Introduction
Whilst we share the view expressed in the majority report of the importance of the manufacturing sector to Australia, we disagree with a number of key recommendations in the report.
The majority report proposes a number of recommendations which would underpin a government driven interventionist approach in the manufacturing sector. Such policies have not worked in the past and there is no evidence to suggest that they will work in the future. The danger is that they will distort the market and cause more harm than good.
The Federal Government should continue to progress policies which drive an increase in productivity. Policies should aim to remove impediments and barriers to investment, growth and job creation. Any Federal Government expenditure needs to be carefully targeted. The Modern Manufacturing Strategy meets this objective. As stated in the submission from the Department of Industry, Science, Energy and Resources:
The Modern Manufacturing Strategy (MMS) sets out a ten-year pathway led by industry for industry, with a vision for Australia to be recognised as a high quality and sustainable manufacturing nation that helps to deliver a strong, modern and resilient economy for all Australians. To achieve this, the MMS focuses government efforts in sectors of competitive and comparative advantage and strategic importance.
In this regard, there are a range of current Federal Government initiatives which are strategically targeted, proportionate and effective. Relatively recent employment statistics indicate that the policies are working. There are now 80,200 more jobs in manufacturing than there were at the start of the COVID-19 pandemic. Total manufacturing employment in Australia now sits at above 1 million jobs, which is its highest level since August 2009.
The majority report proposes a fundamentally different approach from that adopted by the current Federal Government—a step change in government intervention and expenditure. Whilst no doubt being sincere and well intentioned, those promoting such an interventionist approach (to be funded by the Australian taxpayer) would do well to reflect on the history of such endeavours. The work of the Productivity Commission makes for sobering reading in this regard.
In the balance of this report, we discuss in more detail some of the recommendations proposed in the majority report. Given the breadth and scope of the report and the number of recommendations made, we have endeavoured to focus on a number of key areas.
Establishment of Manufacturing Industry Fund (Recommendation 2)
A centrepiece of the recommendations contained in the majority report is a so-called Manufacturing Industry Fund. Whilst not directly referenced, this recommendation appears consistent with the Federal Opposition’s policy to establish a $15 billion National Reconstruction Fund.
In our view, the reasoning in the majority report underpinning the establishment of such a fund is problematic.
At section 5.2 of the majority report, it is stated:
The opportunity exists for Government to establish a framework for manufacturing without running the risk of favouring specific sectors or business models.
But at section 6.9 of the majority report, it is then stated:
The committee supports a range of incentives and stimulus measures including the provision of equity, co-investment, direct government investment, and facilitating private sector investment, including by superannuation funds [we deal with the reference to superannuation funds in section 3 below].
There is a gross inconsistency between the two statements.
On the one hand, the majority report recognises the dangers inherent in the government favouring particular sectors. On the other hand, it then proposes measures which would involve investment (including the provision of equity) in not just particular sectors, but specific businesses.
This reasoning then culminates in Recommendation 2 which provides:
The committee recommends that the Australian Government establish a Manufacturing Industry Fund to provide a range of co-investment incentives to the manufacturing industry in conjunction with the private sector.
We do not support the establishment of a manufacturing industry fund of the scope and nature proposed in the majority report.
Policy makers would do well to heed the warnings of the Productivity Commission. In the Productivity Commission’s submission, it was noted that any resources directed towards particular industries (whether in the form of fiscal support or regulated flows of income) have alternative uses. The main objective for policy should be to ensure an environment that allows resources to move to their most productive use.
In terms of any government “co-investment” in business enterprises (i.e. the government taking equity positions in private sector businesses), the following questions must always be asked:
Why can’t the particular venture attract equity investment or debt support; and
If the private sector will not invest its equity in the venture nor commercial lenders advance sufficient debt funds, why should the Government risk taxpayers’ money?
In our view, the focus should be on government policies which drive productivity and remove barriers to private sector investment.
We note the footnoted reference to: “contracts for difference” in relation to electricity market reform in the United Kingdom (UK). Given the current situation in the UK, this reference deserves more than a footnote. Those promoting the UK model should refer to current issues relating to electricity and gas prices in the UK. Some energy retailers have collapsed. The UK Government has had to pay billions of dollars in support to households to compensate them for soaring electricity prices. Soaring electricity and gas prices particularly hurt those on low incomes, pensioners and the vulnerable.
