What should we make of Iran's nuclear program?

The Iranian nuclear program is back in the news, with the media publishing a restricted report to his Board of Governors by the Director-General of the UN’s International Atomic Energy Agency, on the subject of the implementation of the Nuclear Non-Proliferation Treaty (NPT) Safeguards Agreement with Iran, and the compliance of that country with relevant UN Security Council resolutions (see full report here).

As predictably as death and taxes the news has been accompanied by Israel indicating that it is considering a pre-emptive military strike on Iran’s nuclear facilities, and demands from the United States for tighter sanctions.

This report has received more than usual attention on this occasion because the IAEA has crossed a kind of nuclear threshold of its own, coming explicitly to the conclusion, for the first time that I am aware of, that there are aspects of the Iranian program that are only relevant to the development of a nuclear explosive device, and stating in its concluding summary:

53.     The Agency has serious concerns regarding possible military dimensions to Iran’s nuclear programme.  After assessing carefully and critically the extensive information available to it, the Agency finds the information to be, overall, credible.  The information indicates that Iran has carried out activities relevant to the development of a nuclear explosive device. The information also indicates that prior to the end of 2003, these activities took place under a structured program, and that some activities may be still ongoing

Decoding that paragraph just a little, the IAEA feels it has a good picture of a structured program relevant to the development of a nuclear weapons capability prior to the end of 2003, but is not sure what the Iranians are up to now.  This does not tell us much that is new. A 2007 US National Intelligence Estimate stated (see here) as the first of its “Key Judgements”:

We judge with high confidence that in fall 2003, Tehran halted its nuclear weapons program; we also assess with moderate-to-high confidence that Tehran at a minimum is keeping open the option to develop nuclear weapons.

The incoming Obama Administration was briefed in similar vein by US intelligence agencies in 2009.

This leaves us with many questions to be addressed. Does Iran have a “legitimate” reason for a nuclear electricity program, and if it does, why is it so insistent on developing its own enrichment capability and facilities?  Why does it have undeclared sites that come to light from time to time, and why are so many of these facilities, ostensibly for peaceful purposes, buried deep underground?  Is Iran developing a bomb, and if so, how worried should we be, and should we try to do something about it?

Many have for a long time drawn dark conclusions from Iranian insistence on having the full suite of nuclear fuel cycle capabilities in-country.  This insistence is in fact of little evidentiary value concerning the peacefulness or otherwise of Iran’s nuclear intentions, because Iran’s experience in this field would provide adequate justification for full independence for a purely civil program – which independence is the treaty right of all members of the NPT.

The history of the Iranian nuclear program dates back to the days of the Shah.  In 1978 I was involved in negotiating a nuclear safeguards agreement to cover the intended supply of Australian uranium, visited Tehran, and was given a site tour of the power station which had been under construction at Bushehr since 1975 by the German company Kraftwerk Union AG – the same plant that was finally completed by the Russians and began feeding power into the Iranian grid in September of this year (not much sense of urgency there!).  The Shah saw a nuclear power program as an alternative to burning the nation’s valuable petroleum resources, a sign that Iran was at the first rank of technological capability and hence a source of international prestige, and in all probability, the source of a nuclear weapons option – all views that in time came to be adopted by his Islamic Revolutionary successors.

In light of its historical experiences Iran’s attitude to any proposal for dealing with its emerging nuclear technological capability will be governed by three headline considerations:

(1)  Iran will not agree to any proposal which accords to it a status that is inferior to that of other nations. As is the case with China, Iran regards itself as the heir to one of the world’s great civilisations, and is a country which was very much put upon by the West at a time when it was militarily weak. Over the last century or so it has known foreign military occupation (Britain and Russia), resource theft (the Anglo-Iranian Oil Company, now known as BP), intervention in its internal affairs (the 1953 overthrow by the CIA of the Mossadeq government), military invasion (Iraq, assisted in a variety of ways by the United States), and of course economic and financial sanctions (ongoing). Accordingly, it will not settle for any arrangement which it regards as humiliating, even if there are costs in rejecting what might look like an attractive deal.

(2)  Iran lives under the constant threat of attack by Israel and will not do anything to limit the development of its military response options. I believe for a variety of reasons that Iran has not yet made a decision to move to a military nuclear capability, and is unlikely to do so if it feels it can avoid it, but the ambiguity about the extent of its nuclear capability is part of its deterrence strategy.

(3)  Iran has absolutely no reason to trust the West on this matter. In 1974, during the Shah’s time, Iran lent $US 1 billion to the French Atomic Energy Commission (CEA) to build its Eurodif enrichment facility, and acquired a 10 per cent indirect interest in Eurodif through the Franco-Iranian company Sofidif – a stake that still exists. Iran paid another $180 million for future enrichment services to fuel its nuclear power plants. 

