8.1
This chapter discusses corporate decentralisation, and more broadly, private investment in regional Australia. It provides examples of private companies that have relocated from a capital city to a regional area, or have established themselves from the outset in a regional town.
Defining corporate decentralisation
8.2
Corporate decentralisation does not simply mean relocating from the cities to the regions. It can be much more complex and subtle and may involve:
relocation of a private entity in its entirety from a capital city to a regional town;
establishing a part of a private entity (office, branch, function) in a regional town, while retaining some presence in a capital city; and/or
establishing and retaining a private entity in a regional town only.
Moving existing operations
8.3
The Economist observed that corporate decentralisation can mean either the transfer of an industry or business to a region in its entirety, or the decentralisation of divisions or sections while still maintaining a head-office in overall charge of the operation:
Decentralisation is the process of distributing power away from the centre of an organisation. In the case of a corporation this usually means divesting authority away from the head office and out to operators in the field. Debate centres on which is the more efficient structure for an organisation that has a number of far-flung arms, especially a multinational with operations in several different countries: one where decision-making is concentrated at the centre, or one where it is diffused around the organisation?
8.4
In the context of this inquiry, corporate decentralisation is more about businesses re-locating to the regions or to regional cities rather than the major population centres of the state capitals.
8.5
However, it can also mean that a corporation maintains its head-office in a state capital but has decentralised some or all of its operations around the country. In each case, it is about corporations making investments in regional Australia that are of benefit to those regions not only in terms of direct employment, but also in terms of indirect employment and development as a result of those investments.
8.6
The key to regional development is to facilitate economic development and corporate investment in regional areas. Growing regional economies unlocks their potential from which the whole nation will benefit. While there may be a need for some government investment in terms of fundamental infrastructure, the best way of developing the regions is through the private sector rather than by relying on government agencies and/or public sector decentralisation.
‘Home grown’ regional businesses and industry
8.7
The Committee acknowledges private enterprises that have established themselves in a regional town or city, without any connection to a capital city. In other words, the private enterprise has always existed in a rural or regional location.
8.8
As an example of this natural, organically driven economic development, the Warwick Chamber of Commerce attributes much of its recent growth and development to private sector investment. Its submission also notes that private investment of $200 million in the Toowoomba airport has generated interest in development of infrastructure to support growth in local manufacturing and agribusiness for local, state, national and international export and trade.
Conditions for corporate decentralisation
8.9
The Committee was consistently told that the best thing the Commonwealth can do to facilitate corporate decentralisation is to create the right conditions and policy framework for private entities to invest in regional Australia.
8.10
The Committee shares this view. It will predominantly be the private sector that drives economic and social development in rural and regional communities. Government therefore needs to support the private sector to facilitate this development.
8.11
Many of the conditions necessary for rural and regional areas to develop have been canvassed in previous chapters. They include:
strong physical and digital connectivity;
quality amenity and reasonable services;
human capital, including an educated and skilled workforce; and
foundation institutions such as universities and government agencies.
8.12
The NSW Famer’s Association highlighted this point in its evidence to the inquiry:
Improving the general services and vitality of a town will help to attract greater regional investment and increase the sustainability of regional businesses and local entrepreneurial activity.
There is a chicken and egg problem here which can be addressed by smart strategic initiatives. Corporate organisations just like regional communities require incentives, services and amenities to attract workers and private capital to areas of investment.
Regional development priorities
8.13
The Committee heard that one strategy the Commonwealth can implement to strengthen private investment in rural and regional communities is to identify a list of regional development priorities. It was noted that while Infrastructure Australia publishes its infrastructure priorities, many are ‘motorways in the already crowded metropolitan centres’.
8.14
Instead, it was suggested that the Commonwealth consider prioritising and identifying, in consultation with state governments, investment that allows regional economies to grow. Mr Jack Archer told the Committee:
We don't have an agreed set of development priorities for each region. It really is missing…. we need a simple set of top-three development priorities for each region, where there's some agreement between the Commonwealth and the state and where we're focusing investment where we know we're going to prioritise those things.
8.15
Establishing a list of national regional development priorities would provide certainty for rural and regional Australia. This certainty would allow private companies to make the best decisions on how and when to invest in regional Australia. The Committee was told:
It would send an enormous signal to the private sector to say, 'The government's making a long-term commitment to this pathway of development for this place.' If I put my capital in and the local government is committed too, things like that make an enormous difference to the extent to which the private sector is looking at these places and saying, 'This is somewhere I should be for 10 or 20 years.'
8.16
The Committee supports this idea. It is included as part of the Committee’s strategy for regional development discussed in the following chapter.
