Industry policy podcast discussion with Craig Lawrence from Lytton Advisory

Adept Economics Director Gene Tunny caught up with Lytton Advisory Managing Director Craig Lawrence recently in what ended up as a wide-ranging discussion on the pros and cons of interventionist industry policy. To listen to the conversation, and to check out the show notes, head to the link below:

Picking winners: Industry policy with Craig Lawrence

For the transcript of the conversation, read on.

Craig Lawrence Podcast Transcript

Gene Tunny  00:08

Welcome to the Economics Explained podcast. I’m your host, Gene Tunny. Last month, the government of the state of Queensland in Australia announced that it would possibly invest up to $200 million in the airline Virgin Australia, which is currently struggling. Some 20 years ago, the government of Queensland gave Virgin Australia a special investment attraction package – it gave it financial incentives to invest in Queensland in the first place – and now it’s looking at other measures that it can adopt to keep virgin viable and to keep its headquarters in Queensland. This raises an important question about whether such investment attraction or such industry policy measures are desirable. And to talk about investment attraction and industry policy more broadly. I’ve invited Craig Lawrence, Managing Director of Lytton Advisory back on to the programme. Craig, good to have you here again.

Craig Lawrence  01:30

Thanks for having me all again. Gene.

Gene Tunny  01:32

It’s a pleasure, Craig, would you be able to give us an understanding of what industry policy is based on your experience and also your general experience as an economist, please?

Craig Lawrence  01:50

Thanks, Gene. When we think of industry policy, we’re often thinking of a very interventionist approach that governments take, and in the past, governments were very keen to protect industries. So, a lot of the policy prescriptions were around providing tariff walls and barriers that prevented imports from other countries getting in to protect local industry. And also, governments in the past were very much more confident that they had insight or information that the market didn’t have that would enable them to pick sectors of the economy that would perform better and even in some cases, pick individual firms and subsidise individual firms to get involved. The other thing too, is that at some points in our economic history, there were just sectors of the economy that hadn’t been developed at all. And the private sector didn’t have the capital base to make the investments that were needed. So, a lot of our infrastructure in Australia, for example, our telecommunication systems and our ports were funded through public effort as well. So, there’s a long history there of involvement. But what we’ve seen increasingly is that as industries mature and as markets develop, and as information about those markets becomes embedded in them, that private investments are able to identify where or how best to allocate capital, particularly where there may not be significant large externalities. So, the costs of doing something are actually reflected in you know, the industrial activity itself. So, a lot of industry policy then shifted over time to looking at establishing a competitive environment for businesses to operate in, and also a ways in which to improve the productivity of different industry sectors as well. I guess that’s sort of the backdrop to some of the work that I was doing when I was in government. The other thing that was important too was the attraction of investment into an economy as well. And one of the areas that I worked in, in the government system, was actually looking at whether the government should put an investment into a particular firm in order to attract it, and to draw resources from another part of the wider Australian economy or overseas into Queensland. And, you know, we find that that that approach was done with Virgin, some 20 years ago. And you know, as you mentioned in your opening remarks, it looks like we’re a bit back to the future, but on a larger scale.

Gene Tunny  05:19

Right. So virgin, that’s an example of where the government wanted to develop an aerospace industry or an aviation industry. Is that correct? The government decided that it wanted to develop this sector, there were potential jobs in that sector, high paying jobs, and so therefore, it wanted to encourage the development of that sector. And likewise, they had measures to encourage the development of the film industry, and also biotech. But historically what we’ve seen is that the governments have tended to want to encourage manufacturing. After the war in Australia here we had governments establish high tariffs on motor vehicles and motor vehicle parts to encourage a domestic industry. Governments see something special in manufacturing, is that correct? What is it about manufacturing or other sectors that they that they want to attract? What is it that makes them desirable to the government? Why do they want to encourage those particular sectors?