After the 1979 Islamic Revolution, the Khomeini regime cancelled the Shah’s nuclear program and sought refund of this investment. There followed a decade of bitter litigation, as a result of which Iran was reimbursed a total of $1.6 billion for its 1974 loan plus interest. It remains an indirect shareholder in Sofidif, but under the 1991 agreement which settled the litigation it has no access to technology and no right to take enriched uranium. It has the shareholder’s right to dividends, but financial sanctions against Iran mean that it cannot even receive these dividends.

Iran also has a 15% stake in the Rössing uranium mine in Namibia, the world’s third largest uranium mine, of which the main other owners are Rio Tinto (68%) and the Government of Namibia (10%).  There are two Iranian Directors, Messrs S.N. Ashrafizade and A.V. Kalantari, but Iran does not have contracts for the purchase of uranium. It is ironic that a company partly owned by Iran, and which sells uranium to the United States, cannot sell uranium to Iran.

So a country which has for thirty years had a stake in one of the world’s largest uranium mines and in a uranium enrichment plant, but has seen those stakes effectively frozen all that time, is being asked to believe that it can “trust us” to look after its civil nuclear power needs. Iranian President Mahmoud Ahmadinejad has referred explicitly to this situation in various public comments.

The development of nuclear weapons capability by Iran or any other country can hardly be viewed as a positive development, but it is not an occasion for the international hysteria that Israel and its US partisans constantly attempt to drum up.  Since the early 1990s, when Israel started to run out of the sorts of threats that would enable it to engage Washington’s attention in a convincing manner, we have been hearing about how Iran is an ‘existential threat’ to Israel.  

There are two elements to this preposterous claim:

- An Iranian nuclear weapons capability is just around the corner, perhaps only months away

- Iran is run by mad mullahs, irrational and unpredictable people who could do anything, and who therefore could not be entrusted with nuclear weapons.

Regarding the first element, in 1992 Benyamin Netanyahu told the Knesset that Iran was 3-5 years away from being able to produce a nuclear weapon, and on the other side of the political fence, Shimon Peres told French TV that Iran would have nuclear warheads by 1999.  The Christian Science Monitor recently published a timeline of the “breathless predictions that the Islamic Republic will soon be at the brink of nuclear capability” going back to 1979.  The fact that Iran has been “on the brink” of a nuclear capability for almost two decades speaks to the credibility of that argument. 

As for the notion that Iran is run by “mad mullahs”, the fact is that the Iranian leadership has been quite rational and cautious in the conduct of its foreign and military policies, and can be expected to continue to be so. 

On the subject of the supposed “existential threat”, no less an authority than Israeli Defence Minister Ehud Barak has said

I am not among those who believe Iran is an existential issue for Israel. Israel is strong, I don't see anyone who could pose an existential threat.

Before he left office in 2008, former Prime Minister Ehud Olmert said:

Part of our megalomania and our loss of proportion is the things that are said here about Iran. We are a country that has lost a sense of proportion about itself.

Whether anything should be done about Iran’s nuclear activities, that is partly a function of how serious the threat is, and partly a function of what the options are.  There are only two options for direct action: sanctions and air strikes against the Iranian nuclear facilities.

While restrictions on sale of relevant equipment and technologies make some sense, US Secretary of State Hillary Clinton has something else in mind: the “crippling sanctions” that she calls for from time to time. 

This is a seriously dumb idea, for too many reasons to enumerate here, but here are some of the main ones:

- It is highly unlikely that the United States will get sufficient support for such sanctions to gain agreement to their imposition.

- Even if sanctions are agreed, they will be almost impossible to enforce – Iran has land borders with too many countries, plus coastlines on the Gulf, the Arabian Sea and the Caspian Sea. It is altogether too porous.

- Enforcing sanctions would almost certainly require patrolling of Iran’s offshore waters, with a high risk of confrontation and military escalation.

- The sanctions regime would cause all kinds of grief for the oil companies that need to do business in Iran in order to supply the West with crude oil.

- Iran demonstrated during the Iran-Iraq war an immense capacity to endure suffering. It is unlikely to buckle under any sort of sanctions regime that the West would be prepared to establish.

- Also, this is a society that is proud of its long history and possessed of great self-respect – the sort of self-respect that led Britain to resolve to fight on in the dark days after Dunkirk; in its own mind there was no alternative, no real question to be addressed. Iran will not buckle under external economic pressure.

- As explained in my 2009 blog piece Choke point: the Strait of Hormuz, Iran has the option of retaliating by closing the Strait of Hormuz. The United States would have to respond, and the ensuing confrontation would pose a high risk of spiralling out of control.

