Chris Styles

In early June, taxis in London, Paris, Berlin and Rome protested against the tech start-up, Uber. The protest hit Washington on June 26.

Uber allows customers and private car-owners to find each other via a smartphone app, providing an alternative to a traditional taxi service. Taxi drivers and owners think it unfair that new business models, such as Uber, are allowed to effectively bypass regulations, lower barriers to entry, undercut prices, and as a result substantially lower the value of expensive taxi licences.

The real story behind Uber – and companies like it – is that it has found a more efficient, higher-quality solution to a customer problem. Uber now operates in 138 countries, including Australia, and is worth around A$17 billion.

Welcome to the world of disruptive innovation.

Dell, Amazon, eBay, Google and Uber have all been part of an unstoppable digital disruption of traditional industries. The question for all of us is: “How do we respond?”
There are probably three broad answers:

1. Deny it’s happening.
2. Push back and complain that it’s not fair.
3. Be part of it.

1 and 2 just delay the inevitable. But the reality is that so often the industry disrupters are not the incumbents. So, is 3 possible?

The present response by corporate incumbents has been interesting. Telstra, for example, has established Muru Digital (Muru-D), a start-up incubator. Telstra has said the goal is not just to identify fast-growth ideas for the company, but also to expose it to innovation and new thinking more generally.

The Commonwealth Bank has borrowed from the digital industry and run “hackathons” to generate new ideas that are implemented rapidly.

The university sector is certainly not a bystander in all of this. Our business model is being disrupted by digital learning, private education providers, emerging high-quality regional and global players, as well as research institutes and think tanks.

And the federal government’s May budget has signalled that domestic undergraduate university education is headed towards a true market-based system.

If we teach our students the benefits of markets and competition in other sectors, we have to embrace it in our own. This means thinking hard about our value proposition to students, the business community and society more generally, and ways to deliver on that value proposition.

We, like others, will need to challenge our long-held assumptions, experiment, be prepared to fail, and embrace new ways. That is, innovate.

We also have another role. If our mission as a leading business school is to enhance business practice through our research and teaching endeavours, then we need to make sure we are producing graduates and new knowledge that encourages and supports innovation and disruption.

This is perhaps one of the biggest opportunities presented by the new world in which we live.

Chris Styles is Dean of UNSW Australia Business School and a professor of marketing.

Rafal Chomik and Hazel Bateman

A good proportion of the Financial System Inquiry’s 460-page interim report is dedicated to a discussion of superannuation and, in particular, to making the financial system better at facilitating the conversion of super into retirement income.

Currently, the system does poorly. It does not meet the risk management needs of retirees. They have few options if they want a stable income after retirement that is insured against longevity, investment and inflation risk.

Indeed, existing rules impede the development of such products. It may make sense in principle for a retiree to insure against outliving their savings by buying a “deferred annuity” consisting of an income stream that only starts paying out in 20 years’ time.

But this would not be a wise move if (as is presently the case) the Age Pension means test deems that they are receiving that income in the intervening 20 years, and lowers their interim pension as a result.

The inquiry correctly identifies these issues as part of a wider problem of policy inconsistency: on the one hand, tax-advantaged retirement savings and default fund and portfolio allocations are mandated because we recognise we are subject to under-saving and behavioural biases. The majority never have to interact actively with superannuation during their working lives.

On the other hand, retirement income decisions and risks are left entirely with individuals at the moment of retirement.

The report puts forward four options, some of which are expected to become solid recommendations when the inquiry submits its final report in November 2014.

These range from the full flexibility but limited risk management of the status quo (where individuals use super savings as they see fit, with some improvement in financial information, advice and education) to the limited flexibility but full risk management of compulsion (where some savings must be used to buy a longevity-protected product).

In between these extremes are two other options. The inquiry flags the possibility of incentivising longevity-protected products via tax or the Age Pension means test. But benefits from super are already tax-advantaged so incentivising longevity-protected products may require raising taxes on other income streams and lump sums.

This could tie in with addressing another concern noted by the inquiry: that the tax arrangements within the superannuation system are being used for estate planning rather than for providing retirement incomes. Super taxes may be an area that the government’s proposed tax review will also look at.