In an Australian context, we note that the Federal Government has announced more than $1.43 billion in the 2020–21 Budget and $1.8 billion in the 2021–22 Budget to support affordable and reliable energy, while boosting jobs and continuing to reduce emissions. The focus is on ensuring access to reliable, affordable and secure energy for Australian households and businesses, including the manufacturing industry, while successfully integrating new technologies, and meeting Australia’s international emissions reduction obligations. In our view, this is the correct approach.
Superannuation Funds (Recommendation 3)
In recommendation 3, the Majority Report refers to the establishment of a:
Superannuation Task Force to explore, develop and recommend structural changes and possible incentive-based programs and regulations to increase the level of Australian superannuation fund investment in Australian manufacturing industries, particularly those with an export focus.
We disagree with this recommendation.
Superannuation funds should make investments in the best financial interests of the Australians who own those funds.
The purpose of superannuation is to provide for the retirement of the Australians who worked to earn those superannuation funds, not to support some collateral purpose.
Any initiative which does not recognise this fundamental principle should be rejected.
Government should not view superannuation funds as a potential pool of capital to be mobilised to achieve government policy objectives, however well intentioned.
The proposed task force and what it might lead to in practice is scant on detail. Phrases such as: “structural changes” and “possible incentive-based programs and regulations” are a cause for concern.
At best, they may result in the distortion of decision-making processes to try and achieve a public policy aim which is collateral to the purpose of superannuation. At worst, they could drive (or mandate) investments which may not be in the best financial interests of members who own the superannuation.
Research and Development (Recommendations 1 and 4)
In our view, the recommendation provides insufficient recognition to the initiatives already in place in this regard. There is already a wide range of programmes being successfully implemented.
The Research and Development (R&D) tax incentive is already Australia’s largest innovation support programme. Each year since 2011, the programme has provided an average of $2.5 billion to over 11,000 businesses. In 2019‒20, it is estimated that approximately 38 per cent of the scheme promoted R&D in the manufacturing sector.
There have been a number of recent reviews and reforms. In particular, a number of enhancements were made to the programme as part of the Government’s Jobmaker Plan in the 2020‒21 Budget.
In addition to the R&D programme, the Federal Government has implemented an array of related policies to promote R&D capability and activity, including:
The $2.2 billion University Research Commercialisation Action Plan, including $1.6 billion for Australia’s Economic Accelerator, $150 million to expand CSIRO’s Main Sequence Ventures, $242.7 million for the Trailblazers Universities programme and development of the Higher Education Research Commercialisation Intellectual Property Framework and $296 million to PhD’s and Fellows;
The Entrepreneurs Programme which has provided matched funding of over $0.5 billion to over 21,900 businesses since June 2014, including assistance to accelerate commercialisation;
The Business Research and Innovation Initiative which provides opportunities for Australian start-ups to work with Australian Public Service agencies to develop innovative solutions to improve public policy and service delivery outcomes; and
The Boosting Female Founders Initiative which provides support to women entrepreneurs, including mentoring services needed to scale their start-ups to take advantage of domestic and global markets.
Skills and Training (Recommendations 5 and 6)
Again, the recommendations fail to recognise the initiatives already undertaken by the Federal Government. These include:
Reform of the VET sector, including assistance provided to victims of the previous Labor Government’s failed VET FEE HELP scheme;
The commissioning of the Joyce Review and implementation of a range of reforms including the establishment of the National Skills Commission and the National Careers Institute;
The Supporting Apprenticeship and Trainees wage subsidy which assisted in keeping 100,000 apprentices in training through the COVID 19 pandemic;
Implementation of the Boosting Apprenticeship Commencement programme which provides a wage subsidy—there are now approximately 220,000 trade apprenticeships;
Implementation of the Completing Apprenticeship wage subsidy; and
Establishment of the Job Trainer Fund with the States and Territories which is driven by the National Skills Commission and supports training and re-skilling.
Miscellaneous
There are a range of additional recommendations upon which we provide high level comments.
