from deep voter dissatisfaction with both major parties. The Greens are pleased with the “Greenslide” they have experienced, but some of their success is likely to amount to the same voter protest, only expressed another way, rather than a permanent shift in commitment to the Greens.

* For the purists, there were changes to electorates between elections, and the chart only shows divisions which existed in both 2007 and 2010. Given changes to boundaries, some of these electorates are, strictly speaking, no longer perfectly comparable, but they have been plotted regardless.

Broadband Poll

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As a follow up to our guest post on the numbers behind Labor’s broadband policy, here is a quick poll to see whose policy you prefer. Let us know what you think!

Labor’s National Broadband Network – Less than $10/month

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Our regular guest contributor James Glover (aka @zebra) returns today with a look at the numbers behind the National Broadband Network. He asks: do you think it would be value for money?

The Labor Government’s proposed National Broadband Network (NBN) has many things to recommend it, not least speeds of up to 1GB/s (currently I am on 10Mb/s for ADSL; theoretical speeds of 24MB/s on ADSL2+ and 100MB/s on VDSL are also soon to be widely available, though the reality is dependent on many variables such as distance from an exchange). It would revolutionise the way we communicate as the higher bandwidth would allow not just interactive entertainment and fast downloads, but genuinely accessible cloud applications that really felt like they sat on your computer…and of course dishwashers waking up at 3.00am to negotiate the best electricity price. I doubt whether anybody on either side of politics would disagree that, in a perfect world, this is all desirable. But like all utopias, it comes at a cost and that is where the real divergence between the Labor Party and the Coalition’s broadband policies exists. I hope to cast some light on this cost argument using the power of the Time Value of Money, in particular calculating the real cost to you on a monthly basis so you can compare it with your existing broadband cost.

Labor wants an all-connecting fibre optic network (with subsidised satellite to cover really remote areas) that will cost an estimated $46bn. The Coalition wants a more modest effort: a fibre optic “backbone” network that uses existing copper wiring in urban areas and relies on market competition to pay for further improvements. It is estimated to cost about $8bn plus later commercial costs. Both of these figures seem extraordinarily high. How to decide if it is really worth it? Well if I told you that Labor’s NBN would cost you $10 per month would that sound too high? After all that only includes the infrastructure cost, not the access cost via an ISP. But most of us don’t pay upfront for our broadband or mobile (cell) phone bills, we pay monthly. The Coalition’s figure of $8bn works out at less than $2/month each (for those so inclined, you can read the details behind these figures). But it doesn’t include any additional costs charged by commercial companies building additional infrastructure. It also only claims to provide “peak speeds” of 10Mb/s which I already get on my ADSL+.

Is $10/month a lot of money? Or $2/month for that matter? It obviously depends on what your income is and how much you are currently prepared to pay for broadband. My broadband plan costs $50 for 120GB/month. I also live in a one-person household. It doesn’t sound much to me, but all those $10/month costs add up to the thousands we pay in tax each year. There’s no point paying more for little for no benefit. Of course it’s not going to be charged directly, but through increased taxes (or decreased services). I estimate $10/month to represent an average increase in the tax rate of about 0.5%. This seems reasonable to me. After all, if in 2020 a businessperson (or BusinessBot2020) came to Australia and found our broadband to be the equivalent of dial-up today, they’d hardly be impressed enough to invest in a technology business. Of course, by 2020 with super-fast broadband we should really be able to do most business remotely, right? But we’ve been saying that since the invention of the telephone.

So I’m for the Government’s NBN plan…but what do you think?

Update: I have since writing this post changed my mind based on readers’ comments and some research. It appears that many of the benefits of the NBN are available already on ADSL2+, VDSL and 4G and the Coalition’s more modest plan to build a fibre-optic network backbone might be sufficient. There is also the question of whether a Government entity is best placed to oversee such a large scale project – it’s not like Peter Garrett is going to personally project manage the NBN but Governments in general are not (IMO) best placed to predict and respond to consumer demand. But I accept there are strong feelings on both sides. Sometimes that bright shiny thing in your vision is a light on a hill and sometimes it’s a white elephant blocking your view.

