Enterprise Zones (2001)

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An independent study of Enterprise Zones (commissioned by The Regional and Rural Issues Group at Institute of Chartered Accountants of Australia and Enterprise Zones working group at Local Government and Shires Association of NSW) proposed the establishment of a taskforce to integrate incentives to arrest economic decline in the bush. This was also supported by the National Farmers Association. Rather than moving people to the jobs, one should move the jobs to the people. The study was undertaken by Ian Manning of National Institute for Economic and Industry research. Enterprise Zones would emphasize investment to create long term regional competitiveness. Enterprise zones establish tax and commercially friendly environment for 10-15 years and provide some of the commercial needs for higher risk investments (Sheehan B. and Aplthorpe G 'Government has failed the bush', Financial Review, 28/5/01)

The idea of enterprise zones is being advanced by the Local Government and Shires Association of NSW and the Institute of Chartered Accountants. the idea is that it is better to provide incentives to firms that create regional jobs than to provide funding for reports on opportunities that no one may ever take up (Woods P and Montgomery M. 'Enterprise Zones - a way to develop regions', Financial Review,  1/11/01)


CPDS comment

There can be problems with 'artificial / special' arrangements and incentives such as would be created under an Enterprise Zones arrangement in that:

  • incentives may attract investments which are of limited productivity (and which are not viable without those incentives) which do not contribute to the real long term competitiveness of the region.  Australia as a whole long sought to use 'incentives' (ie tariffs) to attract industry location, and discovered that this created an industry structure which lacked the motivation and capability to be internationally competitive - but which was then dependant on those incentives being continued - and politically influential;
  • experience elsewhere also suggests that investors attracted by lowering their costs may tend to move on when they get a better offer;
  • incentives may attract artificial / 'dodgy' schemes which cast suspicion on viable projects. For example:
    • 10 companies want to raise $430m for investment in rural centres. But this is very hard because the PE ratio for these firms is only 5. They are offering tax effective investments which are perceived as only marginally legal. This leads to even commercially viable projects being assessed harshly (Jacobs M., 'Rural investments deserve a break', Financial Review, 14/6/01)
  • it is not at all clear how one would 'provide for the commercial needs of higher risk investors' without first genuinely developing the region's economy (as artificial 'help' can only ever allow temporary 'success')
  • special arrangements may not actually be necessary - because viable economic development may be feasible (as below)

The prospects of rural and regional Australia should be dramatically improved by a change in community assumptions about economic strategy to give priority to 'productivity' as the path to increased investment. The first change required is from the traditional emphasis on comparative advantages (ie the natural advantages of a region such as natural resources) onto building competitive advantages (ie the knowledge and skills of people, and the effectiveness of organizations). The second change required is to end the industrial era tactic of seeking to attract outside investment as the path to development, and begin emphasis on developing the productivity of enterprises already located in the region (See Defects in Economic Tactics, Strategy and Outcomes).

Productivity is high where there is a large difference between the market value of what is produced, and the costs incurred in producing it. High productivity supports high profitability, high wages and salaries and high net payments to government. In a competitive environment, those who rely on the comparative advantages available generally in a region, often find prices bid down to near their costs. Value added can be large through having competitive advantages, based on the capabilities (such as scale, technological knowledge, marketing capabilities, quality, service capabilities or increased efficiency) of firms in the region. These allow additional 'value' to be captured, but often only temporally, before competitors catch up. High ongoing productivity requires the ability to constantly create competitive advantages.

A Scenario - Major Inland Cities: In 2010 six inland centres in Queensland (Charleville, Roma, Emerald, Longreach, Charters Towers and Mt Isa) are growing rapidly, a prospect which has been noted by national companies and property developers and is beginning to be reflected in their investment plans. In each centre, the community is developing competitive advantages through their enterprises' knowledge, skills and effective international connections, which have dramatically increased the productivity of industries in the region. Investment in those industries has increased, and specialised suppliers to those industries are moving in. Individuals and small firms whose business is conducted by telecommunication, as well as retirees, are locating in these centres because of lifestyle advantages, the improving facilities in the area, and the prospect of capital gains on property. Local authorities are concerned about the need for proper planning for rapid growth, and about funding the necessary infrastructure. Delegations are sent to state and federal governments to ensure they are made aware of what has happened, and that the needs of these centres are reflected in government budgets. Several other inland communities are adopting ambitious goals for their future.

Viable means probably exist to develop a regional industry cluster without governments providing long-term artificial / special support - see Developing a Regional Industry ClusterImplementation through encouraging enterprise is a critical part of this proposal. Simply preparing reports on opportunities is likely to be a waste of time.