Finally, the inquiry opens the door to a full discussion of instituting a default for decumulation of super. A single default would not suit everyone and there are fiduciary concerns about automatically committing individuals to a given decumulation product, but an opt-out would be available and elements tailored to individual circumstances could be included.

Also, only a proportion of savings above a certain threshold may be subject to the longevity-protected product default. These can guide those who are less engaged and offer flexibility to those wanting to make their own decision.

We know from research that defaults have a strong behavioural effect – often more so than financial incentives. A recent online experiment, led by the Centre of Excellence in Population Ageing Research (CEPAR), showed that in a decision to allocate assets between an account-based pension and an immediate annuity, individuals were most likely to choose the default option.

Such products, perhaps combined with a tendering process (seen in countries such as Chile and Singapore) for the most competitively priced, may yet provide value for money with the right mix of flexibility and risk management, regardless of a person’s level of financial capacity, engagement or superannuation balance.

Rafal Chomik is a senior research fellow at CEPAR at the Australian School of Business (ASB). Hazel Batemen is an ASB professor of economics and head of the school of risk and actuarial studies. A version of this post appeared on The Conversation.

Tim Harcourt

When Japanese Prime Minister Shinzo Abe was in Australia recently to talk trade and investment in Canberra and sign a free trade agreement (FTA) between the two countries, it kickstarted a relationship first formed in 1957.

Back then, the Japanese trade minister Abe (the present prime minister’s grandfather) negotiated the Commerce Agreement with John “Black-Jack” McEwen, Australia’s Country Party deputy prime minister and trade minister, which enabled Australia to finally embrace its geography and take commercial advantage of the industrial giant that Japan later became.

In 1957, with the memory of the Pacific war still in everyone’s mind, and with cold war tensions afoot, it took great courage to negotiate the deal and, as it turned out, great foresight given Japan’s subsequent economic development.

Now, Abe knows he needs Australia as an economic partner to achieve his current goals to revive Japan’s growth and the Japan-Australia Economic Partnership Agreement (JAEPA) has plenty on offer for both countries, particularly in agriculture and services.

For its part, Australia has been seeking cuts in tariffs and non-tariff barriers and more openness in Japan’s previously closed rural and services markets for some time, while Japan needs energy security from Australia – particularly in terms of liquefied natural gas,  given stiff competition from both South Korea and China.

But there are a number of other potentials. The first one is foreign direct investment. A more open Japanese economy will give Australian companies better opportunities to work in-market in Japan. According to the Australian Bureau of Statistics, only 3053 Australian businesses export to Japan (a number that has fallen by more than 500 companies since the GFC), and according to Sensis, 14% of all Australian exporting small and medium enterprises sell to Japan.

Fewer than 100 Australian businesses have offices or investments in Japan (compared with more than 3000 in China, for instance) despite Japan having a long-held position as Australia’s number-one export destination until very recently.

Another opportunity is finance. In a paper for the Lowy Institute, Huw McKay and Malcolm Cook point out that Australia and Japan are both regional leaders when it comes to the size and sophistication of their financial markets. China may be growing but their market is still in its early stages of development. Particularly as there have been frequent calls for reform of the world’s major economic institutions, Japan and Australia could play a key leadership role in financial issues facing the Asia-Pacific region.

While Australia-Japan trade flows are dominated by resources, there’s clearly room for expansion in trade in services between the two nations. During his term, former prime minister Junichiro Koizumi introduced a number of reforms in areas such as education, healthcare and government services that had been regarded as “untouchable” parts of the Japanese economy.

According to a local services sector expert, professor James Kondo of Tokyo University, Australian exporters have a comparative advantage in many areas that will open up: “The healthcare, wellbeing, education and the lifestyle sectors have traditionally been closed in Japan, but this will soon change to Australia’s benefit,” Kondo says.

A demographic phenomenon known as “freeters” may also play its part. While Japan is often talked about as the land of the greying sun because of its ageing demographics, there is an influential younger generation with different attitudes to travel, culture and work.

This is particularly evident in the labour market, where the Japanese tradition of lifetime employment and salary-men working for the same company has been replaced by the freeter phenomenon, where casual employment and ever-changing jobs and careers are changing the dynamics of the Japanese employment relationship.

There has been debate about the freeter concept. Some older scholars have claimed it is the choice of younger people to not be tied down to one employer or one job, while many freeters claim that they would prefer more job security but cannot find permanent positions because of the changing nature of work in Japan.