Aside from all of the above, there is the morality of imposing “crippling sanctions” against anyone. As the sanctions against Saddam Hussein’s regime demonstrated, general economic sanctions (as distinct from export controls on particular items of military significance) hit hardest the most vulnerable in society – infants, young children, the ill and the elderly. They do so by reducing access to electricity, clean water, safe food, emergency transport, spare parts for imported equipment upon which life or safety depend. Iran’s very poor air safety record is in part a product of the unavailability of aircraft spares under the existing sanctions. If the proposed “crippling sanctions” are introduced, the scarce available supplies of liquid fuels will be reserved for what the regime considers to be their highest and best use – the uses of the regime itself and of the Iranian military. For everyone else, life will be just that much tougher. In a country of 66 million, a 1% impact on whether any given person will live or die in the next twelve months amounts, across the population as a whole, to 660,000 avoidable deaths per annum. Sanctions are not a peaceful or low-harm way of going to war.

As for the pre-emptive strike option, that is dumber still.  Iran has nuclear facilities scattered across a country the size of Queensland, some of them deep underground and/or defended by Russian surface to air missiles.  Mounting the necessary air raids would be a stretch for the Israeli Air Force, and afterwards the IAF could never be sure whether the known facilities had been destroyed or whether there were alternative unknown facilities that had not even been attacked.  And anyone who thinks that the only possible consequence of an Israeli attack on Iran would be retaliation by Hezbollah from the Lebanon is dreaming.

There are some things in life that one just has to learn to live with, and I think an Iranian nuclear capability, if Iran chooses to go that way, is one of them.

Note: This item was first posted on the ABC’s The Drum website on 14 November 2011. Access it and 298 comments here).

Are KPIs appropriate to the public service?

An article in the 25 October 2011 edition of The Age (see Ombudsman blasts child protection) cites a “scathing” recent Victorian Ombudsman’s report as saying that managers in Victoria's child protection system failed to investigate reports of children at risk so they could meet numerical targets.

Acting Victorian Ombudsman John Taylor said his investigations into the Department of Human Services child protection program in the Loddon Mallee region revealed serious and significant failures to provide safety and wellbeing to the state's most vulnerable children.

In his report tabled in the Victorian Parliament on 25 October Taylor said the failures were caused by deliberate policy decisions of certain managers to reduce the number of child protection reports investigated:

I consider the failure to investigate these reports to be a consequence of an intentional policy decision by the Bendigo office of the Loddon Mallee Region of the department to reduce the number of child protection reports that it investigates.

Despite receiving more reports in 2010-11 than the previous year, the region conducted less than three quarters of the number of investigations.

I believe a practice has developed where the drive to meet numerical targets has overshadowed the interest of children despite evidence that they may be at risk.

The managers deny this, however, I consider that the evidence speaks for itself.

It is not the first time – indeed, the article says that it is the fourth Ombudsman's report in two years raising serious concerns about the performance of Victoria's child protection system. Almost two years ago we saw Child protection workers fudging figures: report in the 26 November 2009 edition of The Age, which begins:

A scathing Ombudsman's report has identified gross deficiencies in Victoria's child protection service, with workers manipulating figures to cover up children neglected by the system.

This report was never released to the public but the then Brumby Government’s Community Services Minister Lisa Neville said that each of the Ombudsman’s 42 recommendations would be implemented. If they were, not much seems to have changed.

At a superficial level reports like this raise the question of what is wrong with the relevant agency, but at a deeper, more fundamental level they raise the question of whether the importation into public service of business practices like giving agencies and individual officers numerical targets (“Key Performance Indicators” – KPIs) is appropriate to the public policy and service delivery purposes for which public sector agencies are created.

Key Performance Indicators are a product of the business maxim, “What gets measured gets done”, which in itself is a warning to those responsible for leading our public sector agencies, for the corollary is that what doesn’t get measured doesn’t get done. KPIs tell staff in no uncertain terms that when it comes to the crunch, certain things matter and nothing else does.  Messages like that are barely appropriate in business. They have no place in the public sector.

KPIs work best when the required results are simple and easy to specify. It is easy to set KPIs for the distributor of a standardised manufactured retail item like, say, soft drinks or breakfast cereal, which might specify for example that the goods must be delivered to a retailer within a specified time of the order being placed, that the consignments must be accurately made up, that there must be no breakages or spillages, and perhaps that the quantity or value of goods sold in a particular distribution zone should increase by a certain percentage over the previous year.

The Soviet Union discovered a long time ago that even in as standardised a process as the manufacture of everyday items, the specification of required outputs requires great care. If you tell a manager to produce two tonnes of nails you will get two tonnes of 6 inch nails because they are easier to produce.  If you tell them to produce 10,000 nails you will get 10,000 panel pins, because they will require less metal.

