© TCCI 2011

Tasmanian Chamber of Commerce and Industry

Robert WallaceTCCI Chief Executive Officer

Common Challenges for Regional Economies

8th April 2011

Presentation to Australian Innovation Research Seminar Series

© TCCI 2011 2

Facts about TCCI> TCCI is a non-profit, non government organisation that is funded by

members for members.

> Building on this history today's TCCI is the state’s peak employer body

and the recognised voice of the Tasmanian business community.

> Size isn’t important. TCCI members range from one employee to

hundreds of employees.

> TCCI is a state based organisation, geographic location does not

diminish the value of your membership.

> Given our diversity in membership, our interest in energy policy is its

contribution to overall economic competitiveness and liveability.

> We promote transparency and open debate

© TCCI 2011

Today’s Plan

> The Wider Economic Environment

> Challenges for Regional Economies

> Infrastructure

>Finance

>Labour

© TCCI 2011

Global Economy Growing AgainBut US employment @ 9.6% in Feb ’11, curbing recovery speed

Source: IMF, ABS

-1%

0%

1%

2%

3%

4%

5%

6%

7%

19

50

19

54

19

58

19

62

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66

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74

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86

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90

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98

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14

% C

han

ge i

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DP

IMF Global Economic Growth (1950-2015)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

China (25%)

Japan (19%)

ASEAN (9%)

Korea (9%)

EU (8%) India (7%)

USA (4%)

Re

al G

DP

G

row

th

Top Merchandise Export Destinations (% share of total exports)

Export Destinations - Forecast GDP Growth, 2011

© TCCI 2011

Australian EconomyModerate recovery expected

Source: ABS, Westpac, Australian Treasury

Treasury

Westpac

-3%

-1%

1%

3%

5%

7%

9%

19

61

19

63

19

65

19

67

19

69

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71

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73

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75

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77

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79

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97

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99

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01

20

03

20

05

20

07

20

09

20

11

20

13

Australian Economic Growth(1961 - 2014)

Actual Growth Forecasts Average = 3.6%

© TCCI 2011

National recovery contrasts with

Tasmanian anaemia

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Re

al G

DP

Gro

wth

Australian & Tasmanian Economic Growth(1991 - 2010)

Tasmania AustraliaSource: ABS National & State Accounts

© TCCI 2011

Expected Economic Performance Index Score of 50.5 in December = Not much change for 2011

Source: ACCI

Survey of Business Expectations

© TCCI 2011

Private Investment by StateGradual recovery in last three quarters for Tasmania

60.0

70.0

80.0

90.0

100.0

110.0

120.0

Ind

ex (J

un

e 20

08 =

100

)

Private Investment, Real Growth Index June 2008 - December 2010

WA

VIC

NSW

SA

QLD

TAS

NT

Source: ABS

© TCCI 2011

Regional DifferencesRegions depended on agriculture, construction, retail, tourism...

-4% -3% -2% -1% 0% 1% 2% 3% 4% 5%

Professional, Scientific and Technical Services

Financial and Insurance Services

Wholesale Trade

Transport, Postal and Warehousing

Rental, Hiring and Real Estate Services

Health Care and Social Assistance

Administrative and Support Services

Information Media and Telecommunications

Manufacturing

Education and Training

Public Administration and Safety

Mining

Electricity, Gas, Water and Waste Services

Arts and Recreation Services

Other Services

Accommodation and Food Services

Retail Trade

Construction

Agriculture, Forestry and Fishing

Past Regional AdvantagesDifference in share of business: Regions v National

Source: ABS 2009. Regions = Statistical Divisions of Illawarra, South Eastern, Sunshine Coast, West Moreton, Northern, Far North, Great Hobart,

Southern, Northern, Mersey-Lyell, Darwin, Northern Territory other

© TCCI 2011

An Economy Shifting to Services

0

1000

2000

3000

4000

5000

6000

7000

8000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

IVA $million

Tasmanian Industry Structure(Real Value Added 1999 - 2000)

