THE DISTILLERY: Rudderless Labor

Like the nation, this column is agog at events in Canberra. A few short months ago, Kevin Rudd was the most popular PM in history. Then, the right advised him to dump the CPRS. His popularity dropped like a stone. Now the right is dumping Rudd. This is government by Newspoll. One wonders if all Labor is achieving is a consolidation of the perception that it has no values, nor judgement.

The shock of Canberra chaos seems to have affected much commentary today with only a stunted crop on offer. The tallest is a comment by John Quiggin in the Australian Financial Review in which he rejects the two causes dominating discussion about the European debt crisis. The first - government borrowing "profligacy” - he cans because "... most countries now threatened by the crisis were, or appeared to be, in reasonably good fiscal shape before the GFC. The Maastricht criteria for admission to the euro zone required member countries to reduce public debt to 60 per cent of GDP, and budget deficits to 3 per cent of GDP. Although these criteria were breached in the aftermath of the 2000-01 recession, they ensured a degree of fiscal discipline ... the ability to dodge the Maastricht rules was largely due to creative financing options provided by institutions such as Goldman Sachs.” The second reason Quiggin dismisses is the current account crisis explanation championed by Paul Krugman. He explains: "But problems with non-optimal currency areas emerge primarily when one country would benefit from an expansionary monetary policy, while circumstances elsewhere require contraction. The entire euro zone needs a more expansionary monetary policy but the ECB, heavily influenced by German political opinion, is still more concerned about the shadow of inflation.” For Quiggin, the primary explanation is that "...banks lent too much money without worrying about the repayment capacity of the borrowers ... whatever the outcome, the main policy lesson is that light-handed regulation of a too-big-too-fail financial sector is a recipe for disaster.” 

This column has sympathies with the Krugman line in-so-far-as an externally applied high interest rate and currency leaves a nation like Greece few choices if it is to sustain competitiveness and employment, even in good times. Whether the impost is the result of the need for high rates elsewhere in the euro zone or historical differences, the effect is the same. However, it agrees with Quiggin's primary conclusion.

Malcolm Maiden of The Age offers new details of the companies set to benefit from the construction of NBN Co: ”Major construction groups that have made the medium-short list include Bilfinger Berger's Baulderstone operation, Downer EDI, Lend Lease-Bovis, Laing O'Rourke and McConnell Dowell. The list also includes two joint ventures set up specifically to bid for NBN contracts, one between Monadelphous and the Spanish specialist construction group Inabensa, and another between Bilfinger's AbiGroup and United Group, as well as the Connect X joint venture between Leighton subsidiary John Holland and Bilfinger, and Silcar, a joint venture between Siemens and Leighton's Thiess subsidiary. The electricity groups Ergon Energy (Queensland), ETSA Utilities (South Australia) and Powercor and SP Ausnet (Victoria) have been asked to bid, and smaller outfits in the hunt for major rollout work include Communications & Fibre, a NSW company that specialises in rolling out fibre; Visionstream, a firm that provides construction and maintenance services to telcos and utilities; the ASX-listed telco maintenance and services group Service Stream, and Jemena Asset Management, a Victorian-based former unit of Alinta that provides asset management and maintenance services to energy groups. Telstra is the only pure telco in the mix ... and engineers Tenix and Transfield have also made it through.”

Next is speculation around Kerry Stokes's participation in the Chinese Ag Bank IPO. Bryan Frith of The Australian reckons "... it involved somewhat more lateral thinking than most would have anticipated – a $US250 million ($A287 million) investment in the pending initial public offering of the Agricultural Bank of China as a cornerstone investor – but it is nevertheless aimed at supporting the growth of WesTrac, particularly its growing operations in China. ABC is the largest rural bank in China and the largest bank by retail customers, with 320 million retail clients ... Business in China revolves around relationships. Stokes has already cultivated relationships with China's politburo and those will only be strengthened by the link with ABC. In addition to its cornerstone investment, Seven has entered into a memorandum of understanding with ABC that will involve a strategic alliance focusing on the growth of WesTrac China's business and the creation of mutual business opportunities for WesTrac and ABC. Both companies will focus on developing financing and leasing for WesTrac China's customers and development of joint business opportunities in China and 'other international markets'. WesTrac will also explore a corporate financing relationship with the bank ... One of the biggest hindrances to date has been the difficulty of financing machinery sales in China, other than through state-owned entities.”

Tony Boyd (Chanticleer) of the Australian Financial Review is far less flattering, noting that "...investors with an appetite for Chinese bank shares were having their doors knocked down about AgBank many months ago ... Stokes could not have been offered stock when everyone else was because he would have had to disclose it in the material presented to shareholders who approved the merger between Seven Group Holdings and Caterpillar distributor WesTrac. The AgBank investment brings with it certain advantages, but one wonders why such a strong partnership started with Stokes behind the eight ball.”

This column wonders exactly what Boyd means by "many months ago”. According to Dow Jones AgBank "... surprised many when it began sending invitations to banks in April to underwrite its IPO.” The same month Stokes pushed through his merger. It's possible the timing was propitious for both. Click here to read more.

Following on from yesterday's revelations that the Resource Super Profits Tax (RSPT) is likely to be modified across different commodities, Matthew Stevens of The Australian quotes from the Minerals Council of Australia KPMG report to assess "... the likely impact on mining projects of a tax that is more like the PRRT than it is the RSPT. The analysis, conducted by KPMG, suggests the miners would have little to celebrate in the flagged government 'concessions'. For example, KPMG assesses that the proposed RSPT effectively cuts the net present value of an iron ore or coal project by 46 per cent and 57 per cent respectively.”

This column will simply note how passing strange it is that Stevens doesn't quote from the report by the same economic consultancy that supported the government's case for the tax.

Still on the tax, and Michael Stutchbury of The Australian uses long-winded arguments to conclude on a point that is, in this column's view, already largely made: that the RSPT co-investment model increases sovereign risk in the long run as government rebates for mine losses in a downturn are unreliable.

Ian Verrender makes a righteous plea that ASIC investigate insider trading surrounding Telstra's NBN Co deal without holding out any hope of such. He reckons ASIC's "... biggest failing is its culture. You wouldn't appoint anyone other than a policeman to run a police service. So if you have a corporate lawyer running a corporate regulator, is it any wonder that the organisation focuses on civil lawsuits and financial settlements?”

Today's most popular subject is Perpetual, with John Durie of The Australian, Elizabeth Knight of The Sydney Morning Herald and Tony Boyd all having a go. The upshot? Departing CEO David Deverall did OK but Perpetual remains wedded to Australian equities. It's key risk is, therefore, the departure of its star stock-picker, John Sevior.