CEDA - Energy Options and Security
Andrew Smith CEDA Speech 24 June 2014 Australia Open For Business “Growing Australia’s economic base”
Good morning Ladies and Gentlemen. I would like to begin by acknowledging the traditional owners and custodians of the land on which we meet today, the Ngunnawal (none-a-wall) people, and pay my respects to their Elders both past and present.
Also I would also like to acknowledge Minister Joyce and Minister McFarlane. Today’s conversation is welcomed by the business community, and I am sure it will make a contribution to the future prosperity of our nation.
I’d like to thank CEDA for putting together two days of robust discussions.
I was struck when reading the abstract for this year’s State of the Nation.
Like so many Australians I listened intently to prime minister elect Abbott on the evening of September 7 last year. On that evening the words “open for business” resonated through living rooms across the nation – and the next morning dominated the headlines in our capital cities and our regions.
Today’s abstract states these words resulted in “headwinds of change flowing through our economy”, and warned that: “national productivity and economic growth have become increasingly constrained”.
It is twelve months since I shared this stage with Minister McFarlane, and today I would like focus on the issues we are still discussing – adding my perspective.
Shell has been in Australia for 113 years, and today more than ever we see Australia as a great place to do business.
As a nation Australia is blessed with some the planets most abundant natural resources and a small and highly educated population. We possess the natural gas, iron ore, arable soil and river systems that enable us to make this dry continent so productive.
We are also a nation served by world class infrastructure. Infrastructure built and paid for by many generations of hard working Australians. The roads, railways, ports, airports, mines, factories and universities that enable us to fully participate in the global economy.
As an island economy Australia is a trading nation, and Australians have always benefited from free trade. Indeed it has been the willingness of Australians to trade and liberalise our economy that has delivered 22 consecutive years of economic growth.
As we cast an eye to the future, we quickly realise that these are the advantages of yesterday.
Herein lies the challenge. If we are to continue our trajectory of economic growth, and the advantages that brings our citizens, what are the hard choices we need to make today?
We need to shift debate so that citizens understand how difficult it will be to ensure our children enjoy greater prosperity than we did. The mining boom made everything appear easy. The narrative of China on our doorstep, of Asian urbanisation and endless resources – made us complacent.
We need to remember that many of the projects that will ensure sustained growth are high cost, and are speculative. So what are the nation building steps we can take in 2014 to ensure Australia remains ‘open for business’ into the middle of this century and beyond?
One way is to ensure Australia maintains a sustainable budgetary position. We are a nation that has traditionally tried to live within its means. That is not something we should walk away from. While I do not intend to say much on last month’s federal budget, I will say one thing. For the business community a sustainable budget is important, because it remains the best way to ensure stable fiscal settings, and volatility in the fiscal environment is a powerful disincentive to investment.
Like any company or household, Australia simply cannot afford to spend more than it earns. As a small, open and capital importing economy it is essential that Australia lives within its means. Australia must regain a strong and sustainable fiscal framework so that it can remain resistant to future global economic shocks.
In the broader context, for me the phrase ‘open for business’ has three strong pillars. They are an internationally integrated economy, a productive economy and an economy with limited market intervention together with competent and efficient regulators.
The first pillar is that of a trading nation with deep links into the international economy. As a people we must acknowledge that it is only through international collaboration that we will prosper. Indeed, the history of my own business provides some great examples of how international linkages can help Australia unlock its own potential.
In the early 1980s the partners in the North West Shelf Venture – often described as Australia’s most successful resource project – were struggling to find an economic development model for the project. At that time the LNG plant design included water cooling and steam driven turbines. But this development option was prohibitively expensive.
Through its international network of LNG engineers, a Shell team was able to redesign the plant to include the world’s first air cooled gas turbine driven LNG plant. This innovation – achieved through an international design team – allowed the JV to reduce the capex required for construction by around 20 per cent. A final investment decision was taken two years later, and the long term contribution of this project to Australian economy is still being felt.
My second pillar of an Australia that is ‘open for business’ is an economy that is free from unnecessary restrictions on productivity. I was struck by a comment I heard the Prime Minister make recently at the Sydney Institute. In talking about the budget he said “we can’t be a generous society unless we are also a productive one”. This idea can be taken further to say we will not be a successful economy unless we are a productive economy.
We have long known that Australia has become a high cost labour market. This is the direct result of our success in raising wages and living standards. We should never be ashamed of the standard of living that our economy has delivered to Australian workers, but equally we should never accept inefficiency in our workplaces.
