Commonwealth Government assistance to industry is considerable. According to the Productivity Commission, in 2011-12 budgetary assistance totalled $5.1 billion and takes various forms.
Source: Productivity Commission
Despite the large amount of money being spent, Commonwealth industry assistance is currently provided on an ad hoc basis. There is a range of programmes across multiple portfolios with differing goals, transmission mechanisms and levels of effective assistance. In many cases, the benefits of industry assistance accrue entirely or largely to the firm or industry supported, favouring one firm or industry over others.
The shortcomings associated with governments ‘picking winners’ are well known. Rather than relying on taxpayer support, market competition provides powerful incentives for firms to improve the quality of goods or services to meet consumer demands.
As outlined in Chapter Two, governments have an important role to play in setting the right environment for market competition to flourish. This includes creating a stable macroeconomic environment and pursuing microeconomic reform by eliminating unnecessary regulation, promoting more flexible labour laws and an efficient and competitive tax system.
A reduction of budgetary assistance to industry, which in most cases benefits a small number of firms, should be accompanied by a renewed commitment to broader reforms which will improve the operating environment for all businesses.
The Commission considers that:
- assistance should be well designed and targeted and be limited to areas of genuine market failure, where the benefits of government intervention clearly outweigh the costs;
- the activity should be undertaken by the most appropriate level of Australian government – whether by the Commonwealth Government or a lower level of government, to avoid duplication; and
- consideration should be given as to whether part or all of the cost of a government activity should be recouped directly from the beneficiaries of that activity.
This approach recognises that there may be a role for government in providing industry assistance where the market genuinely fails to produce the best outcomes, such as:
- encouraging research and development where the benefits clearly outweigh the costs and there are likely to be significant spillovers for the broader community;
- providing structural adjustment assistance in some situations, for example, to help workers adjust to a major dislocation caused by the closure or downsizing of a major employer; and
- intervening when there are clear externalities and where government can do so at less cost than the directly affected parties.
Consideration should also be given to either abolishing or merging all industry assistance programmes with a budget impact of less than $5 million per year. This would result in a reduction of departmental costs.
The Commission considered industry assistance programmes against the guidelines outlined above and, as shown in Table 8.1, proposes that 22 be rationalised, phased-out, abolished or have their funding reduced.
Further information on these programmes is outlined in Section 10.1 of the Appendix to this report.
|Programme name||Abolish||Merge||Reduce Funding||Other|
|Specific firm or industry assistance|
|Automotive Transformation Scheme|
|Ethanol production subsidies|
|Rural Financial Counselling Service|
|Enterprise Solutions Program|
|GM Holden grant|
|Cadbury Factory funding|
|Steel Transformation Plan|
|Clean Energy Finance Corporation|
|Service available from private sector|
|Small Business Advisory Services Program|
|Mix of public and private benefits|
|National Landcare Programme|
|Murray-Darling Basin water recovery|
|Bass Strait Passenger Vehicle Equalisation|
|Tasmanian Freight Equalisation Scheme|
|Assistance to exporters|
|Export Market Development Grants Scheme|
|Asian Business Engagement Plan Grants|
|'Tourism Quality' grants|
|Total programmes: 22||17||2||4||1|
Source: National Commission of Audit
There are also a number of research and development programmes that assist industry. Research and development assistance is detailed in Section 8.2. Drought assistance is addressed in Section 8.5.
The Commission has identified a number of programmes where there is no genuine market failure and where benefits accrue entirely or largely to the firm or industry supported.
These include: the Automotive Transformation Scheme, the Steel Transformation Plan, ethanol production subsidies, the Rural Financial Counselling Service, Enterprise Solutions, the Clean Energy Finance Corporation and specific funding to GM Holden and the Cadbury factory in Tasmania.
Other programmes which should be abolished under this category include schemes which currently fund services that are, or could be, readily provided by the private sector without government intervention, including Enterprise Connect, Commercialisation Australia and Small Business Advisory Services.
The Commonwealth also funds a number of bodies and programmes intended to assist Australian exporters. These include the Australian Trade Commission (Austrade), the Export Finance and Insurance Corporation (EFIC), the Export Market Development Grants scheme, the Asian Business Engagement Plan Grants and support for the tourism sector.
In the time since these organisations and programmes were founded, there have been significant changes in the international environment, greater availability of information (notably through the internet), an increased maturity of the financial services sector and greater accessibility to professional services firms on a global basis.
As noted by the Productivity Commission, virtually all of Australia’s exports by volume and value take place without EFIC’s assistance. Support provided by EFIC has mostly been directed at a small number of large businesses, including major resource projects.
There is no convincing evidence of systemic failures in financial markets that impede their access to finance. In recent years EFIC has earned most of its income through the investment of surplus funds and its capital and reserves, not the provision of financial services.
The Commission considers that EFIC should be abolished as there is little evidence of genuine market failure in the provision of export finance.
In 2011-12 Austrade was provided with funding of approximately $335 million. Austrade’s annual report indicates that in that year, its assistance led to 205 export sales ‘either under negotiation or concluded’. This does not appear to represent value for money with relatively high costs for the number of business opportunities generated. The return on investment is poor.
