Posts Tagged ‘Finance’

Edition 49 – The business of carbon pricing

Sunday, April 10th, 2011

Business21C Weekly is available through the iTunes Podcast directory. To subscribe directly via iTunes, go to the Advanced menu in iTunes and select Subscribe to Podcast. Then paste in the following URL: http://www.business21c.com.au/podcasts/feed

Business21C Weekly is broadcast on Sydney’s 2SER 107.3 fm radio station at 9:00 am each Monday morning.

This week’s edition of Business21C Weekly gets to grips with clean energy and carbon pricing.

Globally, the predicted value of the clean energy industry is $2.2 trillion US dollars within five years. That’s the size of the Brazilian economy – and twice the value of Australia’s GDP.

So, is clean energy investing the new gold rush, and is Australia doing enough to make sure it gets its slice of the action? Where does a carbon price fit? And can we ever hope to compete with the deep pockets and economies of scale of the likes of China?

We talk to two investment experts who specialise in the sector: Tim Buckley, Joint CEO of Arkx Investment Management and Martin Rushe, Managing Director of Moss Capital. Taking both a global and the local perspective, Tim and Martin outline the considerable opportunities they see, should Australia establish an appropriate regulatory framework. And to both, a carbon price is clearly a key part of the solution.

We are also joined by Lance Crocket, General Manager of Pacific Hydro Australia, operators of hydro electric and wind plants in Australia and internationally. Lane talks about what it is like to compete on the world energy market and how he sees the potential for Australia’s clean energy sector as the global industry explodes.

Edition 47 – Scamming

Sunday, March 27th, 2011

Business21C Weekly is available through the iTunes Podcast directory. To subscribe directly via iTunes, go to the Advanced menu in iTunes and select Subscribe to Podcast. Then paste in the following URL: http://www.business21c.com.au/podcasts/feed

Business21C Weekly is broadcast on Sydney’s 2SER 107.3 fm radio station at 9:00 am each Monday morning.

Business scams are on the rise. And staying safe is no longer a just question of avoiding East African princes trying to recover their lost millions. Online scamming has moved on, and it seems, business is still falling for it. The number of scams reported to the ACCC last year, doubled last year to 40 000 according to the Deputy Chair of the Australian Competition and Consumer Commission, Michael Schaper, who joins Business21C Weekly with thoughts on how you can protect your business from the scammers

Rachel Turner, owner of handmade confectionery company, Sticky, talks of her near miss with an email scam from Africa (it was seven years ago, after all). And Jonathan Hambrook of Stockman’s Ridge Wines explains how his company was one of a number of several Australian wineries who fell prey to an elaborate scam that came close to defrauding the industry of many millions of dollars worth of wine – despite ASIC checks, a visit to the scammer’s ‘warehouse’, and reference checks with other suppliers.

We can all get caught out, but Anthony Di Sano has decided to play the scammers at their own game. Founder of thescambaiter.com, Anthony’s mission is to scam the scammers. He explains how he does it.

Two years on: where are we now?

Friday, December 3rd, 2010

In the second of our Cafe21C economics series, we take an international perspective. With contributions from leading economists from the US, the UK and from UTS Business, we ask, two years after the collapse of Lehman Brothers, where are we now?

Business21C editor Kirsten Lees talks to Professor Stephen Brown, David S Loeb Professor of Finance at the New York University Stern School of Business, Andrew Smithers – economist, author and financial commentator and founder of Smithers & Co, UK and Ron Bird – Professor of Finance and Economics and Director of the Paul Woolley Centre for the Study of Capital Markets at UTS Business.

The conversation examines the question of austerity versus stimulus as the UK and the US attempt to pull their economies out of recession, and asks whether Australia’s escape from economic calamity was mainly due to luck or good management. We look at responsibilities in the game of global economics, from financial literacy among the general population, to risk and reward in banking culture to the job of central banks. Could they – should they – have done more, and when?

A new culture of giving

Tuesday, September 14th, 2010

Australians would rather give to just about anything other than education. That is slowly changing, says Sarah Seedsman.

According to the OECD, Australia is the only rich country in which real spending on higher education has declined over the last decade. This has occurred in an extremely competitive global market, in which fierce battles are fought for international faculty and students and the quality of facilities, staff and service is critical to success. In a market in which government funding is heading only one way, philanthropic support has become a critical issue for Australian universities: their ability to compete depends on it. This is the backdrop to Dr Chau Chak Wing’s remarkable $25 million gift to UTS. His donation, the largest ever to an Australian business school, may indicate that philanthropists are looking more closely at higher education in Australia. This would be welcome news to vice-chancellors across the country: fundraisers often complain that Australians do not give to education (see box copy, right).