Nevertheless, the freeter phenomenon has opened up opportunities for Australian service exporters specialising in job placement and career services.

For example, Australian Terrie Lloyd, president of Linc Media, who set up (and later sold) an online recruiting company, Dai-job.com, aimed at freeter job-seekers. He sees this as a boom market because “traditionally, Japan engineers society, but now Japanese society is opening up in a manner that is neither engineered nor controlled”.

Lloyd believes the rise of the internet, mobile phones and SMS messages is “setting up a whole new youth sub-culture based on the information revolution which is more open to Western influences than ever before”.

Despite the potential gains to be had from the JAEPA – early studies estimated it to be worth A$39 billion and A$27 billion to the GDP of Australia and Japan respectively – there is still little awareness about the agreement, especially compared to talks with China.

In fact, according to a survey by logistics company DHL, only 35% of exporters thought an FTA with Japan would benefit their business, compared with 61% who were positive about a China-Australia FTA.

But there is some early evidence of “head-turning”, with 59% saying that once the potential FTA with Japan came into being, they would increase exports to Japan, while 22% of total exporters said they would now start exporting to Japan as a result of JAEPA. In addition, 22% said they would develop a new product or service specifically for the Japanese market.

Japan enabled Australia to have a beachhead into the region in the second half of the 20th century, now Japan and Australia will again be key players and partners as Australia tries to cement itself in the Asian century.

Tim Harcourt is the J.W. Nevile fellow in economics at the Australian School of Business and author of The Airport Economist. A version of this post appeared on The Conversation.

Peter Swan

A passer-by happens upon a drunk searching for a lost wallet under a streetlight. With nothing in plain sight, the passer-by asks, “Where did you drop your wallet?”
“Over there,” gestures the drunk across the street, “but I’m looking here because this is where the light is.”

We often look for answers in the easiest place and not necessarily where the answer is to be found. As marketing moves from subjective art toward objective, data-driven science, are we seeing the emergence of a streetlight effect? Are even the very best big-data driven practices guilty of asking the wrong questions of the wrong data?

Most companies turn to analytics when early growth starts to slow. The familiar refrain, “Let’s make better use of our existing data”, heralds the onset of maturity, when the halcyon early days of triple and double-digit growth are well and truly past.

Initial questions asked of big data are typically, “Who are our best customers?” and “Which products are most profitable?” It soon becomes clear that performance differs by region, season and a host of other factors. So, it’s not long before we want to know, “How do quarterly sales in region A compare with region B, on products X, Y, and Z?”
Next comes propensity to respond (PTR) modelling, used to classify prospects for acquisition, cross sell, churn, or fraud. Where they exist, single customer views enable an entire family of PTR models used to determine next best actions.

Competing marketing priorities soon warrant marketing mix modelling (MMM), to estimate the marginal product of advertising spends across different channels.  Next, MMM naturally leads to attribution modelling, to estimate how each channel contributes to the final sale.

The current holy grail of big-data driven marketing is to offer in real time the most likely product, at the most likely price, to the most likely customer, at the most likely time, via the most likely channel.

But, does big data and analysis make sense in the first place? Like the drunk under the streetlight, have we been seduced into looking for the answers where it was easiest.  Namely, in the data we gathered from past sales to previous customers. But is this relevant for understanding future sales to future customers?

Nothing in the customer data gathered, or in the way it is presently being analysed, addresses the fundamental consumer desire to find the best available combination of price and product with the lowest search cost. All that segmenting and clustering and PTR scoring leaves our future consumers cold, stranded, outnumbered – feeling besieged and beset upon.

Consumers are boundedly rational humans optimised over generations for “fight or flight” and not for solving the n-dimensional optimisation problem that is rational consumer choice.

Tasked with buying a car, my siblings, with common genetic and environmental influences, will likely arrive at different consumption choices to mine. If those closest to me exhibit different preferences, then why are these “previous customer” strangers with no overlapping nature or nurture to me being used to suggest products for me?
Why model the choices of thousands of people I don’t know, and who don’t know me, in an effort to suggest products to me?

No consumer identifies with the clusters or segments thrown up by maximum likelihood (ML) models. All this ML exertion belies the constant state of flux wrought by Adam Smith’s invisible hand, and writ large in every single consumption choice.

