“What Should We Build?”

Over the past week, the Leader of the Federal Opposition has been asking a series of questions on Twitter and elsewhere, about “what should Australia be building?”. As well as building the foundations of Labor’s Federal Election policy platform for boosting jobs in the manufacturing sector, it also provides lots of photo ops for pollies in hard hats and hi-viz clothing. (I do wonder why the potential Prime Minister hasn’t thought of this idea before, or why he appears to not know the answer – isn’t that his job? It also makes me wonder whether we need Parliament anymore, since our elected representatives prefer to conduct their “debates” via Social Media and Press Conferences…. it would save a lot of time and money!)

By this time next year, Albo could be PM (Photo sourced from Twitter)

There has been no shortage of suggestions from the Twitterati, which fall into the following main categories:

  • Renewable energy
  • Trains
  • Trams
  • Ferries
  • High-end engineering

But there has also been commentary around Labor’s ambivalence on the coal and gas sector (especially in the key state of Queensland), and the irony that we export cheap raw materials and import expensive finished goods. Then there is debate on the amount of local manufacturing content that already exists in Australia’s state-based trains and urban trams/light rail systems (skewed by the question of local vs foreign ownership). Plus, there’s the thorny issue of high-speed inter-city trains…

As I commented recently, the manufacturing sector accounts for fewer than 1m local jobs (less than 10% of the working population), and 6% of GDP. It has been declining steadily as a contributor to GDP since the 1960s, and more rapidly in recent years since we abandoned key subsidies to the car industry. I don’t think anyone is suggesting we return to the days of metal bashing and white goods. And while we’ve got to be selective about the type of manufacturing base we want to to develop, we also have to be realistic about the manufacturing capabilities we want to encourage and enhance.

The latter involves developing transferable skills, creating interoperable production lines, deploying modular designs and inter-changeable components, and recycling/repurposing. All of which should mean we don’t need to make every part of every item domestically, but we know how to assemble, service, maintain, repair and replace goods locally, and we can focus on adding value that can be fed back into the supply chain, which in turn can be exported (via know-how and services). Australia has some decent research and development capabilities, but we are not always very good at raising domestic investment, or commerciliasing our IP (so this value ends up being transferred overseas, with little to no return accruing locally).

I’m not a huge fan of simplistic “buy local goods/support local jobs” campaigns, or local content quotas. The former can degenerate into trade protectionism and economic nationalism; while the latter tend to favour inefficient incumbents within cozy duopolies (see the broadcasting and media sector). The current debate has also raised questions about procurement policies, and I for one would welcome a total revamp of government IT purchasing and deployment at Federal, State and LGA levels.

There’s also the consumer angle: Australians are notoriously “cost conscious”, so will they be prepared to pay more for locally-made goods, even if they are better designed, well-made and energy efficient, compared to cheaper, less-sustainable imports? (This is also linked to the question of wage growth and restrictive trade practices.)

The recent pandemic has highlighted some challenges for the structure of the local economy:

  • Disruption to distribution networks and supply chain logistics
  • Food security
  • Energy self-sufficiency
  • Inability to service equipment locally or source spare parts
  • Different standards across the States
  • Medicine and vaccine manufacture, sourcing and distribution

For an up-to-date perspective on where Australian manufacturing policy needs to be heading, I recommend taking a look at the Productivity Commission’s latest submission to a current Senate enquiry. (Am I alone in thinking that the PC, along with the ACCC, is doing more to develop and advance economic policy than our elected representatives?)

The PC’s submission addresses a number of key points:

  • R&D incentives are hampered by complex tax treatment
  • Policies (and subsidies) favouring one industry create uncertainty for others
  • Need for IP reform (especially “fair use” of copyright)
  • The National Interest test needs clarifying
  • More effort on up-skilling through more relevant education and training
  • The role of manufacturing capabilities in supporting supply chain infrastructure

Finally, while I agree that there needs to be some focus on renewable energy and public transport, we should not ignore food and agriculture, bio-tech, IT, automation, robotics, materials science and other high-end capabilities in specialist design, engineering and recycling (including reclaiming precious minerals from obsolete equipment).

(And did I mention the “Innovation Agenda” and the revolving door at the Federal Ministry?)

Next week: Dead Pop Stars

How about that AAA rating?

As the State of Victoria weighs up the costs of yet another lock down, you could be forgiven for thinking that the local economy has taken a further beating after the horrendous events of the past 15 months. Across Australia, thousands of companies and individuals accessed various government-sponsored financial aid packages to keep afloat, causing the federal government to borrow more money, at something like 8x the equivalent rate pre-COVID. National public debt is now expected to grow to more than 40% of GDP by the 2024-25 fiscal year – effectively double what it was in 2018-19.