Recommendation 6 proposes a mandated minimum ratio of apprentices to tradespeople on government funded projects. We are not satisfied that the case has been made for such government intervention. Given the incentives currently being provided for apprenticeships, we query the need for any such mandate. We are concerned that there may be unintended consequences which operate to favour larger businesses over small and medium sized enterprises.
Recommendation 7 proposes a range of industrial relations reforms which are vague and scant on detail. For example, “mechanisms which promote cooperation between workplaces, employers and workers, including through the involvement of unions.” What does this mean in practice? Moreover, we note that the recommendation proposes a review of the 2016 Building Code. This has been an important instrument to protect the principle of freedom of association on construction work sites.
Recommendation 8 proposes measures to improve the diversity of workers in the manufacturing industry, including through the possible linking of targets to government funding initiatives. There is also a reference to: “the implementation of any necessary industrial relations reforms”. Many successful employers have measures to promote diversity. It is in the best interests of a business to draw talent from the widest pool possible. They do this without government mandates. Again, we are concerned about the impact of an increase of government interference and regulation upon private sector employers.
Recommendations 9 to 11 propose various initiatives with respect to government tendering processes. In our view, insufficient recognition has been given to the success of small and medium sized Australian businesses who have participated in government tendering processes. The latest Federal Government procurement statistics indicate that 86 per cent of Federal Government suppliers are small and medium sized businesses with 96 per cent of those businesses having an Australian address. Moreover, the government procurement rules have been updated to allow agencies to directly engage with SME’s on procurements valued up to $200,000. This cuts red tape, reduces tendering costs and provides an opportunity for more small businesses to participate in government tendering processes.
Recommendation 12 proposes limits in relation to future trade agreements, particularly with respect to anything that would restrict preferences being given in Commonwealth Government procurement processes. The implications of such a change in policy require careful consideration. Australia is a trading nation. Our access to export markets has been enhanced through Free Trade Agreements. The costs and lost opportunities arising from the recommendation should be carefully weighed.
Recommendation 13 provides a lowering of the threshold project amount under the Australian Jobs Act 2013. The recommendation is scant on detail with respect to the amount it should be lowered to and the consequences for projects which would fall within the lowered cap.
Recommendation 14 provides for mandatory ratios of apprentices to tradespeople in relation to government funded projects. Refer to our comments above in relation to Recommendation 6.
Recommendation 15 supports green hydrogen as a potential long-term alternative to gas. The Federal Government has a detailed hydrogen strategy which is not limited to green hydrogen. For the short and medium term, it appears that blue hydrogen (made from natural gas or coal with CCS) provides a materially less expensive alternative. It is accommodated for in the Government’s hydrogen strategy. In our view, it is unwise to limit Australia’s strategy to green hydrogen.
Recommendation 16 calls for the establishment of a CRC for Sustainable Manufacturing to operationalise hydrogen and to support the development of a greens metals industry. In our view, there is insufficient recognition of the work currently taking place under existing policies. Query how the recommendation would add anything to the work currently taking place within ARENA, the CEFC and the Clean Hydrogen Industrial Hubs initiative.
Recommendation 17 call for the Government to recognise the importance of the supply and affordability of gas for the future of Australian manufacturing. The Federal Government does recognise this. That is why the Federal Government implemented the Gas Fired Recovery Plan as a key pillar in the Federal Government’s economic agenda.
Recommendation 18 deals with domestic electrical equipment testing capabilities, in particular at Lane Cove Testing Facility. Given a 49 per cent interest in this facility is already owned (indirectly) by the New South Wales Government, it is a matter where they might be expected to take a lead role. Having said that, it is important for Australia to maintain its major industrial capacity in such areas. This issue warrants further consideration.
Recommendation 19 deals with the pharmacy supply chain. This is an important issue. However, we consider that the subject requires further examination.
Conclusion
In our view, the Government’s policies have been effective in promoting the development of Australia’s manufacturing industry. We are concerned that a material step up in government intervention and regulation (as countenanced by many of the recommendations in the Majority Report) will be counter-productive, will not achieve the desired results and will impose a cost upon all Australian taxpayers without the commensurate benefits.
Senator Paul ScarrSenator Andrew Bragg
Deputy ChairCommittee Member
Liberal Senator for QueenslandLiberal Senator for New South Wales