A clear objective statement on AMC and value adding, Faustino. It is time someone brought the governments to account with some audits of what they have supported. A few….
1. I mentioned the 1980 Fraser government support for ICI at Botany without feedstocks emasculating the petrochemical industry in Australia leaving Altona with Bass Strait gas with half the market (and 106 per cent returns on shareholders’ funds).
2. There’s the $400 million fiasco of the WA Labor government in the late 1980s with the PICL petrochemical project that was fundamentally non competitive by any reasonable measure despite the now defunct Chem Systems consultants.
3. Allowing Woodside to export the world’s most “wet” LNG (containing short supply ethane that undermines the prospects for a PPP – see next.
4. Support by WA government for the PPP petrochemical project in the Pilbara and the leverage it provided Shell/Dow for a better offer overseas.
5. Support for SCM (now MIC) pigment plant at Kemmerton in WA dividing the chlorine market for the sake of regional development.
6. Support for V8 engine manufacturing by GMH – what about a hybrid engine instead?
7. Support for biodiesel and ethanol production which is disguised assistance for the rural sector. The plants are dead on the ground and excise exemptions now being granted to promote use of ethanol in fuel.
8. On going import tariffs for four car plants producing for 20 per cent of the small Australian market when one plant could produce a truly competitive car.
9. Money paid to rationalise sugar cane production. What an oxymoron that is.
10. And today $9billion to pay out the heavy water users on the Murray Darling. Hey, what about a ten year phase out? What could Australia do with that $9 billion?
11. And a raft more follies of what inept public servants and their masters.
Where’s a national perspective of opportunities? Where a Jurong Island type common user infrastructure providing a smart manufacturing base for Australia?
Federalism with 13 levels of government has its price to value adding.

Sound. Beautiful. A Sensible call Dong-ke Zhang.

Why is it made so hard?

May the Light reignite a Nation for all to grasp. May those left out be re-engaged with thoughtfulness and respect.

May the nation turn up the desire - this time -' to do the right thing'.

http://www.miacat,com
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Hmmmm there is so MUCH in this issue, hard to know where to begin.

Author says:

>>It is time for Australia to rethink and reform its economic and industrial structure that has placed too much emphasis on its "front-end". Australia must build a robust economy and to do so, it needs to increase the number of "downstream" processing industries that add value to our natural resources.<<

Then:

>>Australia should be exporting iron and steel, instead of just iron ore<<

UNIONS
>>this is what the Australian Manufacturing Workers Union has been saying since about 1977<<

PROBLEM. *Politics*. Ok...how?

1/ Unions want the value added innovation. But don't want to work at labor rates which our competitors use, (China) So, how the heck can we compete in steel manufacturing?
Yeah yeah..I know.. "become more efficient" which of course means LESS labor and MORE automation.

2/ Short Term profit motive. If you can dig it up, ship it to the coast, load it on a ship and make a 'ship'load of money......why would anyone invest billions in an efficient, minimal labor driven steel production facility and then not be sure u can compete with those making steel in Asia?

3/ Political parties love to talk about 'booming economies' specially as elections draw near. Imagine if 6 months before an election, they said "The Government has adjusted policy to favor value adding, and a project has begun in Northern WA to make steel, and will be complete in 3 yrs time"
errr.... the economy won't be 'booming' until a year or 3 after that....besides, BIG extraction companies looking for fast bucks will probably give donations which are intended to discourage such things.

Professor Dong-Ke Zhang and Faustino. The paradigm for investment remains tied up in a cost-based financial return analysis (ROI, NPV, IRR) without regard to ‘competitive advantage’ – that ‘edge’.

Analyses tend to be done with crystal balling about future costs and values; rarely if there’s an international “edge”.

The classic folly is being expressed by the biodiesel industry, (in receipt of direct and indirect assistance) some relying on imported palm oil, or the costly late 1980’s $400m government backed PICL petrochemical plant – never mind the pipeline tariff on the gas – it had no edge with only a small contribution toward caustic soda transport cost savings to the close by alumina users.

Professor ME Porter in his tome “Competitive Advantage of Nations” shows a need for some INHERENT advantage - rarely factor costs which dominate thinking in government circles.

So hence I can point to millions of dollars of public money wasted in supporting the tired and moribund.

Australia still has a farming attitude that extends to manufacturing. The money is not always in producing your own (as Chemeq found ignoring my report not to manufacture).