So what has Australia done to retain its coveted AAA sovereign rating from Standard & Poor’s, and have the rating outlook upgraded from negative to stable? According to the ratings agency, and economists such as Westpac’s Bill Evans, there are probably three or four key factors that have warranted this optimistic economic reckoning.

First, while government borrowing (Quantitative Easing) has blown out as a proportion of GDP, the current low interest rates mean that the cost of servicing that debt is manageable.

Second, while the pursuit of QE has destroyed any hope of returning to an overall budget surplus, the deficit will return to similar levels last seen after the GFC, and the current account will continue to return a modest surplus over the coming quarters.

Third, despite the significant economic risks that were identified at the start of the COVID pandemic, the actual impact on the budget has been less than feared, and the economy is recovering faster than expected (as evidenced by latest employment data and consumer sentiment).

Fourth, Australian banks have seen an increase in customer deposits, meaning they are less reliant on more expensive overseas borrowing for their own funding.

Overall, just as with the GFC, Australia has managed to dodge a bullet (the shock to the system was less than anticipated) – in large part thanks to a resurgence in iron ore prices (again).

But weaknesses and disparities remain:

The over-reliance on commodity prices (mainly based on demand from China) hides the true nature of Australia’s balance of payments – we manufacture less than we used to, and our supply chains have been severely tested during the pandemic. And with international borders closed, we won’t see the same levels of GDP growth that resulted from immigration.

Our household savings rate as a percentage of disposable income has come down from its peak of 22% in July 2020, to less than 12% this past quarter, as people held on to their cash for a rainy day (or 3 months lock-down). The savings rate is expected to come down even further as consumers feel more confident and start spending again.

As with the GFC, home owners have chosen to pay down their mortgage debt – but the picture is more complex. Yes, interest rates remain low (and will likely stay so for at least another 18 months), despite commentary from another economist, Stephen Koukoulas suggesting that the RBA will have to raise rates sooner than expected. With property prices expected to increase 5-10% over the next 12 months, home owners will feel wealthier (but asset rich and cash poor?) as mortgage repayments reduce as a percentage of their home’s value. And while analysts at S&P expect banks’ credit loses to remain low while the economy recovers, the fact that two-thirds of banks’ exposures are to highly leveraged residential property could see increased stress when interest rates rise and if wage growth remains sluggish (more on the latter next week).

Australia’s sovereign credit rating is something of a badge of honour, and represents membership of an exclusive club – fewer than a dozen countries are rated AAA; no wonder it’s a big deal, and partly explains why the Prime Minister gets to attend the G7 (albeit as an observer). Comparatively speaking, Australia is doing very well when it comes to managing COVID (although we could be doing a lot better on a number of measures), and has an economy that continues to be the envy of many. Expect more on that AAA rating (“How good was that?”) as we head into the next Federal election…

Next week: Where is wage growth going to come from?

From R&D to P&L

Last week, the leader of the Federal Opposition announced a $15bn reconstruction fund aimed at job creation if Labor wins government, saying Australia must be a country “that makes things”. With a specific focus on cars, trains and ships, this policy pledge sounded like a clarion call to the metal-bashing industries of old (and recalls either an 80s movie or a 60s pop song…). This followed the launch by the Victorian government of the $2bn “Breakthrough Fund”, aimed at enhancing the State’s R&D capabilities.

While this type of government largesse and targeted economic stimulus sounds welcome, I can’t help feeling the money could be better spent on covering some basic building blocks in the search for innovation and economic development – upgrading the primary, secondary and tertiary education for the 21st century (e.g, an integrated STEAM curriculum); funding budding entrepreneurs (e.g., job maker for the newly self-employed, especially those under 25); enhancing the SME loan market (e.g., making it easier to access working capital without first having to own real estate); and overhauling the procurement and “panel” regimes in the public and private sectors (e.g., giving more equitable access to start-ups and scale-ups).

The “reconstruction fund” talks about making equity stakes, and co-investing with the private sector and superannuation funds. This sounds great, but is it the role of government to pick winners? Surely it should be in the business of enabling innovation and facilitating the growth of SMEs (which is where much new employment is created, rather than in legacy industries and/or declining sectors). Also, because of the way their mandates are written (as well as their ROC models and fiduciary duties), traditionally, superannuation funds and other institutional investors find it very difficult to write cheques for less than, say, $200m. Such a figure is generally far beyond what most start-ups or scale-ups are seeking – so these institutional funds are often placed with external managers who can slice them up into smaller allocations, which adds to the overall investment costs.

