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Australian Financial Review : October 17th 2006
FBA 062 The Australian Financial Review Tuesday 17 October 2006 www.afr.com 62 OPINION Fixing an age-old problem Short-term fixes will not solve the nation's looming aged- care crisis, write Allan Fels and Fred Brenchley. T he Howard government is picking over reform ideas in an area that has bedevilled it for a decade ± aged care. The outcome will determine not just how Australia copes with its rapidly ageing population, but whether the demanding baby boomer generation will pay for the lifestyle and care it expects post retirement, or just lump the rising cost onto following generations. Aged numbers will treble in the next four decades. It is estimated that on current policies, the health and aged costs of this generation will impose a higher tax burden of about 5 per cent of gross domestic product on the next generation. Two intertwined factors are driving the review. Government must respond sooner or later to the 2004 report by Warren Hogan, which identified a $6 billion gap by 2022 in funds necessary to sustain the highly subsidised aged-care sector. Allied to that is the necessity, pointed out by Hogan and others, to address the pressing capital needs of the high-care residential sector. The burning issue here is repayable bonds non-concessional residents of low-care residential care lodge to secure entry. Providers use the interest from bonds to finance new capital works, and argue the concept should be extended to high care. But Health Minister Tony Abbott and Ageing Minister Santo Santoro are nervous, and with good political reasons. In 1997, when the new Howard government proposed an innovative bonds scheme for both hostels (low care) and nursing homes (high care) it got clobbered. The idea was that bonds would be paid into a managed fund, with providers able to access it for capital works. But a heated campaign involving church groups killed it. The upshot was no central fund, but a hybrid scheme where low-care providers could attract bonds but not high care. Over the subsequent decade low-care capital spending has boomed, but high care stagnates. The distortion means lower income for high-care providers, reliant on only accommodation charges. Revenue from these controlled charges is only 50 per cent of average bond revenues. While the Howard government has implemented much of the Hogan report, the big issue of future capital funding remains outstanding. But what to do? Fearful of a repeat of the 1997 campaign ± and this time in the lead-up to the tough 2007 election when Howard is already juggling controversial reforms in industrial relations and education as well as the Telstra sale ± high-care bonds are pretty much off the agenda despite indications that the Catholic Church is changing its former opposition. The 1997 opponents would have to beg for bonds before Abbott and Santoro would risk it. But there are many other options for a long-term capital funding model for the industry that involve greater individual contribution, including aged-care savings accounts, aged-care insurance and vouchers in a system that separates care and accommodation charges. Facing an election, the Howard cabinet will be more inclined to incremental conservative reforms. These are likely to embrace more government-funded high-care places and perhaps a more flexible approach to accommodation charges enabling providers to charge for extra services. Just how extra charges based on capacity to pay would work remains to be seen. Providers would like a payments formula linked to revenues now obtained from low-care bonds, making both forms of care equally attractive. That depends of course on whether the cabinet is looking for a quick fix or a long-term solution. Just throwing in extra beds may help supply, but it will take price signals as well to address demand. Hogan found the sector operating well below efficiency levels, with tight government controls on places and charges offering management little scope for innovation. The growth of new retirement villages largely outside the government-managed care sector ± congregated living as it is called ± shows how demand is evolving. Can the Howard cabinet come up with some long-term plans that maintain aged-care quality and accessibility, while offering the looming wave of elderly multiple choices in residency and care? Certainly there can be no complaint that government has been caught unawares of its ageing population to plan for solutions. It will be a pity if cabinet opts just for temporary fixes. That could create the impression that it has lost its reformist drive and itself may be overdue for retirement to a nursing home. Allan Fels is dean of the Australia and NZ School of Government and a former chairman of the Australian Competition and Consumer Commission. Fred Brenchley is a former editor of the AFR. NOTEBOOK Not every telco can be a winner From this week's edition of The Economist. Nor do new converged services seem very likely to generate much extra revenue. Household spending on communications and entertainment in the developed world grew during the 1990s, as everyone signed up for mobile phones and broadband, but is now flat, so the coming battle between converged operators will really be a fight for market share. Proponents of convergence insist that the new networks' support for video on demand opens up a lucrative market. But just as voice-over-internet technology, such as Skype, decoupled phone calls from phone wires, it seems likely