Craig Lawrence  06:43

It’s a good question and a lot of manufacturing activities are actually about marshalling or pulling together a lot of natural resources and transforming those natural resources into a finished product. And so, I would argue that out of a lot of industry sectors that you would look at, the manufacturing sector probably has very significant supply chains. And we can see that with the experience of the automotive industry in Australia and the wind up of Australian manufactured cars, the extent to which that’s affected component makers here in Australia. And so, you’ve got forward and backward linkages that are very strong out of manufacturing plants. And also, the other thing is that that industry requires significant capital investment. And so, manufacturers face some very heavy decisions about making those investments and for government assistance, there’s an infant industries argument that, you know, after the Second World War, we wanted to see more manufacturing in Australia. We want to dial up different manufacturing sectors. So the argument went, well, if we protect those sectors, we can eventually grow them. And of course, the provision of the assistance should have been on the basis that when they grow up, and they’re no longer infant, you stop providing it. But what we effectively created was a rent seeking economy where industry continually found more and more reasons why they wanted to go to government and ask for continuing assistance. And in the case of the car industry, they literally did that for decades. I mean, having said that, there were jobs created, there was economic activity that was occurring. But the difficult thing to assess is the cost of that assistance, not only in terms of cost out of the budget and out of taxpayers’ pockets. But also, because these industries were protected from global competition, consumers actually didn’t get the cheapest cars for the same level of quality that they could have got if those tariffs hadn’t been up. And so, there was a massive loss of consumer surplus at the same time. I haven’t seen too many studies that totalled that up. But you could you could guess even if you just looked at the level of assistance, that the thousands of dollars that were put on low prices of cars in Australia because we weren’t making them at a globally competitive level – that’s a big loss of consumer surplus over a long period of time.

Gene Tunny  09:50

That’s right. And I think the Productivity Commission has estimated what you’re talking about there. That welfare loss to consumers. I’ll try to put some of the links in the show notes. So vaguely remember, in some of their previous reviews of car industry assistance that they will they just show what a huge cost those tariffs were to consumers and also to industry. Industry in Australia that was using motor vehicles. And we made a decision here in the late 80s, I think to start bringing down that tariff wall because it was just costing consumers and industry too much. And in real terms, cars are much cheaper and much higher quality nowadays, I think. So, I think there have been some clear welfare gains from bringing those terrorists down. Would you agree that bringing those tariffs down was good policy?

Craig Lawrence  10:55

I think so. I think consumers have benefited enormously. The other thing too, is that we look at what we’ve been able to do with our economy and the fact that we have nearly always been a trading nation as well. And in order to achieve those really full gains from trade, you have to be consistent on both sides of the ledger in terms of your approach to tariffs. And so, in as much as we’re pushing for open markets for agriculture, it means that, you know, from a policy perspective and a negotiating perspective at the International Trade tables, we also have to accept that we have to open up the other parts of the economy and we can see just how powerful that is in the current situation with China. The Chinese are arguing that we’re actually dumping barley below costs in the Chinese market, and I would think that our barley growers are simply very, very efficient compared to their Chinese counterparts, because I’m pretty sure they’re not getting big massive subsidies to sell barley into China. And from time to time, you know, we’ve seen other countries export to us. And, you know, we’ve got an anti-dumping authority that takes a look at these types of issues, but it’s not often that, you know, we find that these are the countries are wilfully dumping product in the Australian market at below the cost of production. It’s just that in those particular markets, our manufacturers are just very, very inefficient, you know, because of the way that they’re organised or they’re not able to get the kind of scale that offshore manufacturers can achieve.

Gene Tunny  12:51

Okay, another point I’d like to talk about – you talked before about how what we’re effectively doing is we’re moving resources from one sector to another. So, if you put a tariff on that protects manufacturing, you’re expanding your manufacturing sector and you’ll have to employ people in that sector and you’ll have to take them from other industries or you will have to build up a capital stock in that sector that couldn’t be built up in another sector. So, you’re picking, a winning sector. So, there’s this term that’s used often, “picking winners”. And you can either pick a winning industry – what you think should be the winner – or you can actually then go ahead and pick winning firms, can’t you? So, could we look at policies to pick particular firms? In what ways do governments assist individual businesses beyond a tariff? So, we’ve dealt with tariffs, but what are some other policy measures that they’ll use to assist businesses? And I suppose we should distinguish between what might be generally available measures such as tax concessions and measures that might be specific to particular businesses. Would you be able to take us through that, please, Craig?