Successful corporate decentralisation
8.17
The Committee enjoyed hearing private entities talk about their experiences of corporate decentralisation. In particular, the subsequent relationships formed with rural and regional communities, and the value they bring to these regions. Set out below are some of the stories shared with the Committee.
Case Study: Vic – True Foods
True Foods is a 100 per cent Australian owned and operated family business that was established in 2001 as a specialist manufacturer of flatbread products. True Foods has grown to become the largest Australian owned manufacturer of tortilla wraps, flatbreads and bakery snacks. Innovation is a driving force of True Foods, and True Foods supplies a broad range of partners – from large multinational supermarket brands and international franchise groups to weight loss companies and health food chains.
In late 2011, True Foods purchased a major production facility in Maryborough, regional Victoria. The 27 acre site has 3 acres under roof, and has facilitated growth in the True Foods workforce and production capabilities. True Foods now employs 250 people, and has an annual turnover of around $50 million. True Foods continues to invest in new capabilities and capacity to bring innovative products to market.
True Foods enjoys a strong working partnership with Laucke Flour Mills, with significant collaboration on many of the technical aspects of flour right across the supply chain.
Locality is a key factor in enabling strong collaboration between Laucke and True Foods. Laucke is located in Bridgewater on Loddon, which is only about 40 minutes by road from True Foods in Maryborough. This assists many areas of collaboration, including in product development.
Hofmann Engineering
8.18
Hofmann Engineering is an example of a family business that initially established in a state capital before expanding and diversifying into the regions.
8.19
Hofmann Engineering is a specialist engineering company that was started in Perth, Western Australia, in 1969 and now operates in five cities (including overseas), employing over 500 people. In 2010, the company established its eastern operations in Bendigo, Victoria. In doing so, it created approximately 65 local jobs in heavy engineering.
8.20
Hofmann Engineering was referred to in the Committee’s Issues Paper. Mr Samuel White, General Manager of Hofmann Engineering, told the Committee that:
… we are quite proud to be recognised for what we see as our day-to-day business.
8.21
He then explained the company’s business model which has a strong emphasis on return investment on profits and research and development:
What differentiates us from a few others is that we have no debt. We only put out profit and we have always put the profit from the company back into growth. Normally we spend between a third and a quarter of our turnover on research and development—as I said: cutting edge.
8.22
Mr White also emphasised the company’s strong focus on training and retaining staff:
Ten per cent of our workforce are and always have been some kind of trainee, apprentice, cadet or engineer... The reason why is that we have no future if we are not going to train others. Unless we can get others into that same mindset, then, don't complain in five years’ time that you don't have the right tradespeople or the right mindset or culture, if you didn't teach it.
… How do we train middle management? In general, the best engineers we find are the ones who come through their trade and then go and study engineering. We have second and third generation employees where the supervisor might be grandad, the foreman is dad and the son is the apprentice. You don't hear about that in Australia any more, but the model is already there. The model is there in Europe. John Hofmann was taught the model in Europe and he brought the model here and kept it here in Australia.
8.23
The model being described here is classic German Mittelstand. Mittelstand has a broad definition, but these mostly small to medium size businesses usually show the following characteristics:
are generally private, family run companies that specialize in one product or service;
this strong family ownership structure enables companies to make decisions quickly when it comes to investment and devote a higher proportion of turnover on research and development;
they are less driven by capital markets, therefore they invest in the longer term and tend not to be driven by short-term profit seeking;
they may do only one thing, but do it very, very well;
many place a strong focus on exports and will have offices and subsidiaries across the world; and
they have deep ties with their local communities with a strong bond between employer and the employees.
8.24
In the context of this inquiry, it is interesting to note that the bulk of such businesses in Germany are not located in the major metropolises of Berlin, Hamburg, Cologne or Munich. Rather, most were founded and are headquartered in small to medium sized regional cities. For example, Wertheim, a city of 24,000 people, has 11 companies which are ranked amongst the top three in the global market or are European leaders in their field. Indeed:
Over 70 per cent of Mittelstand firms are family owned and located in smaller cities or regional towns. Their average age since foundation is around 70 years. The annual growth rates in revenues for these firms over the past twenty years have generally been twice that of the larger listed German firms.
8.25
The Mittelstand model, while certainly successful, is a result of a particular business culture and mindset. The example of Hofmann Engineering shows that this model may be applicable to regional Australia.
Macquarie Bank’s Paraway Pastoral Fund
8.26
The Committee’s Issues Paper also noted that Macquarie Bank’s Paraway Pastoral Fund was re-located to Orange, NSW, in 2015 taking staff from Sydney and across NSW, as well as employing people from Orange.