That impression is supported by analysis: The 2005 ‘Giving Australia’ report noted that donors are more likely to give to community service, welfare, health, arts, culture or recreation than to education. Contrast this to the US, where education is the second-largest cause for individual giving, outstripped only by religion. Universities face the greatest challenge in changing this culture – only about six percent of individual philanthropy in the education sector was directed to universities in 2003–04.

Why don’t Australians give to higher education? Michael Liffman, director of the Asia-Pacific Centre for Social Investment and Philanthropy, says it’s a result of our convict origins, which created cultural expectations of government funding. But the UK experienced a similar philanthropic reticence, which recent government initiatives have sought to change. In 2008, to stimulate giving by new donors to education, the government introduced the Matched Funding scheme, contributing one pound for every three pounds received from first-time donors. In May 2010, giving to UK universities topped £500 million for the first time in a financial year.

Bigger in America

The US is the international benchmark in educational philanthropy. In 2009, giving to higher education in America – predominantly by alumni, friends and foundations – reached US$48 billion; corporations gave only 17.6 percent of this. In the last two years, 82 gifts of US$10 million or more were made to US educational institutions, while some 80 percent of donations come as gifts of US$1 million or more.

Wealthy Australians are not giving at anywhere near the level of their American counterparts. Common features of successful university fundraising in the US include:

  • supportive leadership;
  • well-managed ‘institutional advancement’ offices within the university;
  • strong relationship building and well-developed alumni programs – donors with connections to the university and mutual interests are much more likely to give;
  • effective use of volunteers – alumni with a passion for their alma mater are often effective in soliciting gifts from fellow alumni;
  • multiple opportunities for giving;
  • high-impact fundraising communications; and
  • appropriate donor recognition.

In 2007, concerned to develop a culture of philanthropic giving to universities, Universities Australia, formerly the Australian Vice-Chancellors’ Committee, commissioned a study of philanthropy in the higher-education sector. Among its key findings was that successful fundraising universities effectively articulate a vision and a plan for the institution’s future, and engage potential donors with that vision.

Recommendations from the philanthropy study reflected established US success criteria: strong management; capable fundraising professionals; investment in the cultivation of alumni relationships as the primary source of future donations; options for giving backed by taxation incentives; and appropriate gratitude to and recognition of donors.

Things are changing in Australia, though. Apart from Dr Chau’s gift, there are signs that educational philanthropy is beginning to attract the attention of the country’s high net-worth individuals: last year, for instance, The University of New South Wales, reported some 38 donations of more than $1 million.

From the specific to the general

Tuesday, September 14th, 2010

The causes of the GFC are complex and interrelated. Although regulators across the globe are addressing many issues, they are paying little attention to at least three of the major ones, reports Professor Erik Schlögl.

‘Ban them!’ was the cry from commentators and regulators as the Global Financial Crisis subsided and scapegoats were sought. Fingers pointed at practices such as short-selling, credit derivatives and mortgage securitisation – the direct causes of many symptoms of the crisis. Yet by focusing regulatory efforts on these innovations, policymakers are at best restricting some of the transmission mechanisms of the recent crises, leaving the underlying causes unaddressed and the next crisis to manifest itself through other channels. They are, in other words, shooting the messenger.

The question is not, as former Federal Reserve Board chairman Paul Volcker asks: ‘How many other [recent] innovations can you tell me that have been as important to the individual as the automatic teller machine, which in fact is more of a mechanical than a financial one?’ Strong arguments can be made against Volcker’s implicit suggestion that financial innovation has been of little use (or worse) to society. More importantly, however, there are at least three significant issues with the way the financial markets operate that are not being addressed adequately by the policy measures currently under consideration in countries with developed financial markets.

Bad incentive structures

It is the nature of limited liability that it encourages risk-taking, and in many areas of entrepreneurial activity, this is certainly desirable. In the case of financial institutions, however, there has been too much willingness to take on risk, exacerbated by remuneration systems based on upside participation in the form of bonuses and a downside limited by an implicit government bailout guarantee. It’s a worn cliché, but in the GFC, we have seen a privatisation of gains followed by a socialisation of losses on an unprecedented scale.

Given the systemic importance of functioning financial institutions and the consequent necessity of explicit or implicit government guarantees, it would be naive to expect ‘the market’ to supply a solution to this problem without regulatory intervention. Risk, in particular the cost to the economy as a whole of the external impact of financial institutions’ excessive risk-taking, simply has not been priced correctly, leading to a classical case of market failure.

Through more stringent capital requirements, particularly for derivatives transactions, regulators have an instrument to impose a higher price for risk. However, there must also be closer oversight of banks’ internal systems to ensure that risk is priced consistently through the entire chain, from front office to back office, and that regulatory (or economic) capital requirements are taken into account, from the start – in the price calculations prior to entering into a transaction – to the end, when performance should be measured in terms of realised return on regulatory/economic capital.