It is a complex and rapidly changing world we inhabit with little known by these analytical models about my current preferences and circumstances.

The circumstances of markets, like those of individuals, can change in an instant.  Products sell out, forcing consumers to choose from what’s available or to wait. Products stagnate. Promotions and discounts alter the relative attractiveness of one product compared with another, stimulating sales of one and depressing sales of another.

Individual finances wax and wane as personal circumstances alter. Each and every purchase decision is a moveable feast. Even simple choices become rapidly complicated.  Little wonder consumers throw their hands up and head for the safe harbour of brand, or convenience, or availability.

The data we should be analysing − small data − is the time varying vector of product attributes and prices. This is the data consumers – your customers and your competitors’ customers – are using when choosing.

To the extent of their ability, each consumer is assessing, comparing and evaluating the products and services on offer as bundles of attributes with their corresponding “shadow prices”. Trading this attribute off against that, trying to identify the best combination of attributes with their shadow prices to suit oneself, taking into account one’s own dynamically altering preferences over the attributes and one’s own changeable circumstances.

What you should be doing is maximising the net utility of your potential customers, depending on the attributes of your product.
Analysing customer data to minimise the error of estimation, isn’t helping your customers to solve their problems – it is proliferating them. The manifold combinations and permutations are adding to the burden, not lightening the load.

Customers will pay you with their custom, for simply reducing their search costs. Faced as they are with overwhelming choice, customers want up-to-date, reliable, valid and trustworthy recommendations that embody their own personal preferences and budgets that are instantly available.

Peter Swan is a professor of finance at the Australian School of Business and co-inventor, with data scientist Stuart Dennon, of Choice Engine.

Chris Evans

The international tax architecture, as it relates to the activities of multinational corporations, is horribly out of date. It should be condemned as no longer fit for purpose. 

The structure was designed more than 80 years ago in an industrial age when multinationals operated across the world as separate legal entities and the major concern was to prevent double taxation – where the same profits ran the risk of being taxed in more than one jurisdiction. 

But it cannot cope in the digital age where those multinationals are now economically and operationally far more integrated, and able to use mismatches and asymmetries between the tax rules of national jurisdictions to achieve the tax planning nirvana of double non-taxation. 

The ability of multinational companies to drive a coach and horses through the international tax rules – most recently highlighted in the media by the sort of perfectly legitimate profit shifting strategies allegedly adopted by mining magnate Glencore, apparently to reduce its tax on corporate profits of more than A$14 billion to zero – poses a serious risk to corporate tax revenues for all countries, undermines tax sovereignty and adds to the perceptions of an unfair tax system for ordinary taxpayers. 

The corporate tax base, comprising about 20% of all tax revenue and principally derived from the larger corporates, is particularly important in Australia. Changes to the tax mix (possibly even in the form of broadening the GST base) may be inevitable, but as a nation we should not lose the capacity to continue to derive vitally needed resources from the big end of town.

Although we can attempt to shore up existing international tax arrangements with unilateral and bilateral patchwork renovations – such as, by revising the thin capitalisation, transfer pricing and general anti-avoidance rules, by tightening up on tax treaty provisions, or by exchanging more information across international borders – the better resources, in the form of high-quality advice available to the multinationals and the lack of access to key information about group structures and transactions, means that revenue authorities are always playing catch-up.

All too often changes to specific and general anti-avoidance provisions by governments are too late – the stable door is being closed well after the horse has bolted.  A better and more imaginative process might be to tear down the existing regime and re-design and re-build it on a multilateral level.

Australia’s tax system is creaking under the strain of globalisation and we need to act radically and in concert with other countries to plug revenue holes.

Australian governments shouldn’t get too distracted by a planned global crackdown on ‘base erosion and profit shifting’ (BEPS) prompted by the increasing ease with which firms such as Apple and Google can shift their intellectual property and profits to the lowest tax country. It may be high profile, but in the general scheme of things the G20 and OECD approach to tackling BEPS will not get us very far. 

Ultimately there is a tension between the enhanced international collaboration required by the BEPS approach and the natural urge of each country to provide a low rate and highly competitive tax environment to attract the multinationals to locate within its borders. That tension can only lead to lowest common denominator compromise outcomes from the BEPS approach.