UPDATE: Let us know what you think by voting in this broadband poll.

Emissions League Tables

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Yesterday’s Sydney Morning Herald featured an opinion piece by Rodney Tiffen on Australia’s sluggish response to climate change. Deliberately provocative, the discussion was framed from the outset in the language of competition:

An international competition in self-righteousness would be closely fought. But Australia must be a strong contender.

Tiffen went on to draw on data from the International Energy Agency (IEA), but got his statistics slightly wrong in the process:

If we restrict the analysis to the most populous 130 countries, those with a population of 3.5 million or more, Australia is the world leader. Only a handful of small countries, especially oil producers such as Bahrain, Qatar and Kuwait, have higher per person emissions.

Australians may be disappointed to learn that we do not, in fact, take home the trophy in this competition. Both the United Arab Emirates and the United States have populations over 3.5 million and have higher per capita emissions than Australia at last count (2007). Nevertheless, coming in third place in this competition, Australia certainly punches above its weight, with per capita emissions running at 4.3 times the world average. Furthermore, as the chart below shows, we have been steadily catching up to the United States over the last 40 years. In fact, to give Tiffen the benefit of the doubt, the most recent IEA data is for 2007, so we may well be ahead of the USA by now.

CO2 emissions 1971-2007 (Source: IEA)

The reason Tiffen looks at per capita emissions is to ward off one common argument for inaction on climate change, namely that China and the United States are the only countries that can make a difference. There is no doubt that these two countries dominate the overall production of emissions. Throwing Canada and Mexico in with the United States brings North American emissions to almost one quarter of the world’s total. Add China and almost half the world’s emissions are accounted for.

Total CO2 emissions for 2007 (Source: IEA)

Nevertheless, if the aim is to attempt reductions in world emissions, Tiffen’s focus on per capita emissions is entirely appropriate. No-one would be convinced if the United States viewed its emissions along State lines, thereby arguing that their emissions were not so big by global standards after all (although, this defence would probably not be much use to California). While countries may be actors on the world stage through their political proxies at climate conferences, emissions are ultimately the product of people (both at home and at work) and not countries. Ranking countries by per capita emissions is thus useful as it gives some indication of where emission reductions may be more readily achieved. The chart below shows the top 25 (big and small) countries in terms of per capita emissions.

Top 25 per capita emitters for 2007 (Source: IEA)

Qatar ranks so high on this scale that it compresses the figures for all of the emitters below it, so here is the chart again with a somewhat truncated scale.

Top 25 per capita emitters for 2007 (Source: IEA)

There are certainly some small countries with high rates of carbon emissions per capita, but looking at a larger scale reveals that developed countries are the worst in per capita terms. It is worth noting, though, that Europe is doing better than the rest of the OECD and is also ahead of former members of the Soviet Union.

Per capita emissions by region for 2007 (Source: IEA)

Another useful approach is to consider emissions per dollar of economic output. This serves to highlight “inefficient” emitters, not to shame them but to identify where spending money on the problem is most likely to deliver significant results. It should come as no surprise that a league table of the highest emitters per dollar of gross domestic product (GDP) is a catalogue of troubled and/or small nations. Note that these figures are calculated based on conversion to US dollars using market exchange rates. Using purchasing power parity instead does reorder the list somewhat, but the names are largely the same.

Top 25 emitters by emissions/GDP for 2007 (Source: IEA)

This perspective suggests that when developed countries consider programs to assist developing countries to reduce their emissions, they could reasonably focus on significant but inefficient emitters. The chart below provides a possible target list, showing the 10 worst-performing countries in terms of emissions per dollar of economic output after restricting to countries with emissions of at least 150 million tons of C02 per annum.

Top 10 large emitters by emissions/GDP for 2007 (Source: IEA)

When will Julia go to the polls?

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After taking Kevin Rudd’s scalp and now having done a deal with the miners, Australia’s new prime minister, Julia Gillard, is widely expected to call an early poll. The question is, when will the election be held?