The role model for the $15bn fund is the Clean Energy Finance Corporation, which returned a cumulative 4.75% as at June 30, 2020. Certainly a higher return than the cash rate, but hardly competitive with other asset classes or investment returns, if that is a key measure of success. The CEFC performance is currently running below its own benchmark, and while the efforts of the CEFC have no doubt led to more jobs in the renewables and sustainability sectors, hard data is not easy to come by. In its favour, the CEFC has made a large number of small scale investments, which may well provide a template for Labor’s manufacturing fund (although it’s not evident what form those investments have taken).

In speaking to a range of people over the past few weeks (civil servants, start-up founders, VCs, CEOs of listed companies, etc.), the following mixed messages emerged:

  1. Well-meaning government officials tell you that they are “here to help” founders, start-ups, entrepreneurs, SMEs etc. Problem is, these bureaucrats can’t effect necessary systemic change in the way innovation is funded – they can only operate at a transactional level. Also, many entrepreneurs would politely suggest that the government could do more by getting out of the way…
  2. One VC took issue with my suggestion that Australia needs a better manufacturing supply chain that produces more local components that are interoperable/interchangeable, and which also encourages more user-serviceable (and therefore more sustainable) devices and appliances – he was advocating in favour of sealed units and thus a continued dependance on the manufacturer/distributor service model; whereas I think self-sufficiency in manufacturing also means more consumer choice in post-sales support.
  3. An innovative Australian fintech chose to list overseas because the local capital markets did not “get” its business model, while another locally-listed fintech faced similar obstacles with its own listing.
  4. A start-up founder looking for a modest amount of money for an R&D project (in the sustainability sector) had already secured an equal amount of funding “in kind” from a government agency – but was finding it somewhat difficult to match it with the equivalent private capital.
  5. Neighbours building a passive house have had to import energy-efficient triple-glazed window units – because they are not easily available locally, and the only supplier they could find would have cost at least 50% more.

Finally, the new Labor policy (especially if it aims to support the EV sector) will need to demonstrate it has learned the lessons of Australia’s subsidised car industry, and that the proposed fund is part and parcel of an integrated approach to public transport infrastructure, encompassing high-speed inter-city trains, smart cities with self-drive vehicles, better orbital routes connecting suburbs, and regional hubs that aren’t reliant on cars.

Next week: Synchronicity

Three Wise Monkeys

At the time of writing, Melbourne is poised to move out of Stage 4 lock-down – but don’t hold your breath in anticipation: we have become used to the drip feed of information, contradictory policy narratives, and the political process of softening up the public not to expect too much too soon.

Three Wise Monkeys – Image by Anderson Mancini, sourced from Flickr

Meanwhile, the Public Inquiry into the failure of the Hotel Quarantine Programme will this week feature three key political witnesses, namely the State Premier and his Ministers for Health and Jobs respectively. Based on the evidence given to the Inquiry so far, plus the Premier’s daily press briefings, it’s clear that no-one in public office or in a position of authority can say specifically who, how and when the decision was made to engage private security firms to implement the hotel quarantine arrangements.

Of itself, the decision to outsource the hotel security should not have been an issue – after all, the State Government engages private security firms all the time. However, it has now been established that nearly 100% of the community transmission of Covid19 during Victoria’s second wave of infections can be traced back to returning travellers who were in hotel quarantine. On top of that, the Inquiry has seen evidence of people breaching the terms of their quarantine, and has heard a litany of errors and mismanagement at every level of administration.

Although the Premier as leader of the Government has claimed overall responsibility for the quarantine debacle (and which led to him imposing the Stage 4 lock-down), it’s worrying that no-one in his administration (himself included) can recall the details of the fateful decision. Pending the outcome of the Inquiry (and the result of the next State Election), it remains to be seen whether the Premier or anyone else is actually going to be held directly accountable for the blatant quarantine failures.

Not only that, but Ministers, their senior civil servants and key State Administrators all seem to be denying responsibility for making any concrete decisions on the hotel quarantine security arrangements, let alone to knowing who did, when or how. It’s like a bizarre remake of the Three Wise Monkeys, in triplicate: first, we have the Premier and his two key Ministers; then you have their respective Departmental Secretaries; finally there is the Chief Health Officer, the Chief Commissioner of Police and the Emergency Management Commissioner.

