Part of the solution to ending corruption from the likes of Eddie Obeid is to eliminate the financial incentives for such practices, writes Karl Fitzgerald.
THE RECENT CONVICTION of former Labor Minister Eddie Obeid shows a clear connection between economic “rent-seeking” and white-collar crime. We see these patterns of corruption over and over — usually it involves donations to politicians, alongside strong social connections. As a factional overlord in the NSW ALP, Eddie Obeid didn’t require donations — he was already inside the tent.
Beyond his crimes, Obeid’s actions revealed three examples of rent-seeking. In each of the deals for which he was investigated by ICAC, he attempted to manipulate business dealings to enable what economists call “unearned income”. These are excess incomes delivered due to no productive activity of the owner — returns above the cost of production (also known as economic rents) that have no direct association with product improvements or efficiencies.
The lure of unearned incomes attracts corrupt influences to particular segments of the economy, where market power can be expanded for substantial returns. Such behaviour undermines democratic practices. Former NSW Premier Gladys Berejiklian is the latest to feel the political fallout, thanks to her partner Daryl Maguire’s lobbying for property interests.
Obeid received a minimum of three years and three months for conniving with former Mining Minister Ian Macdonald to award a mining license to the recently purchased Cherrydale Farm. Obeid’s family investment vehicle, Locaway Pty, was the owner of the site in the lush Bylong Valley. The previous owner, John Cherry, was a tax advisor to Kerry Packer.
Locaway stood to make $60 million from the land and its associated mining license. The mining license was quickly cancelled by Kristina Keneally’s Government once the rumours gained footing.
Obeid only recently left prison for his role in strong-arming a Circular Quay lease, another example of Obeid breaking the law in his quest to increase his unearned wealth. He had received a five-year sentence for lobbying successive Ports Ministers to roll over a valuable lease renewal process. The leases should have been revalued at the going market rate.
The rollover saved the Obeids thousands in lease payments to the state, defrauding the taxpayer. It also added about $3 million to the valuations of the cafes they were trying to offload at the new premium. These are all economic rents.
The third example of Obeid’s rent-seeking involved his $3 million interest in Australian Water Holdings and their attempt to form a public-private partnership (PPP) with Sydney Water. A cabinet decision went against Obeid and his response was to lean on other factional members to alter the minutes, giving them approval for the PPP.
The cabinet meeting had minuted how the AWH deal would have cost Sydney water customers millions of dollars. If AWH had won the contract, the Obeids would have made millions in a contract that, yet again, provided unearned economic rents.
Obeid is not the only corrupt economic rent-seeker. The pursuit of unearned incomes (rezoning windfalls) led to the John Woodman scandal in Victoria. The same can be seen with former NSW Sports Minister John Sidoti, who is also in trouble for pushing a rezoning decision for land his family owned near a train station. One could also look at Leppington Triangle, or conservation offsets at Meridolum to see the same traits at play.
These practices have been going on for centuries. 140 years ago, elected representatives in Melbourne pushed for tram or train lines to run past their properties, often making strange turns that made little sense in terms of logistics, but huge cents for property-owning politicians. Thomas Bent was one such dominant landholder, ensuring as Minister for Railways that a dual railway line extension was duly put through Brighton and into Sandringham. ‘The value of Bent’s and all other land in the area soared to new heights’ (The Land Boomers, Michael Cannon).
The use of a windfall gains tax, as seen in the A.C.T. and under discussion in Victoria, could deter the pursuit of questionable mining leases or density bonuses if half the money was returned to the public. If the public grants a change of land use, then the public should get a share in the windfall. With asset prices reaching such stratospheric heights, we must create effective barriers to such honeypots.
If governance was targeted effectively, the market power attending such public approval would be accompanied by a tax burden that levels the playing field across industries.
Instead, governments themselves have become willing participants in the game of monopoly, often “fattening the pig” before privatisation. The sale price of the Victorian Land Titles Office was supported by a significant increase in conveyancing fees prior to sale. Likewise in the privatisation of the Port of Melbourne, the significant increase of stevedoring rents, alongside the government contestation of port valuations designed to minimise land taxes, helped the short term aspirations of the State Government claim an extra $2.7 billion.
This led ACCC’s Rod Sims to state:
“Now, we seem to be in a world where you’re privatising to maximise the proceeds of sale — which is fine if you’re selling your car. It’s not fine if you’re a government and you’re limiting competition, you’re closing off competition so you get a higher price for the asset and having created a monopoly, not regulating it so that it’s got unfettered market power.”
Whether there is public or private rent-seeking, the cost to the economy is seen in higher prices that undermine our international competitiveness.
Eddie Obeid is a symptom, not the cause of the problem. To really root out corrupt practices, we need to remove the incentives for such behaviour. Until there is systematic change, more rent-seekers like Obeid will continue to grease the wheels of democracy for their own personal gain.
Karl Fitzgerald is the Director of Research at Prosper Australia, an NGO focused on economic justice in the face of monopolistic control. Karl has expertise in vacant housing and property speculation. He broadcasts the monthly Renegade Economists podcast.
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