When high labour costs are coupled with inefficient workplaces - international capital recoils, and looks for more attractive investment destinations. If the next generation of Australian workers are to prosper in our open economy we need to identify and remove impediments to labour utilisation.
Shell’s own experience in planned maintenance activities illustrate the point well. One particular maintenance task we evaluated planned for:
- five skilled workers to spend 500 paid hours to complete a task;
- naturally we added scheduled breaks and travel, this figure grew to 600 hours;
- but because of restrictive workplace practices, such as demarcation, it led to an actual labour spend of 700 hours.
The result was we had 500 hours of work, but we paid for 700. This was a double blow. Not only did it cost more to complete the task, but the equipment being maintained was unavailable for longer than expected and longer than necessary.
In Australia’s high wage environment, when an oil industry worker is paid approximately 130 per cent of the American Gulf Coast benchmark, we need to refocus on maximizing effective hours at work. A first positive step would be to eliminate unproductive clauses in enterprise agreements. We need to rid EBAs of work practices that impinge on the right to
allocate labour effectively.
Further we need enterprise agreements that provide certainty in investment. When a government or company decides to build a project, be it a freeway in one of our capital cities or a remotely located resource project, it is only fair that it can make a reasonably accurate estimation of the labour costs it will incur in construction. At present enterprise agreements do not deliver that certainty. It is only through greenfield agreements that last the length of a construction process that this certainty can be delivered.
Naturally these agreements can include wage increases based on inflation. But agreements that expire mid way through construction projects are a disincentive to investment, as they often lead to prolonged bargaining periods and industrial disruption.
Finally on the issue of industrial relations, I would like to welcome the government’s reintroduction of the ABCC. While some unions continue to ignore their obligations under enterprise agreements and the Fair Work Act – the ABCC as an independent regulator is needed to hold all parties accountable for their actions and ensure compliance with their obligations under the law.
The final pillar of an Australia that is ‘open for business’ is that of an economy with limited market intervention. This is an area where many generations of Australians can feel proud. Since the 1970s Australia set a cracking pace of deregulation that transformed an isolated economy that could only have dreamed of G20 participation – into the eleventh biggest economy on earth. So successful was this economic transition that Australian’s now boast the fifth highest GDP per capita in the global economy.
Along the way we took significant steps, some that resulted in the type of pain that transitions often produce. We tore down tariff barriers that buttressed inefficiency, we deregulated industries that penalised consumers and we floated our dollar. The result was our great services economy. The economy that delivered growth through the Asian financial crisis and the GFC. But despite the obvious advantage that deregulation has offered, there are some in our community that advocate for a return to protectionism, for example in relation to the export of Australia’s natural gas.
Despite a recent government report that found we have enough gas for 184 years of domestic consumption – not including potential shale gas deposits – some in the community feel we need to quarantine gas for local industry. While this debate is often couched in terms of protecting supply the real contention is price.
But to see the development of additional gas resources we need an efficient and effective gas market to provide the price signals necessary for innovation and investment to occur. Fluctuating prices based on supply and demand changes characterise a healthy, functioning market. And ultimately they deliver the best results for consumers.
We also see fluctuations every day in the prices of commodities such as iron ore, wheat and coal. But we don’t see a debate around the need to reserve iron ore, wheat, or coal, as a means of bolstering Australia’s steel or grain industries.
As we move towards the G20 in November, the B20 of which Shell’s a member, has set up a trade task force. This is focusing on increasing the emphasis on the trade in services and wider moves to liberalise trade and resist and wind back protectionism. According to analysis by the World Economic Forum if every nation improved two key non-tariff barriers halfway towards what is considered best practice, global GDP could increase by $2.6 trillion and global trade by $1.6 trillion.
The lesson here is clear – open markets increase economic activity, and ultimately this benefits people.
At the same time I believe the business community understands dealing with growing global challenges will require innovation, leadership and resolve in dealing with our own need to become competitive internationally. Put simply, industry will need to become more innovative, collaborative and self-sufficient. In closing, the challenge for policy makers, business leaders, the Australian workforce and the community is to focus less on the short term issues that dominate investment and electoral cycles.
From industry we must see greater collaboration and from our political leaders we must see a greater level of bipartisan cooperation on the important issues.
If I could close by revisiting the observation that the mining boom made everything appear easy. We must continue to respond to a new set of challenges, and we need to remember why. While the topics I have raised may appear dry – responding to these challenges is key to providing safe well paying jobs for our children.