Primary Secondary Services Government

Source: ABS 5520.0

© TCCI 2011

Shifting Tasmanian Industry

Agricultre, Forresty & Fishing

Mining

Manufacturing

Construction

Wholesale

Retail

Accom & food service

Transport, postal & warehousing

ITC & Media

Finance & Insurance

Property services

Professions & Scientific Services

Admin & Support Services

Arts & recreation

0

500

1000

1500

2000

2500

3000

-4% -2% 0% 2% 4% 6% 8%

Val

ue

ad

de

d 2

00

9-1

0 ($

m)

Growth in real value added (2000-2010)

Tasmanian 'Market' Industry Structure (Bubble size = employment)

STARS

FUTURE STARS

CASH COWS

AverageGSP growth, 2.5%

Source: ABS 5220.0 & 6291.0.55.003

© TCCI 2011

Investment is the Key

0

200

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600

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1200

20

00

20

02

20

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20

06

20

08

20

10

$ m

illio

n p

er

qu

arte

r

Public & Business Investment

Business Investment Public Investment

60

70

80

90

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110

120

Jun

-20

08

Sep

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De

c-2

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8

Mar

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c-2

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Mar

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Jun

-20

10

Sep

-20

10

Ind

ex

(Ju

ne

20

08

= 1

00

)

Tasmanian Economy - Sector Growth

Household consumption Business investment

Government Exports

© TCCI 2011

Tasmanian Households Scrimp

Source: ABS 8501.0 Source: ABS 8731.0

370.0

380.0

390.0

400.0

410.0

420.0

430.0

440.0

450.0

Jan

-20

07

Jul-

20

07

Jan

-20

08

Jul-

20

08

Jan

-20

09

Jul-

20

09

Jan

-20

10

Jul-

20

10

Jan

-20

11

Turn

ove

r To

tal

($m

)

Tasmanian Retail Trade Turnover

Trend Seasonal

200

220

240

260

280

300

320

Oct

-20

07

Jan

-20

08

Ap

r-2

00

8

Jul-

20

08

Oct

-20

08

Jan

-20

09

Ap

r-2

00

9

Jul-

20

09

Oct

-20

09

Jan

-20

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Ap

r-2

01

0

Jul-

20

10

Oct

-20

10

Jan

-20

11

Nu

mb

er

of

Dw

elli

ng

Un

its

Dwelling Approvals - Tasmania (Aug 2007 - Jan 2011)

© TCCI 2011 14

Business Confidence Drops

An index score above 50 represents growth and below 50 signals a contraction.

Business expectations are for a flat National economy, and a contraction in Tasmanian economy over the

next 12 months.

The National and Tasmanian indexes both weakened during the December quarter.

>National Index: from 51.1 to 49.5 index points, Tasmanian Index: from 39.9 to 36.7 index points.

© TCCI 2011 15

Investment in Equipment Weakening

>Investment in buildings index was unchanged at 45.3 and investment in plant & equipment fell, from

45.5 top 42.4 index points during the December quarter.

>Expectations are for further falls in investment in buildings and plant & equipment during the March

quarter.

© TCCI 2011

State Budget is CriticalDeficits drag down confidence

-230

-130

-30

70

170

270

25

30

35

40

45

50

55

60

65

70

75

80

19

99

-00

20

00

-01

20

01

-02

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1-1

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* 2

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* 2

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3-1

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Stat

e G

ov

Ne

t O

pe

rati

ng

Bal

ance

($

mill

ion

)

Stat

e B

usi

ne

ss C

on

fid

en

ce

Tasmanian Business Confidence

State Gov Net Operating Balance Business Confidence (Original)

State Gov Net Operating Balance

Source: Tas Budget Papers & TCCI Tasmanian Survey of Business Expectations

© TCCI 2011

Spending Does Not Boost Confidence It can actually harm it!

