The Good Oil by Rod Brown *
The biggest talking point in Canberra is the Commonwealth Government decision to provide a $100 million loan guarantee to the Australian Magnesium Corporation (AMC) project in Queensland. It comes on the heels of major grants for the GMH facility in Melbourne, the Email consolidation in Adelaide (from Victoria), and the Alice Springs-Darwin rail project.
There are cries of pork barrelling in the lead up to the Federal election, that Industry Minister Nick Minchin has been captured by his department, and that governments are ill equipped to pick winners.
Indeed, Tony Walker in the Australian Financial Review (11-12 August) argues that ‘economic decisions are now dictated less by the market than they are by what might be efficacious politically…the AMC project may turn out to make sense in an environmentally conscious world, but this is not an argument for the support of a government that is running scared politically.’
I would like to suggest that the government decision to assist the AMC project may probably be the right one.
The market is not the exclusive preserve of the private sector – governments are, and always will be, a part of the ‘market’. The question that naturally follows is, ‘In what circumstances should governments intervene in the market more than their regulatory functions?’
This has been debated ad nauseum at intergovernmental meetings across the globe – mainly when major structural dislocation is occurring, as has happened in the last two decades in shipbuilding, textiles, steel, semi conductors and so forth.
Accordingly, guidelines and protocols have been drafted to limit the conditions on which governments should intervene.
However, as experience shows, most countries blithely ignore these commitments soon after the ink is dry, and scores of decisions are taken daily by governments across the world to ‘facilitate’ investments, with little or no regret.
Indeed, I sat in a conference in Glasgow last year when the business guru Professor Michael Porter thundered that ‘The absolute no-no is for government to intervene in competition, by subsidising’. The audience smiled knowingly.
The reason why conference participants could not be swayed on this point is that subsidies are now a way of life (the EC has made subsidies an art form) and there is sufficient market failure to justify it.
Examples of market failure include the following.
- Existence of wider (external) benefits, that is, private investors cannot capture these benefits and are thus unwilling to cover this portion.
- Under provision of public goods.
- Lack of information.
- Managerial myopia.
- Coordination failure.
In the case of the AMC project, there are indeed external benefits. The problem facing much of Australian manufacturing and resource processing ventures is in achieving a prominent place in global supply chains, and in positioning our innovation efforts within value adding activities that have significant vertical or horizontal linkages to other activities in Australia.
The AMC project offers such benefits. This point would be lost on most of the institutional investors from whom the AMC proponents were seeking equity funding.
There is also the likelihood that the Commonwealth and State Governments had more information at their fingertips than the institutional investors. This is impossible to prove, but the Prime Minister’s investment adviser would have had a wide view of the issues.
The Cabinet discussion must have been fascinating – after all, here is a conservative government, committed to the ideals of the free market, making a $100 million play with taxpayers funds. What’s more, the investment is in Queensland where Labor holds sway. What’s more, this action could retard the SAMAG project in South Australia – the home State of the Industry Minister.
What’s more, it is only three months to a Federal election.
All in all, the Commonwealth Government decision is a landmark.
If one was to be critical of this decision, it is that it leaves the door wide open to more company specific deals and industry policy will become a series of knee jerk reactions.
To be fair to Professor Porter, he was 100 per cent correct in his address to the Catching the Knowledge Wave conference in New Zealand recently when he argued that governments do not need to provide large amounts of money, but they must understand how infrastructure impacts on investments.
Porter’s message to the kiwis was that everything matters – roads, tax, the quality of education. He said that economic policy keys are productivity and competition. Devaluation is no answer – it is just a road to poverty. Don’t try to create entirely new industries. Build upon existing strengths. Have local and foreign companies work together. Firms won’t succeed abroad if they can’t succeed at home. Innovation must be driven by supply and demand, and the transition from a resources to an innovation economy is essential. New Zealand has to determine where it is unique, where it can develop world class capability. Specialisation is essential.
Most of this applies to Australia too. Indeed, the AMC project is arguably a case of building on existing strengths, specialisation, world class capability, and local and foreign companies working together.
The downside is that the aversion of Australian governments to fund infrastructure, and particularly not to coordinate this expenditure, means that they will continually need to make stark choices on which industrial project they assist.
Anyway, let’s hope the AMC project is a winner. Canberra does pick winners on occasions. Think about the two industries that have received long standing tax benefits specific to their industries – the wine industry and the film industry. The former has had a stellar performance, and both industries have generated very substantial externalities that can never be adequately measured.
*Rod Brown’s Canberra based consultancy group, Australian Project Developments Pty Ltd, specialises in industry/regional development and government liaison. For further information telephone (02) 6231 7261 or email apd@orac.net.au