When it comes to the delivery of complex services, these Victorian Ombudsman’s reports scream out the message that KPIs break down completely. They are simply inappropriate to measuring the performance of complex tasks.  What should be a high resolution colour photograph of a complex job, with all its nuances and subtleties, gets reduced to six or eight data points.

KPIs are also an open invitation to game the system.  Tell a manager that what is required for performance pay or for promotion is to meet certain numerical targets and they will be met, by a combination of concentrating on the easier cases and fudging the figures. There is money and position at stake, and people will duck, weave, dissemble and tell outright lies in order to establish that they have met their KPIs.  “Follow the money trail” is as reliable a guide to human behaviour here as elsewhere.

The result is that in an environment infected by KPIs managers at every level will have less knowledge of what is really going on than they otherwise would, and that in itself compromises organisational effectiveness.

To understand what is required to manage and measure performance in a large hierarchical organisation it is necessary to recognise three key principles.

The first is that a “manager” is by definition a person who is accountable for the performance of others. In the course of delivering on that accountability managers at every level are responsible for advising people of their duties and giving them the authority to act, ensuring that they receive adequate training to carry out their responsibilities, coaching them in the finer points, deciding what needs to be done and what doesn’t, allocating tasks to people who are equipped to carry them out, and allocating the necessary resources.

Recognise that central hierarchical accountability point and you are well on the way to understanding how a public service department in a Westminster system (and indeed any well run large organisation) is meant to work. The Department Secretary is accountable to the Minister for the performance of the Department as a whole. In turn, the Division Heads are accountable to the Secretary for the performance of their Divisions, the Branch Heads are accountable to the Division Heads for the performance of their Branches and so on. In a very real sense only the individuals at each level and their immediate supervisors have a full understanding of what the work in their local workplace is: what the current and emerging issues are, the workload pressures, how easy or difficult the people with whom they must interact are, and the priorities determined in the light of guidance from above.

There is not space to develop this line of thinking fully here, but what emerges from it is that the only KPI that has any meaning is that individuals at each level, whether they be managers or front-line staff, perform to the satisfaction of their immediate supervisor.  Supervisors being by definition responsible and accountable for the work of everyone below them, it matters not to people further up the line how the work gets done or who does it; what matters is whether it gets done, and to what quality.

The second is that performance at any level – the performance of managers and the performance of individuals – can only reasonably be measured in the light of the resources made available, a fact which is notoriously lost from sight when meeting KPIs is the order of the day.  It is not under-performance for an individual to be unable to carry out a task, or a series of tasks, or a volume of tasks, for which they have not been given the necessary resources, the necessary guidance or the necessary training. The November 2009 Ombudsman’s Report blamed lack of resources for poor service quality and said the failures it reported were not a reflection on the staff.  Child Safety Commissioner Bernie Geary said that the report reflected an overwhelmed department where beleaguered workers were often vilified for shortfalls in the system.  No doubt they are both correct. Governments are notorious for under-resourcing functions that they see as necessary but politically unglamorous, and then blaming the hapless staff and/or senior management when things go wrong.

The third essential principle is that senior people in any large organisation are paid to make judgements, and the performance of staff is quintessentially a matter for judgement, not something that can be reduced to a series of numbers that would enable a chimpanzee to assess performance.  Priorities change, resources that were meant to be available are delayed or unavailable, things beyond the control of the individual go wrong, other matters intervene.  Only someone in a position to observe closely – the immediate supervisor – can make a fully informed judgement about the performance of a subordinate unit or an individual, and making those judgements is a key part of their job.

Consequent upon this, another key responsibility of organisational leadership is to speak truth to power – to advise people up the command chain what resources are required in order to carry out the unit’s functions to an acceptable standard, and not allow themselves to be fobbed off with bromides about having to learn “to do more with less”.  Everyone should be striving to improve their personal effectiveness and that of their organisations, but there are limits to what any one human being can do.

So I say it is time to throw the whole silly business of public sector KPIs overboard. Statistics can inform management decisions but should not be allowed to substitute for them.  It is time to get back to the holding our politicians accountable for providing their agencies with the resources they need to carry out what is expected of them, for appointing mangers who have the skills and the authority to lead the organisation and ensure that it delivers, and holding those authorised managers accountable for their performance.

In conclusion it is worth noting that, aside from the business of giving everyone Stakhanovite KPIs, I fear we have learned another bad habit from the deservedly defunct Soviet Union – the selective enforcement of requirements, to the disadvantage of those who are out of favour.  When the Soviet Union began to become sensitive to international criticism of its nasty habit of locking up dissidents, it for the most part ceased locking them up for their dissident behaviour but pinged them for the sorts of economic sins that were endemic, part of making life tolerable in the centrally planned economy – crimes like acquiring a bit of foreign currency to buy small consumer items like jeans and Beatles records, or paying someone to give you their place on the waiting list for a fridge, a television set or a car. There were no political prisoners anymore, only people who had violated the foreign currency or other economic regulations.