Source: Tas Budget Papers & TCCI Tasmanian Survey of Business Expectations

© TCCI 2011

Challenge facing SMEs

>High Australian dollar

>Electricity costs + carbon tax

>Water and sewerage costs

>Wages

>Accessing finance & cost of

finance

© TCCI 2011

Finance in Regional Australia

© TCCI 2011

Interest Rates GloballyHigh interest rate hurts investment and drive up Australian dollar

0%

1%

2%

3%

4%

5%

6%

7%

Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

Inte

rest

Rat

e

Interest Rates - Cash

Australia Japan US UK Euro

Sep 2008: Lehman Bros bankruptcy

Source: FXStreet

© TCCI 2011

Cost of Finance High & RisingBank margins, not official rates, key driver

0%

2%

4%

6%

8%

10%

12%

Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12

Ra

te

Cash Rate and Average Bank Loan Spreads(1992 - 2011)

Small Business Overdraft (Spread) RBA Target Rate

Small Business Overdraft Rate Forecast (ASX interbank cash rate futures, 11 Mar11)

Source: RBA , ASX

© TCCI 2011

Higher cost of funds for lendersRegional banks have less access to foreign money, so rely on more

expensive sources of funds

0

5

10

15

20

25

30

35

40

45

50

Domestic deposits Short-term wholesale debt

Long-term wholesale debt

Equity Securitisation

%

Funding Composition of Regional Australian Banks

Jun-07 Jan-10

Source: RBA

© TCCI 2011

Infrastructure in Regional

Australia

© TCCI 2011

Export markets are shifting and

presenting new opportunities

Source: IMF – The World Economic Outlook

0%

2%

4%

6%

8%

10%

12%

China Japan Taiwan Korea Hong Kong USA

Ch

ange

in G

DP

(%

)

Change in GDP Growth 2010 (%)

© TCCI 2011

Geographic location But regions are often separated from main freight channels

Source: National Land Freight Strategy Discussion Paper, February 2011

© TCCI 2011

Relative Electricity Prices (Business)No longer comparative advantage in Electricity

© TCCI 2011 27

Relative natural gas pricesDisadvantaged in gas too...

© TCCI 2011

Energy consumption by industry

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

2003-04 2004-05 2005-06 2006-07 2007-08

Pe

tajo

uls

Energy ConsumptionBy industry, Tasmania

Manufacturing

Transport

Residential

Electricity Generation

Mining

Commercial

Agriculture

© TCCI 2011

Infrastructure Report Card

Transport Infrastructure Score CommentAirports B- Adequate for current & future use.

Ports B- Currently adequate but better rail/road integration needed.

National roads C+ Deteriorated due to higher freight use.

State Roads C Some backlog of work has been addressed.

Local Roads D Failure common due to reactive maintenance practices.

Rail F Inadequate for current and future use.

Other infrastructurePotable Water B-

Irrigation B-

Electricity B-

Telecommunications C+

Gas C

Wastewater C

Stormwater C-

Source: Engineers Australia (2010)

© TCCI 2011

Infrastructure Energy catching up with demographics geography

Source: BITRE, Infrastructure Yearbook

Infrastructure Construction by Type

© TCCI 2011

Infrastructure OwnersPrivate sector leading (PPPs, user pays etc). But for how long?

Source: BITRE, Infrastructure Yearbook

Infrastructure Construction by Project Owner

© TCCI 2011

Energy R&D expenditureInvestor certainty also an issue

© TCCI 2011

Growth Not in InfrastructurePublic sector wage bill is a concern

Source: Tas Budget Papers & ABS

0

100

200

300

400

500

600

700

800

900

1000

Jun

-19

84

Jun

-19

86

Jun

-19

88

Jun

-19

90

Jun

-19

92

Jun

-19

94

Jun

-19

96

Jun

-19

98

Jun

-20

00

Jun

-20

02

Jun

-20

04

Jun

-20

06

Jun

-20

08

Jun

-20

10

State & Local Government Spending: Tasmania(per quarter)