Craig Lawrence  14:35

Sometimes governments look to attract businesses into their geography. And so what they’re really looking at is, you know, from a national economy perspective, the difference of a factory being located in New South Wales or Queensland is probably just down to differences in taxes and differences in some labour costs, maybe even some capital operating costs. But, from a national economic perspective, the output of the factory is not going to change, and the value of the product is not going to be markedly different. But state jurisdictions will want to spend some money to attract a factory in order to build their own manufacturing base. And so that investment attraction often needs to be tested. And one of the ways that gets tested is through looking at a cost benefit analysis from the perspective of the state, not the national economy, as to what resources the state might commit to attract a business and what that state would reasonably bring. One of the things to be very careful about there is how you actually count what benefit is. Because if a business comes in and all it does is it takes employees from another part of the state economy, the employment benefit is not as strong or may not be realised. And similarly, if the business is taking other resources from the state economy that would have otherwise been used by other businesses in the economy. You know, the game could be quite marginal for a big outlay by the state. And this is always the concern when you’re looking at big investments by the state, even the consideration of something like Virgin.

Gene Tunny  16:48

Craig, could I just ask what would those outlays look like? what types of assistance are we talking about?

Craig Lawrence  16:57

Sometimes it can be a capital subsidy. So, a business needs to set up, it needs to build a factory, the government might provide financial assistance towards capital costs or the factory. The government might pick up part of the capital cost of the infrastructure in the industrial state or give a concession on the infrastructure charges or maybe a payroll tax holiday for a period of time, you know, on the employment that sort of thing. Some assistance can take the form of financial assistance and other types of assistance can be in the form of in kind, where a business may, for example, have trouble locating in other jurisdictions because of environmental regulation or lack of availability of a suitable Industrial land, and the state may be well positioned to package all of that up and offer that in an expedited way. And for some businesses, the timing of their investment is critical to be able to get product to market or to seize an opportunity. And so, states that can move relatively fast can offer something that’s attractive to business. The flip side of that is that sometimes, state governments are really not in a position to do the full economic, financial and environmental assessments needed for what they’re actually approving. So, you’ll find that there’s assistance around attracting the investment. And the other thing is that when we’re talking about support for individual businesses, you see a lot of state governments supporting investment in startups. They do that in a variety of ways, funding business incubators and things like that. And often they’ve got criteria for the kinds of businesses that they’re interested in looking at. So, it’s not a blanket thing like a general tax rebate, or, you know, a general payroll tax holiday that’s available to all firms. They’re often targeting particular niches or particular types of businesses. So, we’ve seen industry policy that’s focused on the creative industries, for example. And we’ve seen public funding go for film and television production in Queensland, and not only the infrastructure, the support for the studios, but for actual productions as well.

Gene Tunny  20:00

Yes, so the state government here in Queensland built a new soundstage or paid for the construction of a new soundstage for Village Roadshow Studios at a cost of some $15 million or something. And they argued that it was it would be used at least once during the Commonwealth Games that we had on the Gold Coast. But yes, you’re right, this this type of assistance can take a variety of forms. Please continue, that’s one of my favourite topics, the film industry.

Craig Lawrence  20:38

Sometimes you’ll find too that government will take a look and they’ll identify an industry sector that is just really not part of the economy or not really a focus for private investors in Queensland and then they’ll put massive investment into it. And this happened in the 2000s with the biotechnology sector here in Queensland. And it’s not just private and public money, sometimes you get lucky and you get philanthropy happening. And so, you find that there’s a look at what pure science is doing. And then the issue is what are the commercialization opportunities from a pure science, they’re still not ready to go primetime into a private market. But there is a case for government funding for research and development that puts it on the commercialization track. And the real skill from a government perspective is knowing when to be able to step off and allow private sector, business expenditure on research and investment, to then kick in and pull it through to full commercialization. And that’s that area of overlap between the role of government and the role of the private sector. And that translation from, say, pure academic research into commercialised product, and making sure that there’s a return to the state from its investment. There has to be a genuine economic return, but there’s a point at which it becomes intellectual property that can be commercialised by private sector, and that generates revenue and jobs.

Gene Tunny  22:48

Yeah. Just on this point about R&D and commercialization. So, when I was in the Treasury, what we would always argue, and I know that as an economist you argue this too, that we only want to intervene where there’s a recognised market failure. And with innovation, you can argue that there are spill over benefits from innovation that could justify assistance. But the way the Treasury and also the Productivity Commission in Australia, the way that they would prefer this assistance is provided is as a generally available measure, such as an R&D tax offset. You’re not picking specific businesses or specific industries, it’s available to businesses that have R&D, so they are able to prove that they’re, they’re doing some R&D. With commercialization isn’t the problem that you end up having to pick winners, don’t you? You have to pick particular businesses and there are a lot of problems with trying to pick particular businesses. Would you be able to tell us your thoughts on the pros and cons of picking winners and trying to provide this assistance to specific businesses? Would you be able to tell us the pros and cons and are there any general lessons?