KPIs are a marvellous vehicle for selective enforcement, a marvellous cover for favouritism or covert discrimination.  It is so easy to be understanding about all the extenuating circumstances that explain why the chosen ones didn’t meet their KPIs, but the advancement of those who are not favoured is easily explained – “they didn’t meet their KPIs”.

If you disagree with the above analysis, ask yourself whether you think that a quarter of a century of managerialism in our public sector has improved the quality of policy making or service delivery.  I do not think so.

Note:  A slightly shorter version of this piece was posted on the ABC’s The Drum on 3 November 2011 (see here).

Keating in Laos

In April 1994 then Prime Minister Paul Keating visited Laos for the official opening of the Mekong Bridge, the first ever bridge across the Mekong, which crosses the river from the Thai provincial capital Nong Khai to the village of Thanaleng, just south of the Lao capital, Vientiane.  It was constructed as an Australian aid project, and I had the privilege to serve as the Chairman of the Australian-Lao-Thai Steering Committee which negotiated the arrangements and oversighted the construction.

The day before the official opening of the bridge Paul Keating attended the official opening of the border facilities, on the Lao side of the border, which were also constructed as an Australia aid project.

The border facilities of necessity include a traffic interchange; Thailand drives on the left hand side of the road and Laos on the right. 

The opening of the border post was also attended by the Prime Minister (Chairman of the Council of Ministers) of the Lao PDR, Mr Khamtai Siphandon, seen here meeting with Keating at the opening.

And just for the record, here is the official plaque.

Andrew Farran on the Malaysia Solution

The following letter by my friend and colleague Andrew Farran, former diplomat, Defence official and Senior Lecturer in International Law at Monash University, was published in edited form in both The Age and The Australian Financial Review on Tuesday 20 September 2011.

With Andrew’s permission the full text as submitted is reproduced below:

Re: Migration Act - does the government wish to denounce the UN Convention?

Dear Sir,

If the government proceeds to amend the Migration Act by removing the rights and protections accorded to asylum-seekers and refugees under the UN Refugee Convention (1951) and Protocol (1967), it would in effect be denouncing the Convention.  It may as well go the whole way and do it formally, giving 12 months’ notice under Article 40 of the Convention.

While international law may not be directly enforceable in domestic law, treaty commitments carry a duty to incorporate, and a presumption that their provisions would be construed in the courts, to further their purpose, without undue derogation.

If the government has problems with the Convention, as apparently it does, there is the right to request its revision under Article 45.  It cannot pretend to be adhering to its international obligations while stripping these out of domestic law.  Nor, as the High Court has made clear, can any number of Ministerial declarations regarding the rights and protection of refugees and asylum seekers in another jurisdiction stand up if a legal basis for those rights and protections does not exist in that other jurisdiction, as is the case with both Malaysia and Nauru.

Use of terms in legislation relating to arriving refugees and asylum-seekers such as “unlawful non-citizen” and “offshore entry person”, regardless of the fact that under the Refugee Convention their arrival per se is not “unlawful”, and that they may already be on Australian territory, is prejudicial.  Under the proposed changes it would appear that these persons will be treated as “unlawful”, and the distinction of being on-shore and off-shore will be irrelevant in exercising the new powers of deportation.

While Convention obligations may be excepted on national security grounds, this has to be shown to be the case with each individual applicant, which would be a long shot indeed in most cases.

Yours, etc.

ANDREW FARRAN

Beaumaris, Vic.

Former Senior Lecturer in International Law

Monash University

Richard Farmer on the Gillard Government

Regular readers will know I have a particular antipathy to the whole business of government spin, of the endless repetition of carefully crafted messages full of vacuous phrases like “moving forward”, in the apparent belief that once we have been exposed to them often enough we will begin to salivate like Pavlov’s dogs every time we hear them.  Perhaps some of these people have seen The Manchurian Candidate on too many times for their own good.

As I wrote in Spin undermines government resilience over a year ago, I don’t think these creatures do governments any good, and their pernicious influence helps to reduce the public service to a state of learned helplessness.

I also think that because their style is reactive and defensive, they let the Opposition set the agenda, and lure government into spending too much of its time talking to people who are simply not on its wavelength and never going to vote for them anyway.

I am tired of seeing politicians in hard hats and fluoro jackets on the nightly television news.  Like historian and former Keating speechwriter Don Watson on Monday night's Q&A, I wish they would put them all away and begin to speak to us like adults.

And I think that our political leaders should spend far more time in their offices going about the nation’s business and a vanishingly small amount of time performing stunts and chasing media opportunities.

