Queensland's Local Industry Policy

Comments on Queensland's Local Industry Policy (2009)
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The Local Industry Policy

A policy to promote local participation in the supply chains for major investments in Queensland has recently been developed, and is outlined below:

Outline of Local Industry Policy: A Fair Go for local Industry (Queensland Government, December 1999): The Government is committed to 7 key priorities in terms of: jobs; building regions; raising skills; safe and supportive communities; quality of life; environment; and government leadership. To create jobs government will support investment and key industries. However recent trends have involved major project proponents using global supply chains, thus invalidating the past assumptions about major projects creating flow-ons to local firms. Government will ensure that local industry can participate in major work undertaken in Queensland - by encouraging project proponents to seek local capability (with mandatory requirements for publicly funded projects, and GOCs), and assisting local firms to be internationally competitive. Training and skills development will also be responsive to industry needs. Initiatives will involve:

ensuring firms have an opportunity to tender - by making this expectation clear to project proponents;

establishing a Local Industry Taskforce of key industry groups;

requiring Industry Participation Plans for publicly funded projects, and requiring GOCs to show responsiveness to government priorities (including opportunities for local producers) in their Annual Statements of Corporate Intent;

supporting the Industrial Supplies Office (which provides information on Australian manufacturing capability) and will now advise government agencies, project proponents and Queensland industry;

supporting innovation, flexibility and best practices to build local industry capability - where DSD is also developing a Queensland Industry Participation Program (which will focus on import replacement opportunities, and support for clusters of supply chain industries). General support for industry will involve: targeted industry grants; enterprise improvement programs; supporting regional development organisations; a competitive operating environment; and incentive programs;

integrating Local Industry Policy with (a) new Statewide Purchasing Policy (which requires government purchasers to consider all government priorities in assessing 'value for money', and be aware of global supply chains); (b) policies on private infrastructure provision (which will be enhanced by producing a draft state infrastructure plan, identifying specific projects, evaluating private participation and allowing private proposals, and entering partnership arrangements); and (c) skills development involving: DETIR in ensuring provision of targeted vocational education and training (through Training Queensland) and entering partnerships; requiring training on public works projects; and providing incentives for training in building and construction;

supporting use of Australian standards.

Assessment

The Local Industry Policy, while having some superficial appeal, is not likely to be effective in practice in achieving its desired goal - ie increasing jobs for Queenslanders. The reasons for this are outlined in Attachment A. In particular:

many of the major projects which local firms are expected to supply may not eventuate;
global niche markets may be a better option for firms than import replacement;
purchasing agencies are expected to make impossible judgements, and risk corruption;
DSD's similar Queensland Industry Participation Program appears to have weaknesses;
'red tape' will be increased;
GOCs' position would not be competitively neutral, risking budgetary losses; and
the proposed state infrastructure plan is impractical.

An experienced observer recently suggested that the policy environment in the Queensland Government is now the weakest he has ever seen. The Local Industry Policy, which has been adopted, certainly gives weight to his argument.

3 February 2000

Attachment A: Specific Deficiencies in the Local Industry Policy

1. Heavy reliance is apparently to be placed on 'major projects' from which local firms are expected to rely on flow-ons. These presumably are to be mainly mineral and energy related. However, while many such investments have occurred over the past 20 years, the firms involved have typically experienced poor returns on capital due to the perpetual weakness of commodity prices. This may be a structural (rather than a cyclical) problem associated with (a) the poor bargaining position of producers of un-differentiated products; and (b) the fact that they typically compete in capital intensive production with suppliers in less developed economies with much lower wage rates - which manufacturers discovered was not a viable position in the 1960s and 1970s. Increasingly it appears that the 'production' oriented strategies of such firms will shift to 'shareholder-value' oriented strategies. Simultaneously environmental uncertainties will apply to some energy related projects. Thus, while Queensland will gain some similar investments, 'business as usual' for major investments should not be expected. Thus a policy built on 'business as usual' may well not produce many future results, quite apart from the doubts which must arise about the overall economic benefits which have followed in the past from a simple 'investment and production' focussed approach to development strategy.

2. Local firms are encouraged to rely on an import replacement strategy - rather than on global niche markets. The latter would probably be far more viable. In other words firms may well do better as specialised suppliers to global market linked to (say) Type A projects, rather than unspecialised supplier to whatever range of projects (Types A, B, C .... Z) happen to proceed in Queensland. Two indications of this are:

the apparent revolution which is occurring in the organisation of inputs to industries like aluminium (Ellis S. 'Size Matters when you're trying to be efficient', Australian, 19/8/99). Presumably this reflects firms' efforts to improve past dismal returns on capital. The authors of Local Industry Policy have observed the consequences of this, ie major investors reliance on global supply chains - but have responded, not by promoting the opportunity, but by trying to 'do a King Canute' and hold back the tide.
the extraordinarily rapid growth (20% pa) which AUSTMINE reports is occurring in Australia's exports of mineral related services - which have been estimated to make this into one of Australia's biggest 'mineral' export commodities by 2005 (Cribb J., 'Sidestepping the Shiploader', AMEEF Innovation Conference, 31/3/99).

3. Government agencies are expected to make judgements about the effect of their purchasing decisions which are intrinsically beyond their ability, and invite corrupt practices. For example they are expected to be aware of supply chains, and to make optimal decisions in terms of contributing to a competitive industry. Such insights are completely impossible. The government priorities they are expected to take into account are insufficiently defined. For example, what exactly is meant by creating 'jobs'? This might imply (a) subsidising business to provide employment (which would make job creation a government responsibility, as well as slow and expensive and ultimately self defeating when government funds are exhausted) or (b) encouraging high productivity so that job creation is automatic and self sustaining. However even with the best will in the world, government purchasers can not identify what is required to create the competitive capabilities in the economy needed for high productivity - because this involves understanding literally everything about the global economy. The purpose of an efficient price mechanism in an economy is to enable purchasers to ignore what happens in the supply chain (which they can never know enough about). The requirement to make digressionary choices in purchasing about secondary policy goals is furthermore an opening for special pleading by interest groups and for corruption.

4. The Queensland Industry Participation Program appears to considerably overlap the Local Industry Policy and to itself suffer considerable weaknesses, including: the emphasis given to import replacement and purely local supply chain industries (as above); and the 'targeting' of industry grants (to goals determined by committees?).

5. Some increase in 'red tape' will result from the policy, eg through Industry Participation Plans now required for public projects; through seeking to have the ISO (rather than entrepreneurs) manage the interface between investors and potential suppliers; through managing requirements for skills development though DETIR; and through the Statewide Purchasing Policy which requires purchasing agencies to be aware of global supply chains and the effect of purchasing decisions on markets.

6. GOCs, by their obligation to take account of the broad objectives of government, would be placed in a position which is not competitively neutral unless offsetting Community Service Obligation payments are made (which has not been indicated by the policy). Every time that GOCs, who operate in a competitive environment, are required to do something which does not involve using their assets for the greatest financial return, their chance of delivering unforeseen losses to the government budget is increased.

7. The proposed development of a state infrastructure plan from which projects would be identified for private participation appears impractical because any such planning must be undertaken on a functional basis, and be responsive to a diversity of considerations which are specific to that function (ie one can develop a plan for a roads' system, but not simultaneously, through a single organisation, produce a meaningful plan for roads and 20 other different types of infrastructure).