So yes, we need to think beyond being a removalist country shipping “dirt” into ships and add value. But how? Why is it that on one side of the Burrup Peninsula salt is exported, and on the other, energy yet Australia is the world’s largest deep-sea importer of caustic soda? And Bass Strait oil and gas only ever provided energy (ignoring the aging now pot boiler-scale Altona petchem).

What about clustering of activities as Prof Porter demonstrably shows and Singapore plays so well with Jurong Island? Clustering provides for mutual support in workers, infrastructure and materials.

As shown in high-cost Europe it far outweighs factor cost penalties oft touted in Australia as holding back investment. Clustering requires vision and commitment (to wit support for Kemerton in WA).

We need a national forum to create vision to stop the rot (as my previously quoted “wet LNG” that could once have supported a PPP-type petrochemical industry.

It should Competitive Advantage, being smart and integrated.

Wizo/faus/tino – are we half-brothers? &#61514; You asked about the driving force behind government industry support, whether cases like AMC are common and can we ensure more accountability in government. AMC-style failures are common, particularly at the State level - most serious public-spirited economists in state governments spend much of their time fighting against stupid proposals, mostly unsuccessfully.

So the context for the AMC decision was a system in which Ministers and most bureaucrats were (and remain) ignorant of, and uninterested in, how economic development actually works, what are the relevant theory, principles and empirical evidence, locally and globally. The Ministers are attracted to “big project”, headline-catching, initiatives, the bureaucrats seek preferment by toadying to the Ministers rather than giving evidence-based advice on the options available. In general, the best economic development policy for a state government is to create an entrepreneur-friendly environment with light-handed regulation, and leave commercial investment decisions to the private sector. But Ministers want “to do something.”

I directed economic analysis of many “value-adding” projects in Queensland. We typically found little or no net benefit for the state (i.e., the people of Queensland), in all cases the subsidies involved would have been better used in reducing taxes on and regulation of the private sector, making it more competitive. QNI was reluctant to go ahead even with $100m of subsidies. We found that the main benefits went to non-Queensland capital providers (around half overseas) and equipment-makers (Australia can’t sustain an equipment industry for the very occasional project) and to interstate workers attracted by the opportunity. Generally, not all of the relevant skills are readily available, they are attracted either by bidding them away from existing Queensland employment (imposing costs on unsubsidised employers in other industries) or from other states. Korea Zinc (with subsidies around 25% of the capital cost) was “justified” on the grounds of technology transfer. The technology has nor been used elsewhere in Queensland.

People attempted to conceal projects from me, to avoid serious scrutiny. I had a few hours to assess the Paradise Dam studies, which were seriously flawed. (more)

Even using their inappropriate assumptions and techniques, it was clear that the two larger-scale irrigation projects were not viable. It was possible that the smallest option, with lowest environmental costs, was viable, but you’ld have had to do a decent analysis to find out. The project went ahead, my analysis emerged under FOI (in spite of attempts to stop it), Beattie said, stuff that, we’re doing it.

An anecdote: the proponents of the AMC project accused my team and I of being “Ivory Tower economists.” I pointed out that I had worked for the UK CEGB, my economic amalyst had worked for BHP and my financial analyst was a project analyst for CRA. None of the proponents had any industry experience.

The problems with accountability are mainly that the politicians prefer to have unfettered discretion and the ability to support favoured interests, and are reluctant to subject themselves to independent scrutiny; and that the populace do not demand it, often hoping to benefit from sectional, vested interest, policies without understanding that ultimately we all lose from such an approach.

I think that the damage can be limited only by major reductions in the size of government, but pollies and bureaucrats tend to oppose this. Policies which embrace openness, competition, change and innovation best promote growth. Policies which have the effect of restricting or slowing change by protecting or favouring particular industries or firms are likely over time to slow growth to the disadvantage of the community. I have long argued (unsuccessfully) that change is inevitable, its nature unpredictable, and governments should adopt policies which enable the jurisdiction to cope with, and take advantage of, changing circumstances. Governments and bureaucracies are generally impediments to innovation, entrepreneurship and positive change, tending to favour existing interests Peter Beattie won a landslide election victory in 2001 on a “denial-of-change” platform. I think that Howard’s biggest failing is that he has had the opportunity to make changes which would strengthen Australia in future but has too often adopted populist, vested interest policies, even though he generally has a good grasp of what’s needed.