I have written on this topic and tweeted about aspects of it often, but I don’t think I have yet managed to put the issue as succinctly or compellingly as Richard Farmer in yesterday’s edition of Crikey:

Taking the bait. What do you do when your tactics are completely failing and defeat is looming? Some people might decide to try something different but not the Australian Labor Party. Its response to medicine that makes things worse rather than better is to increase the dose.

The government of Julia Gillard is now a victim of its inability to stop playing politics in the way dictated by its opponents. The Prime Minister seems to believe she has to respond to the bully-boy tactics of Tony Abbott in kind. Insult is matched by insult; distortion by distortion; spin by spin. Running the country is reduced to a series of corny photo opportunities.

The topics for this unedifying national debate are chosen by the Liberals and Nationals. And if opinion polls mean anything at all then Labor is sick and getting sicker.

A radical change in approach is called for. It is time for Labor to become the serious ones that avoid the gimmickry of modern perpetual campaigning. Forget the 24-hour news cycle. Stop the farce of what they these day call "the doors" where members repeat the carefully crafted and meaningless attack or defence words of the day.

Actually answer Opposition questions in parliament as they deserve to be answered, with a brief yes or no normally, without the debating school rhetoric. Abolish Dorothy Dixers from your own side. Let Labor backbenchers actually think for themselves and seek information about things of interest to them rather than raise subjects some whiz-kid thinks will make for a telling grab on the nightly television news.

Let Tony Abbott bore everyone on his own.

Put away the funny hats and fluoro vests. Keep the Prime Minister in her office most of the time and let her out to give an occasional speech that actually says something. And instead of those door-stop interviews, schedule a formal press conference once a fortnight.

Future submarine: informed debate needed.

An unhelpful and regrettably uninformed contribution to the debate about Australia’s future submarine capability, and indeed about the current Collins Class submarines, was made last week by a senior official who ought to know better, and upon whom we ought to be able to rely for public utterances underpinned by careful research and analysis.

In Australia’s mining boom: what’s the problem?, an address to The Melbourne Institute and The Australian Economic and Social Outlook Conference, 30 June 2011, Productivity Commission Chairman Gary Banks had this to say, in a section of his address which canvassed areas which might contribute to fiscal consolidation:

But no doubt there is more low-hanging fruit waiting to be picked. For example, the case for Australia spending $36 billion or so on another dozen homemade submarines, when imported alternatives could be purchased for a fraction of the cost (and risk) has never been adequately explained publicly — notwithstanding the generally acknowledged failure of the Collins Class precedent. The whole area of defence procurement seems ripe for a thorough independent review.

While I would agree with Mr Banks about the need to review defence procurement, his comments about the availability from an overseas supplier of an acceptable future submarine are remarkably ill-informed.  He appears to believe that a submarine is a commodity, like sand or cement – as long as the article travels under the label “submarine” it will do the job.

In fact a submarine is one of the most complex pieces of military equipment in existence, the design of which involves wicked trade-offs between range, capability and stealth. Because of these trade-offs, submarines are carefully designed for the particular roles they are to perform, with equally careful regard to the geographical environment in which they are to serve.

To put it in a nutshell, European submarines are typically built for short patrols in deep cold water.  Australia needs long range submarines, to operate in warm shallow water.  All other navies which operate long-range submarines operate nuclear fleets, so if we want a long range fleet it is going to have to be purpose designed.

As long ago as 2008 a group of some of the nation’s leading experts on submarine design and operation advised the Government that there is no military off the shelf option which will provide the capabilities which Australia requires, and that this will of necessity be a developmental project. The nearest design which meets Australia’s capability requirements is the Collins Class submarine, and accordingly this represents the lowest risk starting point for the development of a new design for the mid-21st century. 

In addition, there is good reason to believe that the United States will refuse to release certain critical technologies for incorporation into a European designed and/or built submarine, for fear of technology leakage.

This advice of these experts informed the Government’s thinking about the requirements for Australia’s future submarine capability and was reflected in the 2009 Defence White Paper. The case which was made and accepted had nothing to do with “skilled job creation or technological spillovers” as suggested by Mr Banks in his presentation – it was purely and simply a clear case of there being no off the shelf option that goes even close to meeting the need.

As for his claim about “the generally acknowledged failure of the Collins Class precedent”, I know of no-one in the submarine world who thinks that the Collins Class was a failure. The Defence Materiel Organisation has never provided enough budget to maintain them properly, but that is another story.

And just for the record, there was no significant cost over-run with the Collins project, notwithstanding the Howard Government’s beat-up to the contrary, which as far as I can discern was intended to demonstrate that the then Leader of the Opposition, Kym Beazley, had made a foolish decision when, as Defence Minister in the Hawke Government, he had opted to have the submarines built in Australia. Of the $1.7 billion allocated to “fix” the submarines following the 1998 McIntosh-Prescott Report, only $143 was for areas where the submarines failed to meet the requirements of a contract well in excess of $5 billion (in other words, to fix the submarines); $300 million was for changed operational requirements and $727 for technological obsolescence (i.e., technological developments which had taken place during the build).

