25/10/2013 - 11:41

Legislators overstep the mark

25/10/2013 - 11:41


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Governments the world over seem to think they have some skin in the game when it comes to the business of business.

CAPITOL PLAN: While narrowly averted last week, default by the US government is an unthinkable event that would trigger a more severe recession than that of 2008.

Business and politics are terrible companions – as this state discovered in the 1980s when the government was called on to rescue a number of failing companies, and the wider world is now realising as it suffers the aftershocks of the 2008 GFC.

In both examples it was politicians who initially came to the aid of businesses collapsing under unsustainable debt burdens, only for the political fix to become a bigger problem than the original crisis.

Last week’s near-default by the US government – an unthinkable event that would have triggered a more severe recession than 2008 – was a direct result of politicians trying to repair the damage being done by their artificial monetary stimulus of the economy and a belief that some businesses are too big to fail.

In effect, the cure to the 2008 crisis has become the disease, with government initially taking on the debts of failing banks and then compounding the problem by continuing to create additional debt in the belief that the problem can be washed away in a sea of cash; or, worse still, that politicians are better at running businesses than business people.

Unfortunately, excess government debt and too much monetary stimulus is unbalancing the global economy and leading to quick fix ‘stop-the-spending’ proposals, such as those from the far right Tea Party in the US.

While Perth is a long way from Washington DC, a broadly similar set of circumstances can be traced to the problems of the government in Western Australia, which are the result of cutbacks in tax revenue caused by slower-than-expected growth, higher-than-expected demand for services, and an unreasonable desire to interfere with business.

Clearly the lessons of the 1980s have not been heeded.

That the meddling here is being undertaken by a pro-business government led by Colin Barnett is ironic, but is really no different to the intervention by governments in Europe, the UK and the US in business – especially banking.

The WA case study is the attempt by Mr Barnett to force Woodside Petroleum into developing an onshore processing centre to handle gas produced at its Browse Basin project.

Because the state has provided extensive support for Woodside’s original gas hub proposed for James Price Point near Broome, the government has developed a sense of mutual proprietorship, seeming to believe that it is a partner in the $40 billion plan.

Perhaps it is a partner in the sense of providing essential services and land access, and because it was budgeting for a strong flow of jobs and tax revenue from any onshore development, but in truth, the government was only ever a facilitator, not an active player.

And therein lies the core problem that is today affecting the government/business relationship worldwide: rather than ‘design the playing field’ for business by enforcing rules and regulations, governments believe themselves to be a player in the game of business.

It didn’t work in WA in the 1980s. It’s not working in Europe today, and its causing a huge problem in the US, where extreme political views are being fanned by deep-seated fears of excess government interference in business and the creation of excess (and unsustainable) levels of government debt.

What’s happened in the Browse situation, and it’s one the Mr Barnett ought to learn to live with, is that the rules of the game have changed; not by government but by science, and the discovery of a way to monetise remote gasfields without landing the gas onshore.

Given that similar technology has been used in FPSO (floating production, storage, and offloading) vessels for the extraction of oil for several decades, there is fundamentally nothing new in liquefying gas aboard a floating mothership. It’s just bigger and somewhat trickier.

But floating LNG production is also likely to prove substantially cheaper than the onshore processing solution, and it means even the most remote gasfields can be developed.

It would be far better for everyone if the WA government went back to marking out the lines on the playing field and stopped pretending it knows how to run a business.

Gas opportunity

Creating a clear set of rules that encourages (not discourages) floating LNG production could turn out to be a significant winner for WA, even if the government and union movement can’t see it that clearly yet.

The immediate view for LNG ‘floaters’ is that they mean fewer direct jobs and reduced tax revenue.

The longer view is far brighter, however, because of the advantage WA has over other sources of LNG in terms of proximity to market, and the security of supply advantage over Middle East sources of gas.

The latest trends in the LNG market point to a strong increase in demand in Asia as two rival fuel sources – coal and uranium – drift further into the politically unpalatable category.

Last week, investment banks JP Morgan published a surprisingly optimistic view of LNG demand based on hints that both South Korea and China will join Japan in cutting back on coal and uranium.

“Over the past week, there have been separate indications from officials in South Korea and Beijing regarding a reduction in future reliance on nuclear and coal-fired electricity generation, respectively,” the bank said.

“We think the policy directives incrementally support our view of robust medium-to-long-term LNG demand growth which, in turn, supports incumbent LNG supplier nations and companies.”

For WA, with its vast offshore gas reserves, the JP Morgan view is excellent news for gasfield development – if the state government could accept the inevitable changes to the technologies being used to produce LNG.

Gold spike

Last week’s sharp rise in the gold price was a reminder of just how volatile financial markets are in the wake of the near-default in the US, but the volatility is not a pointer to a long-term recovery in the gold price.

The problem for gold remains its appeal relative to other asset classes, particularly as the world slowly recovers from the 2008 crisis and interest rates start to rise, which they inevitably will.

In the UK, for example, one of the hardest hit economies, growth is ‘rocketing’ along at 3.4 per cent, triggering speculation of a New Year rise in interest rates, which will add to pressure on zero-interest gold.


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