With the right regulatory framework and proper accounting for risk, one would also expect financial institutions to shift resources – including in quantitative analytics – from front office/trading to risk management, which to date has been seen more as a cost (eg, through regulatory compliance) than as offering a potential for profit through an optimal use of economic capital.

Excessive use of leverage to enhance yields

The second issue that played a central role in the GFC and one that continues to be of concern is that hedge funds (or banks acting like hedge funds), having identified small inefficiencies in the market, seek to exploit these through highly leveraged positions. This works well in theory – in fact, the theory of efficient markets relies on inefficiencies being immediately exploited and the market thereby being returned to equilibrium – but in practice, it leads to major exposure to ‘model risk’ (ie, the risk that the assumptions underlying the trading strategies no longer hold) and is a primary vector for contagion between markets in a crisis.

Even though hedge funds are not banks, nor are their investors small depositors who need to be protected by the government, the high degree of leverage means that their activities potentially pose a systemic risk to the financial system. This is a lesson that should have been learned from the failure of Long-Term Capital Management in 1998, yet this historic hedge-fund failure and subsequent bailout had few regulatory consequences.

Feedback loops and ‘death spirals’

The hedge-fund-driven contagion between subprime mortgages and the equity market also illustrates the third burning issue: successful quant strategies, be it ‘statistical arbitrage’ prior to the GFC or ‘portfolio insurance’ prior to the 1987 stock-market crash, are quickly imitated, leading a significant portion of market participants to follow similar trades. This breaks the underlying assumption of these strategies – that the trades they prescribe will not move the market – and potentially leads to a disastrous feedback loop, causing the market to spiral ever downwards. Extreme market moves suddenly become far more likely.

This needs to be taken into account by regulators in their assessment of banks’ risk-management systems. Isolated analysis of each financial institution is not enough – the question that needs to be asked is how will the major market participants react in a given scenario of market stress, and what happens if they all react the same way?

Regulating to address the causes rather than the symptoms

The global financial system will remain vulnerable to further crises unless these underlying causes are addressed: regulators must impose improved capital requirements that enforce a correct pricing of risk in financial institutions, limit the leverage that these institutions and their major clients can employ, and take into account that risk-management strategies typically fail when they are pursued by a large proportion of market participants simultaneously. Banning one or another of the transmission mechanisms of the last crisis will not prevent the next one – which, given the increase in high-frequency and automated trading, may unfold in the course of minutes and seconds rather than at the relatively sedate pace of the GFC.

Get sick, stay home, deal with it

Tuesday, September 14th, 2010

The ‘get sick, get well, go home’ health-care paradigm that flourished over the last century must now change to support an increasing incidence of chronic illness and long-term aged care. Professor Jane Hall, Associate Professor Marion Haas and Associate Professor Rosalie Viney report.

On March 23, 2010, President Obama signed legislation that will overhaul the US health-care system, a feat that, according to The New York Times, will assure Mr Obama a place in history ‘as one who succeeded where others tried mightily and failed’. Less than a month later, the Australian Prime Minister and six out of seven state and territory leaders announced ‘the most significant reform to Australia’s health and hospitals system since the introduction of Medicare, and one of the largest reforms to service delivery in the history of the Federation’. Within two months of being elected, the new UK government declared ‘the biggest revolution in the National Health Service since its foundation more than 60 years ago’. Health-care reform, clearly, is on the agenda of governments across the world and seems to be a key factor in how governments are judged, by voters and by history.

Australia’s new government is facing the implementation of the reforms agreed between the Federal Government and the states in April, in essence establishing the new governance and funding structure for public hospitals. Working out the detail and embedding the changes will take a great deal of policy energy over the next few years. Take, for example, the ‘efficient price’ that is the basis on which Commonwealth funds flow to our hospitals. What factors should be taken into account in determining what is efficient? Higher transport costs in rural areas? Hospitals transferring patients to those hospitals offering necessary specialised services? Longer hospital stays when local communities do not have adequate residential or home-care services?

The experience of other countries in setting up and managing regional health-care structures offers valuable lessons. We must also be able to use the experience of our own reforms, by building monitoring and evaluation mechanisms into the system and by maintaining the flexibility to adjust policy settings in response to the feedback. The need for reform is ongoing, because the pressures on health-care systems in developed countries are increasing and fundamentally changing.

Changing paradigms

The health-care system we have inherited and the financial structure that supports it are based on what worked last century. Acute infectious disease was the principal public-health challenge, producing a ‘get sick, get well, go home’ hospital system that has flourished for more than a century. In the 21st century, however, things have changed. Real reform is needed to allow a new health-care paradigm to emerge, one that is flexible enough to future-proof the health-care system against an evolving set of patient needs.