These remarks by Mr Banks were a reprise of a comment he made in his keynote address to the Annual Forecasting Conference of Australian Business Economists in December 2010 (see here), at which he referred to “submarines costing multiples of equivalent imported models”.  The key word there is “equivalent” – the best advice available to the Government that Mr Banks serves is that there is no equivalent imported model. Who told Mr Banks that there was?

Comments by senior commentators like Mr Banks matter.  His recent remarks were enthusiastically quoted by Australian Financial Review Economics Editor Allan Mitchell in an opinion piece on Wednesday 6 July, and by columnist Brian Toohey in a piece posted on Inside Story on 7 July (see Luxury vessels here). And so the notion that building the submarines is an unnecessary indulgence receives further confirmation in the public mind.

There is a debate to be had about Australia’s future submarine, an important debate – so let’s hope that it can be a better informed debate than it seems to be at the moment.

Note: The information cited above about the budget allocations for completion of the Collins Class project was drawn from Peter Yule and Derek Woolner, The Collins Class Submarine Story: Steel, Spies and Spin, Cambridge University Press, 2008, p. 324.  

Foreign investment and food security

The question of whether or not the purchase of Australian farmland by foreign governments or foreign government agencies or enterprises, or indeed by any foreigners at all, will have an impact on Australian food security continues to bubble along in the nation’s political discourse.  Associated with these concerns are claims that the purchase of Australian assets by foreign government owned agencies or companies involves a loss of Australian sovereignty.

The two hot items currently giving momentum to this debate are the purchase of farmland in Western Victoria by a Qatar Government-backed entity, and the purchase of 43 farms outside Gunnedah by the Chinese Government-controlled Shenhua Watermark Coal Corporation, whose interest in these farms is clearly the coal that lies under them.

One of the latest contributions to the debate is an opinion piece by CIS Research Fellow and Senior Lecturer in Economics at UTS Business School Stephen Kirchner, in The Weekend Financial Review, 2-3 July 2011.

Kirchner sees no problem in foreign investment in our farm sector – he says it will enhance our food security – and he sees only base motives in those who wish to “meddle” in commercial transactions and thereby prevent Australian farmers from getting the highest sale price they can for their farms:

What unites politicians on this issue is not so much xenophobia but their conviction they have the right to meddle in commercial transactions they don’t like.

….

Xenophon’s proposed national interest test is more prescriptive than the existing national interest test under the Foreign Acquisitions and Takeovers Act, which is deliberately open-ended.

Ironically, this would open the door to administrative and judicial review of the Treasurer’s unbounded discretion to reject foreign acquisitions that fall within the terms of the act.

This may not bother Xenophon, but it certainly bothers other politicians and Treasury, who want to preserve their ability to meddle without scrutiny by the courts.

…

The FIRB is just a fig-leaf of bureaucratic respectability for political decisions to interfere in commercial transactions and deny the resident owners of Australian equity the right to realise its full value by selling to the highest bidder.

There is some silly ideological stuff here: Kirchner appears to believe that nothing should be permitted to get in the way of a “commercial transaction” – being “commercial” puts it off limits, apparently – and his imputation of base motives to anyone who believes otherwise almost obscures the key policy point he makes in his article:

In the unlikely event of a serious international conflict or crisis, foreign-owned assets in Australia can be nationalised or exports of food restricted.

There are some important issues to be considered in relation to large scale foreign investment in Australia, but as Kirchner’s comment immediately above indicates, they have little do with either food security or sovereignty.

To deal with the latter point first, investment in Australia by sovereign entities or sovereign-owned or –controlled entities involves no compromise to Australian sovereignty. This is because, while the entity might exercise the powers of the sovereign in its own country, it can only be present in Australia as an Australian natural or corporate person, its actions within the Australian jurisdiction entirely subject to Australian law.  Foreign entities farming in Australia, for example, are subject to the same rules about land clearing, control of noxious weeds, plant and animal health, use of agricultural chemicals etc. as everyone else, and to tax laws including those relating to transfer pricing.

Similarly, any entity, sovereign or not, wishing to convert farmland for purposes of mining will be subject to the approval of the responsible State and Commonwealth authorities. There is a debate to be had about whether or not 43 farms outside Gunnedah should be made over for coal mining, but that debate has nothing to do with the fact of the 43 farms now being owned by a Chinese Government-owned company.

Unlike Mr Kirchner I do not believe that nothing should be permitted to get in the way of a commercial transaction and I think that from time to time particular transactions raise important matters of national interest for consideration by the Government of the day.