Craig Lawrence  24:30

My opinion on this is, it’s only an opinion, but I just don’t think that government has the information to be able to pick winners. One thing that I was looking at a couple of years ago was if there’s a company that has to know how to pick winners, for example, it’s a pharmaceutical company. So big drug companies like Merck will have research teams combing through chemical compounds, and they may look at 10,000 different chemical compounds a year. One of the skills of these large pharmaceutical companies is to know when to turn the research dollar tap off on their teams. And that’s quite a brutal internal process. So, in a sense, they’re prospecting, like a resource company. The resource is the next chemical compound that can turn into a good drug. And to go all the way through the clinical trials process is millions and millions of dollars in years and years and years. And so, for these large companies, what they want to do is I want to draw the line as soon as they can, but they also want to be sure that they actually take drugs through to becoming blockbusters and winners because when they do get payoff it’s a multi-billion dollar payoff that is a return for their shareholders. And it’s often struck me that that kind of analysis of the data and that focus, government finds really hard to achieve. And it’s primarily an institutional thing because the goals that have a different to the private sector, you know, the private sectors, primary goal is to maximise the return for its shareholders subject to the operating environment that it’s given by, you know, societal expectations and the law and regulation and /so on. But the government objectives are a little bit less well defined. You know, that sort of, we want to stimulate investment, we want some jobs and the way that they articulate those objectives are not quite crisp enough to be able to make hard, immediate decisions. And the other thing is that the responsibility for a fail rests with the entity less than with the government that might have provided it with a bit of seed funding. And so, you know, we don’t remember all the poor decisions and investments that governments have made over time. And so, there’s no pressure on the government model for how it organises itself to do these things better. So, the way in which we selected the River Project, for example, probably hasn’t changed. And similarly, with other projects where, you know, we’re just not getting the returns that we thought we were going to get

Gene Tunny  28:00

Yeah, and there are a couple of examples that really illustrate that point in our state in Queensland in Australia. Well, one, virgin. I wonder 20 years ago when they were making that decision, whether they would have made a different decision if they would have known in 20 years-time, that they would possibly have to consider investing $200 million into the airline to keep it within Queensland. Maybe they, you know, maybe they still would have gone ahead there. They only have a short time horizon. And there’s also that example of Berry. Are you aware of that example, Craig? The fruit juice company. So, the Queensland competition authority did a report on industry assistance about five years ago. And there’s a great example I give in there about how we provided financial incentives for Berry to relocate some of its production to Queensland, – I think from New South Wales or South Australia. And I think only stayed here for maybe a bit over 10 years before it took all of its production to New South Wales, because it just wasn’t economic to produce here. So, is there a risk that we can provide all of these incentives? We can waive payroll tax, so they don’t have to pay payroll tax, or they have to pay very little of it. We could even provide an explicit subsidy upfront. We can provide cheaper infrastructure, as you mentioned. Is there a risk that once the incentives run out, they’ll just work out, well, it wasn’t economic being in this jurisdiction without the incentive so we’ll just go somewhere else. Is that a risk?

Craig Lawrence  30:01

I think it is a real risk. And its why exemptions and tax concessions are probably a bit more attractive for government because you’re only giving up something out of what you would have gotten from the business. So, you know, payroll tax exemption is well, we can’t give you anything other than something off what you would have paid us. And the same with a company tax break as well, is that, in general, getting a little bit of a tax holiday is a cost to the revenue of the government. But it’s not an extra fee or charge. That’s much different to say, a grant found that’s come out of consolidated revenue and has been drawn from revenues that have been collected from elsewhere in the economy. So, there’s always a risk of that and it means that the design of the industry incentive has to be very carefully thought about, because it has to provide the right incentives for businesses to stay around for a period of time.

Gene Tunny  31:20

Yes, exactly.

Craig Lawrence  31:22

I think looking at the virgin case, it’s very hard, you know, if you wind the clock back 20 years, it’s very hard to know what virgin was going to be at that time. And to say then that in 2020 it’s going to be this. So, the investment is really made on a much shorter time horizon.

Gene Tunny  32:00

Exactly. Craig just on not knowing 20 years ago what would happen in 2020. So, the big event in 2020, quite obviously, is COVID-19. With COVID-19 and the economic dislocation it has caused, should we relax some of our principles? As economists, should we be more open to interventions to bail out or to retain industries or to attract industries or businesses into the country or into the state? Should we change our principles? Given this special event, COVID-19?

