Bad regulation clogging the economic arteries of Australia
The complexity of regulation and the costs of complying with it are often cited as impediments to business in Australia. Kelly O’Dwyer believes that, like bad health, bad regulation brings us all down.
As the family doctor reminds my father, there is both good cholesterol and bad cholesterol. Good cholesterol helps keep the artery walls clean and is absorbed through liver metabolism. Bad cholesterol builds up and clogs the arteries and can lead to coronary heart disease, heart attack, stroke or worse.
Regulation is no different. It can provide a framework, protecting property rights and giving parties the certainty to invest. Or it can be prescriptive and pervasive, adding layers of cost, slowing down businesses and, in the worst cases, job and value destroying.
Australia and the rest of the world saw the differences during the first phase of the Global Financial Crisis with our securities laws. While companies elsewhere in the Western world stood by, relatively hamstrung, corporate Australia swiftly recapitalised. In 2009, Australian corporates raised US$80 billion in equity – mostly in the secondary market. US listed companies raised US$213 billion, and LSE listed companies raised US$12 billion. Ordinarily, Australian equity issuance would be around five per cent of the global pool. During that period, some estimates put it over nine per cent.
With rapid deleveraging, Australian companies had the confidence to maintain employment and to continue to invest. Private funds flowed to recapitalise the Australian banks, which were also spared horrendous write-downs to their loan books. Government assistance was limited to the wholesale funding guarantee, without the need for Government equity injections.
So what was the difference? First and foremost, Australia had a sound, but flexible regulatory regime that allowed the bulk of capital raisings to be completed in very short timeframes.
Prospectus protections focused on substance rather than form and provided for update disclosure. The ASX had flexibility to take account of circumstances and to facilitate rapid capital raisings for market participants. So innovative accelerated entitlement offer products were refined or developed, which allowed institutional components to be completed in a matter of days.
In an environment of unprecedented volatility, this gave investment banks the confidence to underwrite raisings, which in turn, gave companies the confidence to launch.
Meanwhile, in the UK, prescriptive requirements ensured there were lengthy timetables before banks could go ‘off-risk’; in the US, onerous disclosure requirements hobbled the recapitalisation effort.
It’s an instructive example and has received little attention to date as one of the reasons that Australia was able to weather that period.
Unfortunately, it’s also a relatively rare example. Too often, the arteries of our economy are clogged, diverting productive effort and stopping the free flow of capital and ideas.
Businesses, community organisations and consumers complain about layer upon layer of red tape. Local, state and federal regulation pile upon industry codes. In larger companies, whole divisions are devoted to compliance costs. In small businesses, owners work into the night to wrestle the paper tiger.
The Productivity Commission estimates that four per cent of business costs are spent on regulation, and that reductions in red tape could lead to an extra $12 billion in GDP.
Perhaps more disturbing than the costs incurred because of bad regulation, are the things that don’t happen at all – just like widespread recapitalisations in the US and the UK during the GFC.
We should be concerned about unjustifiable prohibitions; about things becoming ‘too hard’ and opportunity costs; about barriers to investments in new infrastructure and appropriate housing stock; and barriers to new business start-ups and taking on new employees. Not to mention, the step-changes which might result if innovative effort was spent on core business, rather than working around prescriptive legislation.
Australia needs to go on a regulatory diet and take its simplification medicine.
Governments must work together to review our regulatory regimes, prioritising areas that will have the greatest impact on national productivity.
Equally importantly, Governments at all levels have to stop introducing new regulation without a proper independent impact assessment. They should consider whether there is a market failure and whether there is a role for government. Deadweight costs must be minimised and clear benefits identified before legislation is passed.
That’s not happening at the moment. Since the current Federal Government formally tasked the Finance Minister with a deregulation agenda, it has introduced 16,173 new regulations and repealed only 79. That’s 205 new regulations for every one repealed.
Little wonder that President of the Business Council of Australia, Tony Shepherd warned in these pages last week that one of the biggest impediments to economic growth and productivity is “regulation, regulation, regulation”.
Deregulation and simplification should be urgent priorities. Our economy needs to be operating at peak efficiency as we transition to a high Australian dollar world; we can’t afford to be slowed down or stopped in our tracks by clogged arteries.
Kelly was elected in a by-election in December 2009 at the age of 32 to represent the seat of Higgins, her local electorate, following the retirement of former Federal Treasurer Peter Costello. Kelly is currently the Deputy Chairman of the Coalition’s Deregulation Taskforce which is chaired by Senator Arthur Sinodinos AO. She is also a member of the House of Representatives Standing Committee on Economics and Chairman of the Coalition’s Foreign Affairs, Defence and Trade Committee.
Paul
June 7, 2012 at 12:52 am
Thank you for your
Thank you for your comments.
I agree with the sentiment that regulation has the potential to stifle productivity. I could draw attention to numerous examples at federal, state and local government levels where I believe this to be the case. Our company is involved in property development and construction and is continually frustrated by the planning approval process that fluctuates between local and state governments which increase property prices dramatically and hence our international competitiveness. However, the most topical current regulation relates to the pending carbon tax. I am currently being asked by potential clients to take the risk on the impact of the carbon tax for projects priced now and signed post July 1, 2013. Potential subcontractors and suppliers refuse to take that risk. I defy anyone to tell me with any accuracy at all what the impact of carbon tax will be on our projects. The complexities in doing so are enormous and are not something that SMSE’s are competent in undertaking and nor should they be.
Paul