As usual, my first inclination is to dig into the historical data. Looking at all of the Federal elections since Federation, December is far and away the most popular month for a poll. Although the election does not even have to be held this year, December is sufficiently far into the future that it fails to qualify as an early election. Unless the bounce Gillard has experienced in opinion polls proves to be extraordinarily short-lived, we should be looking at a somewhat earlier date. Interestingly, both July and August have only seen one election. On the admittedly spurious grounds of historical precedent, September would be a better bet.

Australian Federal Elections by month

But what of other sources of information? At the time of writing, the shortest odds from SportingBet were on August 7. In my own rather modest poll, August is also proving the most tipped month (it’s not too late to vote in the poll…just make your selection in the form below). No-one has voted for a date in July and I am inclined to agree that that is really a bit soon. Nevertheless SportingBet is still showing odds (admittedly long ones) for 31st July.

In a bid for contrarian status, I will diverge from both the bookies and voters in my poll and will tip a September election. But which date? History is not much help there. Of the four September elections in the past, there has been one on the 1st, 3rd, 4th and 5th Saturday of the month (1914, 1934, 1940 and 1946 respectively). So, I will veer as close as possible to the people’s choice of August, while still tipping September and predict that the election will be on Saturday 4th September. In choosing that date, I have not been swayed by the fact that the fourth Saturday of the month has been the most popular historically, other than to nominate 28th August as my fall-back selection.

Since I will most likely be wrong and you probably disagree with me, make sure to vote!

RSPT RIP – Long Live the MRRT

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In the third in a series of guest posts on the subject of Australian mining tax, Zebra (James Glover) considers the changes to the proposed tax the new prime minister, Julia Gillard, has negotiated with miners.

The Govt has announced a replacement for the RSPT discussed in earlier posts to a Mineral Resources Rent Tax (MRRT). The principle differences are the tax rate – 30% and a change in the deduction. For established mines it is now based on market value depreciated over 25 years and the uplift rate is 12% not 5%. In addition there is a 25% deduction from earnings upfront which makes the base rate of tax 22.5% rather than 40%.

This post replaces an earlier one I put up about the MRRT in which I erroneously assumed that the opt-in about using the market value of assets applied in the way I proposed in my second post. The key statement here is:

“Miners may elect to use the book or market value as the starting base for project assets, with depreciation accelerated over 5 years when book value, excluding mining rights, is used; or effective life (up to 25 years) when market value at 1 May 2010, including mining rights, is used. All post 1 May 2010 capital expenditure will be added to the starting base.”

In the case where the mining company opts to use a market value approach I take it to mean the depreciation takes place before the MRRT is calculated. This means the formula is:

MRRT = 30% x (75% x Earnings – Price(2010)/25)

Currently the mining industry average for P/E (price to earnings ratio) is 14, though in the case of BHP-Billiton it is 19. For an average miner then Price(2010)/25 = Earnings x 14/25 = 56% Earnings so the actual MRRT is based on 19% of Earnings. However the Price is fixed at the May 1 2010 value so this will not increase over time even though earnings will. Should earnings continue to rise at the dramatic rate we have seen in the past decade then the MRRT will eventually look more like the 22.5% base rate.

It appears that the Govt and the mining industry’s compromise is to push the revenue from the tax windfall out from today to later years. In a sense the mining industry has also removed the contentious “retrospectivity” of the tax by using the current high price and choice of 25 years depreciation to ensure the current value of the MRRT is minimised but will rise at 22.5% of increased earnings going forward.

Thanks to an observant reader who pointed out my error. Mea culpa.

RSPT – A Fair Valuation Based on True Value of New and Existing Mines

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Following on from the interest generated by his last post, Mule Stable regular Zebra (James Glover) returns to the subject of the Resources Super Profits Tax in another guest post.

In a previous post I explained how the formula for the RSPT (Resource Super Profits Tax) was derived by considering the Government to be a 40% silent investor in any mining project. I showed that the correct deduction from the return on investments is indeed GBR (Government Bond Rate), as proposed, not a higher rate that includes a “price of risk”. One important thing I missed in this analysis, however, was whether the investment amount (I) was the correct basis for valuing the Government’s new 40% “investment”. I aim to show that the correct variable should actually be the Market Value of Assets (MVA) and as such the appropriate deduction from profits is several times (maybe as much as 4 times) higher for established mines.In the example given based on the mining industry “price to earnings ratio” of 14 the RSPT would only be 9% of earnings. I should emphasise this is not about having separate formulas for new and existing mines but correctly taking into account the fair, market based, price the Govt should pay for it’s 40% share of the earnings.