Craig Lawrence  32:52

When thinking about the question “has COVID-19 created a situation that breaks the current economic paradigm?” I tend to be a bit of a simple bloke. I’ll look at what is COVID-19, really? And you have to acknowledge the massive human toll that the virus has created globally. And I need me to say that first. But in economic terms, what we’re talking about is employee displacement in the economic system, and that employee displacement in the economic system comes through the lack of availability of key people in firms to carry out their tasks. And also, the lack of availability of people because they’re ill or they’re no longer in the workforce. And then the other thing is the public health response requiring people to shelter at home, and the social distancing rules that are driving a different type of behaviour whilst we wait for a vaccine. So, while I look at those two things, very simplistically, I’m looking at a shift in the supply curve for markets, you know, for different goods and services, and the economy responding to that, and then I’ll look at the principal question and go, do I think that the model that I’ve got in my mind about how an economy works is fundamentally changing? And I don’t think it is. I think what we’re seeing is we’re seeing a supply side shock to industry sectors, an extreme supply shock. And for me, I don’t think I’d want to modify the principles or anything. In fact, it becomes a bit more critical that you want sharper economic analysis because you have to be able to look at how resources might be reallocated as a result of that supply side shock. And we know that we’ve gone into a very steep downside of the V. And we’re probably coming out with a flat side of the other arm of that, that V in terms of economic activity. It might change some consumer preferences for things but doesn’t fundamentally change the structure of our society that then affects the permanent way in which we understand these economies. I don’t think so. And for that reason, I just think that now more than ever, good economic analysis is needed to help us understand how to drive out of such a steep downturn. And, and also to take lessons from the past when we’ve had massive unemployment before, you know, what were the things that we did to assist with the recovery? I don’t think we need to create new industries to re mobilise people because I think the industries are all sitting there. They’re the officers and the factories, and the commercial spaces, they’re all there waiting for people. So, it’s really more a human factor thing. How do we re-engage? How do we redesign our operations to keep our economy going? It does provide an opportunity to look at the way in which we consume goods and services. And I think a lot of people will reflect on that and maybe they might reorder their priorities and preferences. But that’s no different to the introduction of say, a smartphone or digital streaming and people’s behaviour changing as a result of, say, new technology or people being more reliant on the internet for entertainment and to be able to transact business. Those things have evolved over time. And we’ve had a short, sharp, shock here that we have to recover from, but I don’t think that means we have to give up the economic frame which has served us well so far.

Gene Tunny  37:42

Yes, I agree. Craig. I just thought I’d bring that up because I mean, Virgin, one of the reasons Virgin is on is in administration at the moment is because the Coronavirus has been the straw that’s broken the camel’s back. But it was an airline that was in trouble prior to Coronavirus, I think, and we need to recognise that when we’re thinking about whether it’s something that government should be in investing in and as a as a principle, I would rather the government not be investing in businesses. If it can provide some sort of temporary financing, perhaps maybe you could justify that sort of thing, but not a not an investment in equity investment in the company. I can’t really see the logic in that. Can I ask about regions? What if you’re in a high unemployment rate region, could it be in the interests of a local council to provide a subsidy to, say, an abattoir to open up which could employ locals? Could that be a good use of public funds? How would you go about assessing that?

Craig Lawrence  39:10

When you look at regional employment issues, you always want to see where the labour market or the capital market is not performing. Okay, I’ve got high unemployment in this region. Is this something where there’s not sufficient information for employers or are the investors and financiers who have money to spend not seeing what the commercial potential is or not willing to take a risk there in a relatively small market compared to, say, a major metropolitan centre. And, you know, if I, if I can form a view that there’s a potential market failure, then prima facie I’ve got grounds to say, well, maybe government could do something about it. But then I still have to go through that classic thought process of saying, well, what’s my government intervention going to look like? And is that actually going to do more harm in the economy than not doing anything at all. So, the first thing is to simply say, look, if the private sector cannot allocate capital in a way that addresses a social issue for me, then do I need to make an investment. And if I make an investment from the public purse, I’ve got to be very clear about whether I’m doing this on a commercial basis, or I’m doing it to address a social policy issue that I’m seeing and when I do make that investment. If I decide to, from a local government perspective, I’ve got to say, well, is that going to be a sustainable thing? There’s no point in sinking capital into a project and then in the short term, it just fails to deliver. I think in some cases to pursue the policy of trying to alleviate regional employment, investment in the in the region is attractive. But the other thing you want to say about that is the extent to which that investment stays and circulates within the region and flows into the other businesses and strengthens the regional economy. And to do that, I think one would really have to have a good understanding of how resources flowing in and out of that regional economy. Both physical and financial. I mean, if all the money goes in, and then the next day it gets spent on things outside the region, there’s hardly any touchdown they and so you can spend a lot of money and you just don’t get the policy outcome that you want. And that’s why sometimes public spending on hospitals and education in regions is a good thing because you get the service delivery that you need to meet in terms of social policy objective. But those extra pay packets go into regional economy and support, indirectly, local business, local businesses and more economic activity as well.