8.27
In explaining the relocation, Mr Jock Whittle, Chief Executive Officer of the Paraway Pastoral Fund, said Orange was chosen because the fund needed a regional presence. In identifying the strengths of the region, he said:
It was a central location to where all our properties are located ... and it’s allowed us to attract people with the right skills.
…There are good education businesses here, really good health businesses and a really good food and tourism and winery industry makes it attractive, and it has good access to Sydney.
…Obviously there are some other significant agricultural resources [like the Department of Primary Industries] and businesses that were part of our consideration.
8.28
Reporting from April 2017 indicates that the fund’s relocation has been a success and it is producing consistent profits. The Australian Financial Review reported:
The Macquarie Group-managed Paraway Pastoral has attracted new capital from Australian superannuation funds after selling a major part of its portfolio and then rebuilding it during the 2016 calendar year and delivering a $39 million profit.
Paraway Pastoral Chief Executive, Jock Whittle, confirmed the company would continue to expand following the deployment of more than $300 million for properties, including those from the Western Grazing Company in Queensland, Sundown Pastoral in the New England area of NSW and Beckworth Station outside Ballarat in Victoria.
Goulburn-Murray Water
8.29
Goulburn-Murray Water is an example of an entity that was decentralised from a major city to the regions. It is Australia's largest rural water corporation managing around 70 per cent of Victoria's stored water resources, around 50 per cent of Victoria's underground water supplies and Australia's largest irrigation delivery network.
8.30
At the Wodonga public hearing, the Committee received evidence from Mr Graeme Hannan of Goulburn-Murray Water who sees the company as a decentralisation success story:
In the mid-nineties, all head-office functions from the previous Rural Water Corporation were transferred to regional Victoria, to be delivered by the newly created Goulburn-Murray Water. Those corporate functions included water resource management, dam safety and dam management functions, entitlement management, and water administration functions. There were many advantages of doing this, and the main ones were that staff were closer to our customers, in all aspects; staff were closer to the assets that they were managing; and staff were closer to the suppliers that we were buying the services from. I was not with the Rural Water Corporation but joined not long after Goulburn-Murray Water was established, and I relocated from Melbourne to undertake what I believed to be a fulfilling career move and also to enjoy the regional lifestyle benefits.
8.31
Mr Hannan further explained the intent behind the decentralisation decision:
This happened back in the mid-nineties and, at the time, the then Rural Water Corporation in Victoria was being regionalised. The largest irrigated region was in northern Victoria and the headworks' function went to the new entity, Goulburn-Murray Water, in northern Victoria. It happened because there was a view by state government that the management of water needed to be closer and more accountable to the customers and the people who paid for those services. That was the catalyst and the driver, and I think that has been a good move. It has certainly allowed a mature and comprehensive customer engagement model to function a lot better because we are in the community of the customer.
8.32
The positive business and social outcomes of the relocation were also shared with the Committee:
It's been a good move for regional Victoria insofar as there are more jobs in small towns like Echuca, Rochester, Kerang and Wangaratta that are good jobs. They are skilled jobs and they provide important linkages to universities and TAFEs and the like. We are able to engage with our local schools and our local regions. We get schoolchildren in to look at the diversity of jobs that they would otherwise be unaware of that exist right in their region. So the combined effect of all those activities make it a good move for people delivering services in the communities where those services are.
8.33
Goulburn-Murray Water represents a good example of what can be achieved when a corporate entity successfully shifts its operations and decision making to regional Australia.
Arnhem Land Progress Aboriginal Corporation
8.34
Arnhem Land Progress Aboriginal Corporation (ALPA) was established in 1972. In contrast to Macquarie’s Paraway Fund and Goulbourn-Murray Water, the ALPA is not a business that has been decentralised from a state capital to the regions. Rather, ALPA is decentralised across the NT.
8.35
ALPA is the largest Aboriginal corporation in Australia. Traditionally a retail enterprise, ALPA works across 1.2 million square kilometres of remote Australia. Mr Chris Hayward, ALPA’s Manager of Strategy, gave an overview of the organisation’s success:
In the last five years our workforce has doubled. Our turnover has increased significantly. But our key KPIs are really around sustainable Indigenous jobs. So, when it comes to regional economic development, you might say that we're champions of it and we engage very actively with governments at all levels to further that and keep these regions thriving… Turnover is $95 million this year across the group.
8.36
ALPA has a strong focus on employing Indigenous people, and women. In particular, it has:
… 1,200 employees in total with about 1,050 of those Indigenous. So we are sitting on roughly 85 per cent Indigenous employment, which is something we are very proud of. It is a key KPI for us.