Today, more than half the global disease load is in chronic conditions such as cancer, diabetes and heart disease, conditions antibiotics cannot fix and hospital stays do not ‘cure’. The health-care delivery model required by our changing demographic needs will be high-tech and home-based, with an emphasis on self-management.

The pacemaker provides a simple example of how the system needs to work differently. Today, someone with a pacemaker must visit his or her cardiologist regularly to monitor whether the device is working properly and whether a change in medication is required. New technologies will allow a sensor to read signals from the pacemaker, transmitting them via broadband connection to a remote database, which then analyses the signals received, alerting the doctor if something unusual is detected. For patients, this will mean improved quality of life, reduced hospital costs, less travel (particularly in rural areas) and less anxiety – great outcomes all around.

But who pays for all this and how? The costs of internet connections, databases and technical support cannot be classified as ‘medical’ or ‘pharmaceutical’. Within the current financial structure of the health-care system in Australia, there is no way of funding this emerging model of care. Health-care providers must find other ways to cover these costs.

Changing behaviours

Another question is how we can use financial incentives to encourage providers to help achieve public-health goals. The fee-for-service model has some fundamental flaws in this respect. To quote George Bernard Shaw: ‘That any sane nation, having observed that you could provide for the supply of bread by giving bakers a pecuniary interest in baking for you, should go on to give a surgeon a pecuniary interest in cutting off your leg, is enough to make one despair of political humanity.’

In both the UK and the US, health reforms are moving away from activity-based payments in favour of incentive-based payments that reward outcomes. In the US, the system is generally known as ‘pay for performance’; in the UK, it is described as ‘outcomes payment’. Both countries combine this approach with a strong emphasis on primary care rather than hospital-based care.

There is some scope for innovative thinking within the proposed Australian reforms. For example, diabetic patients will be given the option of enrolling with a general practitioner, who will be paid a fixed fee for each diabetic patient enrolled. This could be a model for new payment methods in primary care – one that supports managing the growing number of home-based chronic-disease patients through primary carers rather than in hospitals.

That aside, however, the Australian reforms continue to emphasise public hospitals and activity-based funding, and offer too little in terms of better outcomes for patients in the short term. The challenge for Australia is whether reform will stop at the hospital gate or whether these developments can become the foundation of a 21st-century health system, addressing the new problems of chronic disease and using up-to-date technologies.

Public or private funding?

The public debate on health-care reform reverts too frequently to a contest between two models or philosophies – more government intervention versus more market forces – despite widespread international evidence that the mix of funding between the two has little impact on actual health outcomes. This debate distracts from factors that do have a tangible impact on health outcomes and patients’ experiences. It distracts from what matters most to Australian health-care consumers: accessibility, quality, equity and value for money.

In 1984, Australia became the first country to require that new drugs be assessed in terms of their value for money. Value-based research has since had an impact on health-care economic policy in this country and has been the focus of much of the research at UTS’s Centre for Health Economics Research and Evaluation (CHERE).

The Australian approach has ensured that pharmaceutical companies, technology companies and policy bodies focus not solely on what a new treatment may achieve but on what value it delivers. If ‘value’ is defined in terms of all the criteria – not just cost, but also equity, quality of life and accessibility – then a value-based approach offers a rich matrix with which to evaluate health-care developments. It ensures that those funding health care have a better understanding of the social value of any additional health-care dollars they spend.

Though this system has been adopted internationally, notably in the UK’s National Health Service, the issue of value-based analysis has been more problematic in the US. In such a politically sensitive environment, the notion has drawn criticisms of ‘rationing’, with talk of ‘death panels’ being set up to make cost-based decisions on who should and should not receive treatment. To work around this, the Obama administration has put significant funds into research that compares the efficacy of different treatments without specifically considering the financial dimensions.

Get sick, stay home, manage it

Although statistics from the Australian Institute of Health and Welfare rank Australia third in the world in terms of life expectancy, international surveys show that we compare poorly on safety and quality, and access to health care. The current reforms are focused on public hospitals, but further health reform remains a key agenda item. Australia’s challenges are echoed in health systems around the world.

The ‘get sick, get well, go home’ model of health care is no longer valid. A changed global disease load needs different solutions, delivered in a changed social context. As developed countries around the world grapple with these issues, the way forward is to leverage experience gained internationally and domestically to apply global best practice.

While the ‘government versus private enterprise’ pendulum continues to swing, a consensus is building that, regardless of politics, a value-based model with incentive-based payments, preferencing primary care over public hospitals, may well underpin health-care reform for the 21st century. Without doubt, flexibility is a keystone to the future of a sustainable system. The flexibility to research, implement and evaluate new treatments and technologies, and to pay for advances in patient care as they emerge, is crucial to building a model that is sufficiently resilient to cope with the health-care demands of the new century.