Gene Tunny  42:50

Yes. And in terms of bang for buck, in terms of how much it costs to support one job in the region, it might be end up being cheaper to put the money into health or education. Would that be fair to say?

Craig Lawrence  43:08

I think so. The thing about that is that you you’re getting other economic benefits in spending it on health and education. Because you’re basically improving the living standards of people in those communities and you’re improving their prospects for employment, things like that, through investing in health and education. So you meeting this wider social policy objective that have downstream economic benefits for the economy. So, it’s a much deeper, much more impactful return because of that. Rather than just simply putting forward an employment subsidy payment, which is just a transfer into employers’ pockets if they hire so many people, you give them a jobs bounty or something like that – they’re not getting the educational the health benefits as well.

Gene Tunny  44:22

Yes. And it can be very expensive to subsidise jobs. So, I mean some estimates I’ve seen, I remember the PC producing estimate back at the time they were looking at the car industry in the 2000s. And I think there was one study they estimated it could cost $300,000 per job saved. So, you can get some very high estimates of the cost of protecting or attracting jobs via industry policy measures.

Craig Lawrence  45:01

I think this is something that I was just looking at recently in terms of industry policy. UNIDO actually looks at industry policy in terms of three stages of economic development. There are the kinds of policies you put in place for developing countries, the kinds of policies you put in place for economies that have industrialised, they’re well into industrialization but they’re still labour intensive in their manufacturing processes. And then in the sort of third phase of industrialization, the kinds of policies you’re looking at there, government takes a step back from actually putting the direct cash in and the kinds of things you see there are joint public private investment in research and development. This is where governments are looking to leverage the private sector and creating an environment for private sector interest in something. And similarly, governments will look to not provide the funding but create the climate to stimulate venture capital, funds for investment in high technology, that sort of thing. The other thing too, is that, you’ll find that, and we see this at both the federal and state levels, the funding for higher education increasingly oriented towards STEM. So, Applied Science, because that helps generate the kinds of research and information that you need to do advanced manufacturing and high technology. And the final two bits when you look at the industrial structure that we’ve got, over time we’ve gone through a number of major structural adjustments in the Australian economy. And in the 80s, we realised that we weren’t super competitive in the steel industry. And so, we had a federal government programme to reallocate the resources in the economy through the windup of the steel industry. At the moment, the jury’s still out on how well that’s being done with the car industry. So, you’re really looking at ways in which you can facilitate enterprise restructuring. And also, the other thing, too, is that as people are leaving one industry sector, trying to map their skills into other industry sectors, and I know, in particular in the car industry in South Australia, they’ve done a lot of work with the Holden staff, for example, trying to get them into other employment and that I think they’ve been reasonably successful. I can’t remember the exact number, but over 80% of the workforce has been redeployed into other jobs. And I mean, that’s got to be a success, you know, when you close down a big car operation like that with thousands of people, and it’s taken some time, but to be able to retrain people, and to convert their skills into something that’s useful in other sectors, that’s not a not an easy thing to do. And it’s not something that any industry sector would naturally pick up and work on. So, it’s a classic role for government in terms of you know, redeploying skills in the economy. Those five areas are about how you work at the frontier of the current industrial structure and the emerging economy. And, you know, we’re never static, we’re always dynamic. We’re always inventing new approaches. In a globally competitive market, our ability to be able to affect those changes like that in the industry space is becoming increasingly important.

