THE HOLLOWING OUT OF AUSTRALIAN INDUSTRY
THE WORLD ECONOMIC FORUM, DAVOS & THE A50 ECONOMIC FORUM, SYDNEY
Two recent events, vital to Australia’s hazy future, have run their course for another year: the first in January, the World Economic Forum, Davos, Switzerland and the second in February, the A50 Economic Forum (dubbed the mini-Davos) at the Sydney Opera House.
Davos was an international collective of powerful global CEOs and major political decision makers. Their final communiqué was one of dire warning. The A50 meeting in Sydney was a Federal Government initiative to invite fifty potential foreign investors overseeing $17 billion of investment funds, part of which might find their way to Australia. There are economic headwinds and navigational hazards to be negotiated before investors can reach a decision. (AFR Weekend, 8 Feb. 2017)
The World Economic Forum, Davos
To return to Davos – the final communique warned that, as technological, demographic and climate pressures intensify, there is a danger of systems failure (SA energy crisis and NSW partial power crisis). Competition between world powers and fragmentation of security efforts will put collective prosperity and survival at risk. There are three specific concerns, none of which are of an economic issue (Future Finance, 15 Jan. 2017):
- proliferation and use of weapons of mass destruction,
- rise of nationalism and declining cooperation between world powers,
- climate change leading to crisis and disaster.
The Forum did emphasise the moral and ethical dilemmas of the Fourth Industrial Revolution. To date the Homo sapiens Revolutions through the Anthropocene have been:
- First – from agrarian to coal/steam power,
- Second – urbanisation, electricity and mass production,
- Third – digital and mass travel,
- Fourth – internet, robotics and artificial intelligence.
An urgent problem of the current Revolution is the need to invest in young people and the increasing risk of rising inequality between the techno-super rich and the rising underclass. Concerning the construction and application or artificial intelligence (robots), it was recorded that Australian business is not ready to embrace Artificial Intelligence. Participants in a seminar involving USA, UK, Canada, Australia, China, France, India and Germany concluded Australia was trailing in skills uptake and risks becoming uncompetitive due to a poor grasp of STEM subjects. (The Guardian, 25 Jan, 2017)
The take-home message from the World Economic Forum for Australia is:
- Australia is lagging in its preparation for Artificial Intelligence due to inadequate STEM skills,
- The seeds of social instability are starting to germinate due to loss of industry to Asia, unaffordable housing and under employment,
- Australia’s relative decline in GDP (corroborated by CSIRO electricity consumption forecasts) is partly due to small population. Unlike Canada, Australia does not have the United States as an adjacent trading partner.
The A50 Economic Forum, Sydney
In early February, hard on the heels of the debilitating Davos findings, Australia hosted an investment seminar for fifty principals responsible for $17 trillion of investment funds. The purpose was to assess Australia’s economy (infrastructure and property markets) for investment opportunities and to determine the probability of economic survival following the resources slow-down and the fragmentation of the global trading patterns. These giants of the financial world will arrive at their own conclusions aware Australia is facing economic uncertainty due to several factors:
- Credit Ratings The credit rating agencies, Standard & Poor’s, Fitch, Moody’s, have warned Australia that its AAA credit rating might be down graded if the budget situation does not improve.
- Corporate Tax Rate The Government’s intention to reduce industry tax rate from 30% to 25% over four years may be too little too late and may not impress investors. The tax rates of Australia’s competitors are comparable to that of the Australian proposal e.g. Korea 24%, Malaysia 25%, Thailand 20%, Canada 15-25%, India 30% and Japan 32% . A potential bomb shell is that if the USA reduces the tax rate to 15% and boosts infrastructure spending, there will be a flight of capital to the USA from Australia. This would be a bad outcome for Australia.
- Imputation and GST Although some nations have a higher tax rate than Australia, its Achilles Heel is the dividend imputation and the 10% GST. Since Australia does not tax dividends the Government will suffer a huge revenue loss when combined with the reduced income when the lower corporate tax kicks in. Industrialised countries normally do not provide this tax free wind fall to shareholders. Without the burden of imputation corporate tax rate would fall to 19%. The rational policy would be to remove imputation – politically this is not possible. With GST the sensible option would be to increase this to 15% to provide the Government with extra income – politically this does not appear possible either. GST for other industrialised nations are Germany 19%, New Zealand 15%, United Kingdom 20%, Japan 8%. (Weekend Australian, 25 Feb. 2017)
- Sovereign Risk A50 investors may seek explanation of why the Australian Government rejected a bid for NSW Ausgrid by CK Infrastructure Holdings, Hong Kong, in 2016. Among discussion points it is possible that the expanding role of Chinese investment in the Australian energy industry will become a topic for conversation. An approximation of Chinese investment in this industry is:
– NSW Energy Australia is partly owned by Chinese Light and Power,
– ACT 50% of power distribution is owned by Singapore Power International,
– VIC CK Infrastructure, Hong Kong, owns 51% of Citi Power. CK Infrastructure has also bid $7.6 billion for Duet Energy
which controls gas pipelines in Victoria and Western Australia,
– SA CK Infrastructure owns 51% of SA Power Networks.
Confidence in the Australian power industry may have suffered by recent power failures in South Australia and New South Wales. In both cases, there were extensive power failures and heavy industry was required to cut power consumption, or lost power to major industrial complexes, namely – the BHP Cu-U Olympic Dam project, the Arrium steel mill, Whyalla, and the AGL Tomago aluminium smelter, Newcastle. If the violent winds and high temperatures have already caused these problems so early in the Anthropocene then far worse extreme weather may be expected in the period 2020 to 2030.
Australia’s Growth Projections
The Australian Electricity Market Report to 2020 and 2030 provides an estimate of future power consumption. Two growth scenarios are suggested. The first estimate suggests an annual growth rate between zero and 2.5% with a declining rate over time reflecting slow population growth. Uncertainties for this prognosis are exchange rates and manufacturing competitiveness, household energy use and the relative balance of centralised, on-site and off-site electricity generation. The second estimate considers consumption growth will be below 2% a year which is below the projected national economy growth rate. (CSIRO, EP141067,2014)
The messages for Australia from Davos and Sydney are:
- A Davos panel considers Australian business is less prepared for the Fourth Revolution than other industrialised nations.
- The threat of a downgrade to Australia’s AAA credit rating exists.
- The Government is facing a significant revenue loss from the combined effects of a lower tax rate, dividend imputation and a low GST.
- Australia is regarded as a stable investment platform but investors may require an explanation on the nature of Chinese investment and control in the National energy industry.
- The effect of recent extreme weather events on Australian power security will be scrutinised.
- Investors require stable growing markets – the growth projections for population and energy consumption will be closely scrutinised.