For new mines MVA = I (where all “=” signs should be taken to mean “approximately equal” to head off the pedants) so the proposed tax is correct in this case.

The Government says that in return for this tax take they are taking downside risk as well as upside benefit. One of the criticisms of the RSPT is that the Government is effectively nationalising 40% of ongoing mines and the GBR deduction is irrelevant as there is no serious downside risk. In the framework I propose the Government is not currently proposing to pay a fair price for this “nationalisation”. If the fair price of the Government’s stake is taken into account then the tax from existing mines is considerably lower than proposed. It may be as low as 9% of earnings. This does not require a backdown by either the miners or the Government, although the Government’s tax take might be less than forecast

If the Government is going to nationalise 40% of a mine – at a fair price – then it needs to effectively pay 40% of the Market Value of Assets (or MVA) for the mine. For new mines the Investment = Equity + Debt is pretty much set at this value. The Government RSPT tax is then:

Tax = 40% x (Earnings – GBR x MVA)

The first term is the Government’s 40% share of the earnings (here taken as Earnings before Tax). The second term is the deduction for the interest that recognizes that the funding of the Government’s share is undertaken by the mine at the Government Bond Rate or GBR. There is no good reason for the Government to pay less than the market value of this asset or MVA. For a new mine just starting up MVA = I, the investment amount, so

Tax = 40% x (Earnings – GBR x I)

If ROI = Return on Investment = Earnings/I then we can write this as:

Tax = 40% x (ROI – GBR) x I

which is the proposed RSPT formula.
For an ongoing mining operation with established operations and contracts, the market value will exceed the book value several times over. I am going to take the very simple assumption that MVA = Price ie the market value of the assets is the market value of the equity. This ignores leverage and is probably too simplistic. Price is based on share price and the number of outstanding shares. In terms of PE-ratio (the ratio of Price to Earnings as determined by the share price) we can write

Tax = 40% x Earnings x (1 – GBR x PE-ratio)

Compared to the original formula the deduction is 40% x GBR x PE-ratio x Earnings. Alternatively we can write this as 40% x GBR x I x MBR where MBR is the Market to Book ratio = MVA/I. So the original Govt funding deduction is just multiplied by MBR. The current formula assumes implicitly that MBR = 1. For existing businesses eg. banks MVA/BVA can be as high as 4 (which is BHPs current value). This gives a very simple deduction in terms of % of earnings, rather than Investment/I, of 40% x GBR x PE-ratio. Note that this is really the same formula for new and existing mines; it just makes proper allowance for the true value of established mines.

So what is the fair deduction for existing mines? It obviously varies with share price and hence market conditions. For mines which are privately held we need a proxy based on publicly traded stocks. The PE-ratio for traded mining stocks is currently about 14. So now, using GBR=5.5%, the fair deduction for the Govt’s nationalised share for existing mines is not 5.5% (as many erroneously claim) or 22% (allowing for a 25% ROI) but 31%! Note this deduction is off the 40% so the total RSPT tax on earnings would be 9%.

So under a scheme based on a fair deduction for existing mining assets the tax should be:

RSPT = 40% x Earnings x (1 – 5.5% x 14) = 9% x Earnings.

After 30% company tax this represent a total tax of 38%. Even if we don’t know what the PE-ratio would be for mines which aren’t publicly traded we can use an industry based proxy for the mines whose stocks are publicly traded. Currently this is in the range 13-14. If I was the miners I’d be pretty happy with that. Maybe they should have taken a closer look at the RSPT before opposing it. All the miners have to do is get the Govt to accept it should pay a fair value for its stake and the framework I propose makes that transparent.

No move expected by the Reserve Bank

Stubborn Mule

Obstinately objective