Gene Tunny  49:33

Absolutely. Craig, I know we have to wrap up soon but there’s just one more issue I’d like to chat about quickly if you’ve got time. What we see with a lot of these sweetheart deals, these special deals for companies, or film productions to locate in a jurisdiction, we see that the agreements that the governments make with the companies are stamped commercial in confidence, which means outsiders, analysts, economists can’t do that independent assessment of whether it’s a good idea or not. It’s done within government. Do you have any thoughts on whether this is something we should be worried about? That the nature of these agreements being commercial in confidence means that we can’t have external scrutiny.

Craig Lawrence  50:42

Yeah, I think there’s plenty of ways to get external scrutiny without needing to publish it on the front page of a newspaper. And so, a lot of people think that because it’s not in the public domain, it can’t be examined. But of course, it can. And just to take a completely different angle on this, we know, for example, with national security issues, that there is independent oversight of our national security agencies by a parliamentary Standing Committee. So, those agencies just can’t do whatever they like, there’s an accountability there. So, when the government of the day doesn’t present its financial resolution for an incentive before an estimates committee. There’s no reason why all the information relating to the decision cannot be given to, say, the Auditor General for review, as an independent office holder of Parliament to basically look at it. I think that governments would be thinking a lot more carefully about some of the commercial decisions they entered into if they knew that there was a genuine independent review. The full detail doesn’t have to be published. But if the public knows that the institution that’s doing the review is genuinely an arm’s length from the government of the day and has independent statutory authority, they’d have a lot more confidence. The other thing is that it’s often not clear when commercial in confidence is claimed what the matter is surrounding the confidentiality. You know, these companies actually publish, if they’re listed companies, you know, they do have to publish the revenues, you know, for the stock exchange. reporting and other compliance issues. And so, I can understand that it might be embarrassing for a government if it is handing a big subsidy to an individual company, that it doesn’t want to disclose it. But these are public funds, they’re meant to be generating a benefit for the wider public, not just simply following on to the bottom line for shareholders. I think the public’s entitled to know what benefits they’re getting in return for the use of their funds. So, I’d always try to push for transparency. And I think that there’s a number of ways to do that. I mean, one way is having an independent body do the review at the time, or just immediately after the decisions made. The other thing is not to wait for the cabinet period for disclosure of information, but to have a three-year period or something, when the commercial imperative for confidentiality is waved and open the books on it. We can see the difficulty that this can have, because, for example, if I was to pick on say, WestConnex in Sydney, they made the initial investment decision in 2013. The New South Wales Audit office did a review of that in 2014 but subsequent to that they made a few changes to the investment of the project. And they pulled some parts of the project out and did them as separate projects. And so, you know, you want to have an independent review of the decision-making processes around that, so the public has confidence about the decisions that are being made on their behalf,

Gene Tunny  55:03

Right, that’s a toll road, right?

Craig Lawrence  55:07

Yes. So when you look at it, the big secret is, well, what were the traffic forecasts at the time? Because the traffic forecast drives the revenues. And so, there’s a lot of sensitivity around the forecasting, and I just think that there’s some things that after a period of time, the need for them to remain confidential is not really there. And they should be brought out into the public domain as soon as possible.

Gene Tunny  55:38

Absolutely. Craig, industry policy is a huge topic. We’ve covered a lot of ground today. Are there any points other points you’d like to make before we wrap up?

Craig Lawrence  55:50

Just time and again, it’s something I always beat the drum on, is that good economic appraisal makes an enormous difference right up front. Have that clarity of thinking, and just having that one Jeremiah there to say, is that really what we’re expecting to get by making this particular public investment? And I know in my own experience time and again, I’ve asked a difficult question and the outcome hasn’t been an abandonment of the investment, but it’s been an improvement in the way in which the governments handled it. It’s actually saved millions of dollars for people from tax pious and I know that in in one circumstance, there was just asking a question about whether a company was committing its own equity to the project. And it turned out that they weren’t, it was all debt financed, and because they put a couple of million dollars in, that was a couple of million dollars that the state didn’t need to put in. And if we hadn’t asked the question, we wouldn’t have saved the taxpayers that couple of million dollars. And I just feel that someone that’s passionate about the project could ask a reasonable set of questions just to test it.

Gene Tunny  57:24

Absolutely. Craig Lawrence, Managing Director of Lytton Advisory that’s been great. We’ve had a really comprehensive conversation about industry policy. I’ve really enjoyed that. And yes, thanks again.

Craig Lawrence  57:42

Thanks so much, Gene. It’s been a pleasure to be on the show.

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