Half our board are women, which we're pretty proud of, and half our senior management team are women. The workforce varies, but I think it's actually about 52 per cent.
8.37
Apart from encouraging education, ALPA also seeks to involve young people in business:
To give you a good example, we've got a little furniture business that we've started, called Manapan Furniture. It's out on Milingimbi. It's probably the most ambitious business we've ever attempted. We're working with some of Australia's best designers… and we've got these two boys out of Milingimbi school, 20 and 21, and they're in there learning furniture making. We do support literacy and numeracy training on the ground, but their ability to learn is just amazing—the development of their hand skills in a relatively short time. That sort of thing exemplifies it.
8.38
Given ALPA’s apparent success, it is worth noting that the governance model is a mixture of traditional and modern western practices:
The governance model is a meld of traditional Indigenous governance as well as Western governance practices, so it is very cross-cultural, and we are very much a cross-cultural partnership. I think that is a great part of that success story. I think that is a secret of success, if you like, that others should look to emulate—taking the best of both worlds and then putting them together.
Bendigo and Adelaide Bank
8.39
Bendigo and Adelaide Bank is headquartered in Bendigo, and is one of only a few top 100 ASX listed companies to base itself outside of a metropolitan city. The organisation was originally established in Bendigo and has successfully grown a national business from a regional location.
8.40
In 2008, Bendigo and Adelaide Bank built its new headquarters in Bendigo’s Central Business District – an investment that transformed the city and established it as the leading regional centre for financial services.
8.41
The bank reported that it employs about 1 300 people in Bendigo which makes a significant contribution to the diversity and strength of the local economy.
8.42
In evidence to the inquiry, Ms Marnie Baker, Chief Customer Officer, told the Committee:
We are the leading regional bank and the only bank with its headquarters in a regional community. We're also really good at what we do and we have leading customer satisfaction and trust scores as well as award-winning products and services. We're often recognised for the good that we do in our communities, and our most recent gong came from the US based Fortune magazine in their annual Change the World list, where our bank ranked 13th globally for creating economic opportunity and for financial inclusion. The ranking makes Bendigo and Adelaide Bank the leading Australian company on the list and second in the world for a commercial bank—so, no small feat.
8.43
Bendigo and Adelaide Bank sees its decision to be regionally based as a positive one:
For our own business, the experience of being regionally based has been a positive one. We've been able to attract and retain great talent. This has enabled the bank to create a unique culture that values people, has a strong sense of belief in community and is highly motivated to do the best it can for its customers.
8.44
Being in touch with its customers is also seen by the bank as a key aspect of being regionally based:
… the closer you are to your customers the truer you remain to the purpose that you are there for… By living in a town like Bendigo, I could be in a supermarket on the weekend or I could be at the local football match with my children and everyone knows where I work and they will tell me, good, bad or otherwise, exactly what the bank should be doing or should not be doing. You can't get that if you're sitting in a high-rise in a capital city. You do not have that connection to your customers. That's been a secret ingredient in our organisation: never losing connection with your purpose and the reason for being, and that is your customers.
8.45
The Committee also heard about the Community Banks established by Bendigo and Adelaide Bank. In particular, the Committee heard how this model creates sustainable incomes for communities to be reinvested locally.
Our shared value business model empowers the local community to own and operate its own branch and share the revenue generated by our customers' banking business with our bank, local shareholders and the community. This has created a sustainable income for these communities and generated capital that they can invest in local community-building initiatives. In the last financial year, community banking generated more than $224 million in revenue. Of this, more than $116 million was paid in salaries to Community Bank employees, many of whom call regional Australia home.
8.46
These examples demonstrate that it is possible to establish regional enterprises, transfer existing enterprises into the regions, or relocate part of an existing business to a region or regional city successfully. The Committee believes that regional Australia is a good place to do business and that business investment into the regions should be supported.
8.47
The examples also show there is no universal model or structure for corporate decentralisation. Hofmann Engineering, the Paraway Pastoral Fund, Goulburn-Murray Water, ALPA and Bendigo and Adelaide Bank are different types of businesses with different business models. Nonetheless, they have been successful in generating profits, growing their businesses and bringing benefits to regional communities.
Unsuccessful corporate decentralisation
Conoco-Phillips
8.48
In Darwin, the Committee heard about Conoco-Phillips, an energy and oil company that relocated part of its operations from Perth to Darwin.