The Commission considers that any residual functions of Austrade such as ongoing trade facilitation should be incorporated into a commercial arm of the Department of Foreign Affairs and Trade. This will allow a greater focus on trade facilitation and diplomacy within the Department and reduce duplication of corporate services and other overheads. The existing loan book of EFIC should also be transferred to the Department of Foreign Affairs and Trade to investigate options to on-sell or wind up the loans. Other reforms to Australia’s foreign affairs arrangements are outlined in Section 8.4.
The Export Market Development Grants scheme, administered by Austrade, reimburses small businesses for up to half of their international marketing costs, including for consultants, marketing visits and promotional material. The previous National Commission of Audit argued that the scheme should be abolished as the benefits of success are able to be captured by the business itself without other benefits to the community.
Popular as the scheme is, there is unlikely to be a significant spillover effect from the Export Market Development Grants scheme, as little economy-wide learning is promoted. Changes in the international environment mean that businesses have more experience and more opportunities for international marketing and therefore less need for government assistance. Austrade’s 2011-12 Annual Report stated that 38.7 per cent of Export Market Development Grant recipients during the previous financial year employed four people or less.
Similarly, the Asian Business Engagement Plan provides funding to assist member-based business organisations to harness commercial opportunities in Asia for small to medium sized Australian businesses, with the benefits then accruing to business members of the organisations. There are minimal broader spillover effects outside of these business members.
Approximately $185 million of Commonwealth funding is directed towards tourism initiatives and management. Most of this funding is for Tourism Australia, although other programmes now administered by Austrade include ‘Tourism Quality’ grants and the Tourism Industry Regional Development Fund. The Department of Foreign Affairs and Trade is responsible for tourism policy.
Nearly two thirds of Tourism Australia’s budget is directed to advertising and other promotional activities. While tourism is one of Australia's main exports, most of the benefits of tourism accrue to the tourism operators. There is no clear reason why significant funding should be provided to tourism above other Australian export industries.
The States already provide a marketing budget for tourism. However, it is arguable that marketing Australia as a destination for international tourists should be undertaken at a Commonwealth level rather than on a State-by-State level. The Commission proposes that grant funding for the tourism industry be ceased, and funding for Tourism Australia be reduced by 50 per cent, to focus on international marketing, with the function incorporated into a commercial arm of the Department of Foreign Affairs and Trade.
The Commission has identified other industry assistance programmes which have a mix of public and private benefits. These programmes should continue but with reduced levels of Commonwealth funding. They include Screen Australia (where funding should be halved and focused on areas of Australian content, including those with an historical perspective that might not otherwise be funded) and the National Landcare Programme (where funding should be halved and better aligned to the goals of the Environment Protection and Biodiversity Conservation Act 1999).
Commonwealth funding is also provided to meet the public benefit of recovering environmental water for the Murray-Darling Basin. Water recovery is funded through a range of different measures including buying water entitlements and funding private infrastructure that will return water to the river system.
The Commission considers that the Government should focus on maximising public benefits and achieving value for money in its water recovery, not on providing industry assistance. This means moving away from infrastructure funding, which is significantly more expensive and which provides substantial private benefits to landholders.
The Commonwealth should also refrain from providing assistance in areas where there is already a State presence. Duplication of industry assistance programmes wastes taxpayer funds.
Programmes which should be abolished because there is already State funding, or where the States are clearly responsible for the function include the Bass Strait Passenger Vehicle Equalisation Scheme and the Tasmanian Freight Equalisation Scheme.
In addition to budgetary assistance, support to industry is also provided through trade protection, such as tariffs, and through other non‑tariff forms of protection, such as anti-dumping measures. In 2011-12, net tariff assistance to industry amounted to $1.1 billion.
As noted by the Productivity Commission, Australia’s current system of applying dumping fees to protect Australian producers from cheap imports ‘benefits a small number of import competing firms, but imposes greater costs on the rest of the economy’.
Dumping protection should not be implemented unless the benefits to affected producers clearly exceed the costs to other industries and to Australian consumers. Introducing an improved public interest test would be a practical way of assessing the benefits and costs of dumping protection.
Recommendation 32: Industry assistance
Rather than relying on industry assistance, commercial discipline drives firms to reduce costs and improve quality to better meet customer demands. The Commission recommends significant changes be made to the approach to industry assistance in Australia including:
- limiting assistance to areas of genuine market failure and occasional transitional assistance to deal with genuine structural change. In all instances the benefit of government intervention must outweigh the costs;
- rationalising, phasing out, abolishing or reducing funding for 22 existing industry assistance programmes;
- amending Australia's anti-dumping system to include an improved public interest test so that dumping protection is only implemented if the benefits to the affected industry clearly exceed the costs to other industries and Australian consumers; and
- the Government continuing its drive to reduce the cost of doing business in Australia in such areas as labour market reform, deregulation, energy policy and provision of economic infrastructure.
Recommendation 33: Assistance to exporters
As the benefits of exporting accrue primarily to the business undertaking the activity, the Commission considers that there is scope to reduce current Commonwealth assistance for exporters by:
- abolishing the Export Finance and Insurance Corporation, ceasing funding for Export Market Development Grants, tourism industry grants and the Asian Business Engagement Plan, halving funding for Tourism Australia and significantly reducing the activities of the Australian Trade Commission (Austrade); and
- moving any residual functions of Tourism Australia and Austrade into a commercial arm of the Department of Foreign Affairs and Trade, with the existing loan book of the Export Finance and Insurance Corporation also transferred to the Department of Foreign Affairs and Trade to investigate options to on-sell or wind up the loans.