Instead of “see no evil, speak no evil, hear no evil” it’s more a case of: “I didn’t see who made the decision, I didn’t speak to anyone who made the decision, and I certainly didn’t hear from anyone who did make the decision“. In exchanges with the media and at the Inquiry, some of the players have even tried to deflect responsibility onto their counterparts, along the lines of, “I assumed X had made that decision”, or “the decision had been made before I got to the meeting”.

Yet, somehow, a decision was made.

So was the decision taken telepathically, organically or via a process of osmosis – the people involved simply “knew” or “sensed” that a decision had been made?

In case anyone think I am being unfair or I am deliberately misconstruing the situation, let’s follow the logic of what we are being told, and as a consequence, what we are being asked to believe. Earlier this month the Hotel Quarantine Inquiry heard evidence about an apparent administrative “decision” to exclude the Chief Health Officer “from taking control of the state’s coronavirus response against his wishes and in contradiction to the state’s own pandemic plan”.

A few weeks prior, the Premier was reported as saying:

I wouldn’t want anyone to assume that anyone had made an active decision that [the Chief Health Officer] should be doing certain things.”

And there is the nub of the issue – as voters and tax payers, we are expected to believe that none of our elected representatives, civil servants or public officers have made specific decisions about key aspects of the public health response to the pandemic.

In his evidence to the Hotel Quarantine Inquiry, the Secretary to the Department of Premier and Cabinet gave further insight into the decision-making processes. Like his colleagues and counterparts, he was “unaware” who ultimately made the decision to use private security firms. Instead, he suggested that decision-making was shared among key experts:

“I have a strong view that the concept of collective governance where you’re bringing together the special skills of different actors to deal with complex problems is an important part of how we operate,” he said. “So you’ve asked for my response, as the head of the public service, I can see some legitimacy in the idea of there being collective governance around an area such as this.”

So does “collective governance” mean that no single person is responsible for decision-making (and as such, no individual can take the credit or be blamed for a specific decision)? Or does it mean that everyone involved is responsible, and as such they are all accountable for the decisions made by the “collective”, or which are made in their name or on their behalf? In which case, if the decision to engage private security firms was the root cause of the second wave and the Stage 4 lock-down (and all its consequential social and economic damage) should the “collective” all fall on their swords?

As the Guardian commented last week:

“The hearings have been running for several weeks now, and no one has yet claimed personal responsibility for the decision to use private security guards in hotel quarantine. The murkiness around this decision […] has become almost more significant than the decision [itself]. In inquiries like these, being unable to elicit a clear answer to such a key and really simple question is usually not a good indicator of the underlying governance protocols in place.”

Having once worked in the public sector for five years, I know that there are basically four types of decision-making outcomes in Public Administration:

  1. A good decision made well (due process was followed, and the outcome was positive and in accordance with reasonable expectations – job done)
  2. A poor decision made properly (the due process was followed, but unfortunately it turned out badly – shit happens)
  3. A good decision made poorly (we stuffed it up, but sometimes the end justifies the means – high-fives all round)
  4. A poor decision made poorly (no-one in their right minds would have come to that conclusion, and the results speak for themselves – we’re toast)

Subject to the evidence to be presented to the Inquiry this week (and depending on how the transition out of Stage 4 lock-down goes), I fear that in the case of the decision to outsource hotel quarantine security, it sits squarely in category #4.

I can almost imagine the scenario when the “decision” to hire private security guards was communicated to the various Ministers, Civil Servants and Public Officers:

Member of the Collective #1: “OK, the State Government has been asked to implement the Hotel Quarantine programme on behalf of the Commonwealth, so we need you, you and you to organise the security hiring arrangements. We don’t care how you do it, or who you use, but just get it done, and make sure that any poor outcomes can’t be attributed to any of us.”

Member of the Collective #2: “Can we take up the offer of assistance from the ADF?”

Member of the Collective #1: “Don’t ask. (Don’t get.)”

Member of the Collective #2: “Oh, so we’re working under a policy of plausible deniability?”

Member of the Collective #1: “You didn’t hear that from me.”

Member of the Collective #3: “Is so-and-so aware of this decision?”

Member of the Collective #1: “I don’t know, and you don’t need to know either.”

Member of the Collective #4: “Got it. Didn’t see it, didn’t say it, didn’t sort it.”

Of course, this dialogue is pure conjecture on my part, but I think we’ve all seen enough episodes of “Yes Minister”, “The Hollowmen” and “The Thick of It” to know how these things play out….

Next week: The Age of Responsibility