8.49
Mr Greg Bicknell, Chief Executive Officer of the NT Chamber of Commerce, told the Committee that Conoco-Phillips relocated back to Perth after some challenges experienced by employees and their families. He said:
[Conoco-Phillips] moved their engineering staff up here. That experiment lasted for several years, but in the end they have relocated their office back to Perth. It was an issue around holding people here, mainly around spouses. The people here were not content in their family lives because of the expectations around culture, shopping and all those sorts of things that aren't at the same levels in Darwin as they are in Perth. They tried very hard to maintain that presence up here, but now they've got to a stage where they can't do it in a place the size…
I think everyone had the best intentions and worked as hard as they could to get them here. It was more social factors that really drove the change in the end. The previous government here put in place some incentive schemes to attract corporates to set up in the Northern Territory, but it's all about connectivity to peers in the industry and being able to get the right sort of people in those corporate head offices.
8.50
The issue of lifestyle and the amenity of rural and regional towns, reflected in the example of Conoco-Phillips, was a consistent message received by the Committee.
Australian Paper
8.51
In her submission to the inquiry, Dr Amanda Wash summarised the experience of Australian Paper’s operations in a globally competitive market:
Beyond the loss of jobs and industrial diversity, the story of Australian Paper demonstrates another troubling aspect of regional development: the fundamental incompatibility between the modest scale of many regional operations and the pressing corporate drive to create economies of scale.
The Shoalhaven Paper Mill had occupied a unique and important niche in Australian paper manufacturing: it specialised in making the security-grade paper for Australian passports and other sensitive documents. This specialisation ‘suited small-scale production – but not the "bigger is better" mantra of modern manufacturing’… As a business strategy, specialisation should present opportunities for regional enterprises. In the case of the Shoalhaven mill, high-level manufacturing skills were not enough to outweigh the (necessarily) small-scale production in which the mill specialised. As a result of the closure of the Shoalhaven mill, paper for Australian passports and birth certificates is now imported.
8.52
According to Dr Walsh, the lesson to be learnt from this experience is:
… that, even where the necessary skills and resources are on offer in a regional community, there are no guarantees that a large enterprise will take them up or retain them. Any large, globally-integrated enterprise will inevitably seek to achieve economies of scale, and this is often incompatible with the establishment or maintenance of smaller regional operations.
Ticket Master Australia
8.53
In its submission to the inquiry, the NSW Southern Tablelands highlighted the loss of jobs from NSW to Victoria and the impact of inconsistent local, state and federal government policies. In particular, it noted the inconsistencies of incentives for private businesses:
In 2016 TMA (Ticket Master Australia) was seeking to relocate from metropolitan Sydney to regional NSW, bringing with it 400 local jobs. The Goulburn Mulwaree Council worked assiduously with the company to address its needs, and TMA sought assistance from the NSW government to help with relocation costs. The NSW Government’s view was that there was no net gain to the state, so the company was ineligible for financial support.
As a consequence, the company relocated to Victoria, resulting in a loss to NSW of significant revenues and 400 jobs. The Victorian Government is aggressively seeking to attract new investment with several supporting programs (Regional Jobs and Infrastructure Fund – 10 programs offering payroll tax rebates, infrastructure extensions, development support, etc). For example, the 2017/18 Victorian State budget allocates $173 million tax relief to regional businesses by reducing payroll tax.
8.54
The unsuccessful examples set out above demonstrate the larger structural issues that may make it difficult for relatively small regional businesses and industries to survive in a competitive market place. Conoco-Phillips was undermined by the lack of amenities available to re-located staff and Australian Paper found itself subject to international competitive pressures which scuppered, at least in part, its regional operations. And for Ticket Master Australia, its relocation appeared largely determined by the financial incentives offered.
Financial incentives
8.55
The Committee received little evidence about the provision of incentives – financial or otherwise – to attract private entities to rural and regional locations.
8.56
In its joint submission to the inquiry, the Albury City and the City of Wodonga suggest that the Commonwealth provide ‘funding support for relocating or newly establishing businesses in regional areas.’ The Councils assert:
It is here where relatively small incentives and grants for start-ups or relocating businesses can make a very significant and positive long term economic impact in a regional city.
8.57
The Cessnock City Council also listed a number of financial incentives the Commonwealth ‘can provide that would encourage greater corporate decentralisation to regional areas’. These incentives include:
a. payroll tax reductions;
b. cash rate loans for purchasing of buildings and renovations;
c. easily accessible funding grants towards relocation costs;
d. higher R&D tax-offsets if undertaken in a regional centre;
e. tax-offsets for employee relocation costs;
f. contributions towards salaries in the first 12 months post relocation to each employee, hired from the host community;
g. increased funding to the host community for local skill development.
8.58
The Committee considers this an issue for further examination. It recommends incentives for private entities be included as part of a Green and White Paper process on regional development in Australia. This is discussed more fully in Chapter 9.