Nor do I share his view that Treasury officials are motivated in this matter by a desire to meddle. In the days when I was directly involved in advising on foreign investment in mining (1970s-80s, as a senior officer of the Department of Trade and Resources) I was far more often concerned by the desire of Treasury officials not to meddle in transactions that I saw as raising serious national interest questions.  This was particularly the case when John Howard was Treasurer; to my recollection John Howard never saw a foreign investment proposal he didn’t like, and most of the relevant Treasury officials were of a similar view.

As I wrote back in March 2009 about the proposal for Chinalco to increase its stake in Rio Tinto (see State-owned is not the main problem):

The principal reason [why the application should be declined] is not, as often asserted in the media, the fact that Chinalco is a state owned enterprise (SOE), and might not therefore behave in accordance with normal commercial considerations. The most important reason is that Chinalco is a major player in its own right in the international minerals market, which is why it wishes to increase its stake in Rio Tinto, and likely to become more so. Either now or in the future, its commercial interests as a buyer and investor elsewhere might well diverge from the Australian national interest as a seller. We should examine carefully for its potential impact on the national interest every proposal for a major foreign purchaser of minerals to take a stake in the Australian minerals industry.

Issues raised by proposed investments which establish foreigners in a position on both sides of the commercial negotiating table are:

-  Transfer pricing issues

-  Access through taking a minority stake to commercially sensitive price information – very important in relation to monopsony buying practices of the Japanese steel industry before market conditions put market power in the hands of the producers rather than the consumers.

-  Issues to do with foreign government coordination of purchasing by enterprises within their jurisdiction, public or private.  Two examples will suffice:

(1)    In the late 1970s when the contracts were being negotiated, the sum of the amounts that the nine Japanese power utilities wished to take from the Northwest Shelf LNG project was vastly in excess of the amounts that the project would produce. Having secured from the NW Shelf consortium a rather unwise undertaking that they would not sell any of the gas to other than Japanese customers, the Ministry of International Trade and Industry then proceeded to allocate amounts determined by it to the individual power companies, so that suddenly Japanese demand was equal to Australian supply, and there was no price auction. I will leave it to the reader to judge what impact this may have had on the project’s revenue stream.

(2)    In 1986, when China ceased buying all its wool through a single government agency (Chinatex, represented at the Australian wool auctions by the formidable Mme Zhu Youlan) and four separate agencies began to compete with each other in the market, there was a major spike in the Australian wool price – a fact which Mme Zhu in conversation with me attributed to the inter-agency competition.  Clearly the reduced coordination in China was good for Australian woolgrowers.

-  The willingness of foreign executives to abide by Australian Government policy (very difficult in my experience with US companies which for entirely understandable reasons put US laws such as the Trading with the Enemy Act and the extraterritorial reach  of US antitrust law ahead of Australian law).

The above examples should be sufficient to indicate that large-scale foreign investment does indeed raise national interest questions which it is proper for governments to consider.  To those who find it troublesome that the national interest is nowhere defined in legislation, and believe that it ought to be, my response would be that determination of the national interest is properly a matter for the elected government of the day, in the circumstances at the time, and the capacity of a present or future government to determine the national interest should not be constrained by an attempt to define it in advance in legislation at a particular moment in time.  There was a time when State Governments felt that it was in the public interest to legislate that no Asian person can own an interest in a mining lease or a boat, and sooner or later such legislation can become, well, downright embarrassing. As a 1963 article in Time magazine noted (see here):

Whim Creek. The White Australia policy is often carried to absurd, esoteric extremes. Recently, five Japanese technicians employed by a Japanese-controlled mining concern—at, of all places, Whim Creek in Western Australia—were convicted of violating an obscure 1904 law specifying that "no Asiatic or African alien shall be employed in any capacity whatever in or about any mine claim." As a result, Western Australia's state legislature last week repealed the law, but virtually negated its action by adopting an amendment specifying that Asians must still get government permits to work in the mines.

As for those governments who believe that they are increasing their resource or food security by investing in production in Australia, my advice would be that the investment achieves very little by way of security over and above that which can be obtained simply by signing a commercial contract with an Australian-based supplier.

On the one hand, contracts are enforceable at law, and there is every reason for the buyer to expect them to be performed if at all feasible. On the other hand, the Australian Government has clear power under the Constitution to prevent or control exports, and nothing written into a commercial contract will prevent an Australian Government from exercising that power if it saw it as being in the national interest to do so.  In the unlikely event that Australia ever faced food shortages, it is hard to imagine an Australian standing idly by and permitting food supplies needed in the home market to be exported.

There can be all sorts of valid reasons for foreign governments and their controlled entities to invest in Australia, but security of supply is not really one of them.

There can be all sorts of reasons for Australian Governments to decline to approve proposed investments by foreign government entities, but loss of sovereignty is not one of them.