We may need to be a bit more imaginative in how we deal with the problem.  For example, the problem stems from the fact that multinationals are treated as if they are a series of separate entities operating in different tax jurisdictions for tax purposes. That permits them to easily shift their expenses to high-tax countries (where they are worth more to the company) and their income to tax haven jurisdictions where they will pay little or no tax. 

If, instead, a multinational was treated as one single global entity and had to make a consolidated report on all its activities to all tax authorities for the countries it operated in, then it would be a relatively simple task to stop this tax arbitrage activity. 

A portion of those consolidated profits could be allocated to each of those countries on the basis of predetermined factors, such as agreed weighted formulae based on the number of employees, amount of sales or physical assets in each of those countries. 

Each country could then tax their share of the profits at whatever rate they deemed appropriate and put an end to the extensive game-playing that presently bedevils the international tax scene.

Chris Evans is a professor of taxation in the Australian School of Business. This article is based on a presentation made to The Australian/Melbourne Institute 2014 Pathways to Growth, Economic and Social Outlook conference.

Fred Hilmer

Concern that competition might suffer in the current privatisation push by state governments revives an issue we wrestled with in the National Competition Review I led in the early 1990s.

The warning from Australian Competition and Consumer Commission chairman Rod Sims that he would oppose privatisations unless competitive structures and pro-consumer regulations were in place has prompted a robust response from Victoria and NSW, with assurances that appropriate safeguards are being implemented.

But the issues involved are complicated. Almost half of our 1993 National Competition Policy Report dealt with the complex policy responses to monopoly structures, particularly those in public ownership.

There is often genuine confusion between privatisation and competition reform, with an assumption the move from public to private ownership will automatically lead to lower costs and lower prices. But while both head down the lower-cost route, only one – competition reform – delivers lower prices.

We need to treat privatisation and competition reform as separate but related concepts. And I believe we need both.

It is possible to contend there can be an effective competitive structure, such as multiple generators in electricity, or access regimes for ports or rail beds, even where the assets stay in public ownership.

This was our review’s position, but it is one that I have recently argued, on the basis of the past 20 years of experience, is wrong.

While competition matters, so does ownership if productivity gains are to be maximised to the benefit of consumers. The electricity industry in NSW is a case in point. Multiple generators, all in public hands, were not a great success.

The potential for ministerial involvement was always present, despite assurances this would never happen. Management never had the freedom to act, innovate and take the risks that private ownership would allow.

However, the reverse is also true. Ownership matters, but so do market structures and pro-competitive regulations such as access regimes. Otherwise we merely shift the monopoly from public to private.

Certainly privatisation brings benefits. There is the clarity of purpose a commercial board and owner provides. There is the willingness to take risks without concerns that there will be “electoral consequences”.

We have seen governments, subject to electoral pressures, avoid blackouts by overbuilding generating capacity, leading to poor capital productivity. Red tape – convoluted approval processes for key financial and investment decisions – further limits the performance of public entities.

But while private ownership alone may reduce costs and increase operating profit, consumers don’t necessarily benefit. The big winners from private monopolies are the owners, not the public.

Admittedly there is a one-time benefit to the community from the higher price received for a monopoly right. Because the monopoly has value, the state receives a higher price than would be the case if a competitive structure was created. It is argued the higher price, reflecting the present value of the stream of monopoly rents, compensates the public for putting up with monopoly pricing.

There are two problems with this. First, the premium for public monopoly rights should be heavily discounted, as governments can change regulation – a point clearly understood by taxi owners, pharmacists and owners of gaming licences.

Second, the privatisation benefits in terms of efficiency improvements are unlikely to be enjoyed by consumers, unless there is a competitive incentive structure in place. In addition, these efficiency improvements are heavily discounted in setting a bid price for public assets.

Hence, Sims’s point that privatisation and competition reform must go hand in hand. Independently, both can provide economic benefits. But the real gains in productivity and consumer welfare come when both ideas are implemented in a complementary way.

Moreover, it is crucial that competitive arrangements are adopted at the proposal stage, before assets are privatised. Public monopolies can be restructured by parliament. To deal with the negative effects of private monopolies is much harder.

Fred Hilmer is vice-chancellor of UNSW Australia. A version of this post appeared in The Australian Financial Review.