that YouTube and other internet- video services will decouple television service from broadband pipes. So even if video on demand does prove popular, the network owners may not benefit from it. Convergence does have some merits then, mainly in cutting costs and increasing efficiency, but the hype is wide of the mark. Its chief significance is that it heralds the advent of far more vigorous competition in the telecoms industry. It will be a bloody fight for the companies involved, but the ultimate victors will be their customers, who will benefit from greater choice and lower prices. GALLERY DAVID ROWE FINANCIAL REVIEW Farmers must have exit plan We should be very sparing with business relief measures that can have the unintended effect of keeping unviable farmers in business. Since when was being ''part of the Australian psyche'' a sound basis for policymaking? Few Australians would quibble with Prime Minister John Howard's romantic attachment to our farmers, especially with the current drought vying for the title of ''worst ever''. But such muddled thinking is not confined to Canberra; it is responsible for most of the worst agricultural policies in the world, namely the obscene agricultural subsidies of the European Union, the United States, Japan, Switzerland and South Korea. Of course, our farmers are not advocating subsidies such as those in the EU, where farmers are paid $US1 a day for each cow, a greater rate than that earned by many people living in Third World countries. Australian farmers get by with only a fraction of the government assistance that their rich-country counterparts in the northern hemisphere enjoy; and they seek drought assistance only in the ''exceptional circumstances'' of a serious drought. Even so, the government's enthusiasm to roll over, relax the rules on drought assistance and extend the program by $350 million ± on top of the $1.2 billion paid out since 2001 ± to ensure it runs beyond the next election requires scrutiny. This is all the more so since progress towards a genuine national water market, with water trading between rural and urban areas, competition between suppliers and pricing that reflects costs of supply, has been so slow, in large part because of the resistance of farmers, with the blessing of the Nationals. There have been improvements in the structure of drought assistance in the past decade but the Prime Minister's sentimentality prevents it from being structured so as to assist small farmers to exit the industry and make way for more broadacre farms, which are the most profitable. Drought is part of the Australian landscape. If climate change is increasing the frequency and intensity of droughts, as Mr Howard now seems to accept, we should be prepared to provide welfare assistance on a limited basis to farming families whose incomes have been reduced below subsistence level. But we should be very sparing with business relief measures ± such as the interest payment subsidies included in current drought relief ± that can have the unintended effect of keeping unviable farmers in business. As the Bureau of Agricultural and Resource Economics says in its most recent Australian Farm Survey results, low average returns in farming ''partly reflect the generally high proportion of small farms [which] masks the much higher returns from better performing and larger farms that generate the majority of each industry's output''. The policy goal, as it already is in most industries that are not ''part of the national psyche'', should be to encourage the con- solidation of small holdings into larger, professionally man- aged broadacre farms that are better able to deal with drought and other business challenges. One way of doing this is to build farm management deposits, a creative policy brought in after the 1994 drought to encourage ± with the aid of tax breaks ± farmers to set aside something for a dry year. At the end of 2005, $2.8 billion had been set aside in such deposits, typically by larger farms. Unfortunately this has not, as intended, brought about an increase in the rigour with which drought relief is administered. On the contrary, the percentage of interest payments able to be covered by interest subsidies was increased last year. Yesterday Mr Howard made it easier for farmers to qualify for drought relief, doubled the period for which they could receive relief without re- applying, and floated the idea of helping small businesses in drought-affected areas. Some of this may be justified, but experience teaches us that much of it will not be. In the absence of sound cost-benefit analyses of the various options for providing drought relief, and their impact on the long-term viability of the industry, it is hard to dispel the suspicion that the government is motivated at least as much by electoral prospects as by sound policy. One irony is that the farm industry could have been better off as a whole if the government had succeeded in cajoling the states into introducing a genuine national water market; more water would have been available for some farmers and others might have sold their rights profitably. There is no denying the seriousness of the drought, which is expected to cut farm incomes by 60 per cent this year and 0.5 percentage points from national output, or the right of farmers to sympathy and some tightly targeted assistance. But they are not helped in the long run by policies that because of misplaced sentimentality do not make it an absolute priority to increase the long-term viability and resilience of their industry.