Recurrent expenditure Capital investment

Source: ABS National Accounts

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

1000

1200

1400

1600

1800

2000

2200

2003 2004 2005 2006 2007 2008 2009

% G

SP

Emp

loye

e E

xpe

nse

s $

mill

ion

s

General Government Employee Expenses

Employee Expense (LHS) %GSP (RHS)

© TCCI 2011

Labour in Regional Australia

© TCCI 2011

Strong Labour Markets Are WelcomeBut putting pressure on wages costs

57.0

58.0

59.0

60.0

61.0

62.0

63.0

64.0

65.0

66.0

67.0

2

4

6

8

10

12

Par

tici

pat

ion

rate

(%

)

Un

em

plo

yme

nt r

ate

(%)

Unemployment Rates by State (Feb 78 - Feb 11)

Participation rate (RHS) Nat unemp (LHS) Nat Average (7.2%) TAS NSW QLD NT

Source: ABS

© TCCI 2011

Large Variances Among Regions

© TCCI 2011

Investing in Skills

> Skills Innovation & Competitiveness Well-being

Economic value

> One extra year of education for the working age population delivers 3% to 6% increase in our Gross State Product

Social value

> Education delivers private benefits to the individual and shared benefits for the community improved social cohesion and inclusiveness

© TCCI 2011

The value of education

Value to the individualCompared to a person with year 11 education or less:

> A man with a year 12 education earns around 13 percent more, and a woman around 10 percent more

> A university education adds around 40 percent to men’s and women’s earnings.

Source: Productivity Commission (2010), The Effect of Education & Health on Productivity & Wages

© TCCI 2011

Education retention a major issue

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

NSW VIC QLD SA WA TAS NT ACT

%

Apparent Retention Rates to Year 12

National

Source: ABS 4221.0

© TCCI 2011

How Will We Employ Them?

> 86 per cent of all occupations require a post-school

qualification

© TCCI 2011

Need to boost private sector

workforce and skills

Source: ABS Labour Force 6202.0

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

Western Australia Queensland Victoria New South Wales South Australia Northern Territory Tasmania Australian Capital Territory

Private Sector Workforce(% of total population)

© TCCI 2011

On the demand side, population

growth helps expand local markets...

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1975 1980 1985 1990 1995 2000 2005

Po

pu

lati

on

Gro

wth

(%

)

Annual Population Growth (1972-2009)

Tasmania Australia

Source: ABS

© TCCI 2011 43

Innovate or perish .....

© TCCI 2011 44

> Most profitable strategies are built on differentiation: offering

customers something they value that competitors don’t have. But

most companies, in seeking to differentiate themselves, focus their

energy only on their products or services. In fact, a company has the

opportunity to differentiate itself at every point where it comes in

contact with its customers – from the moment customers realize that

they need a product or service to the time when they no longer want it

and decide to dispose of it. We believe that if companies open up

their creative thinking to their customers’ entire experience with a

product or service – what we call the consumption chain – they can

uncover opportunities to position their offerings in ways that they, and

their competitors, would never have thought possible.

> McMillan & McGrath, Harvard Business Review on Innovation, 2001

Discovering New Points of

Differentiation

© TCCI 2011

How To Promote Regional Growth?By investing in the right things and applying innovation

> Put as many minds to the task as possible

> That is, use markets for economic planning

> Flexibility – land use, labour, capital

> Investment (not consumption) orientation

> Public goods – great infrastructure & education

> Infrastructure (energy, water & sewerage, roads)

– rational pricing, not cost shifting. Continual

drive for efficiency and innovation.

© TCCI 2011

Tasmanian Advantages Cheap Housing, low congestion, great lifestyles

Source: Productivity Commission: Performance Benchmarking of Australian Business Regulation, 2011

0

100

200

300

400

500

600

Median House Prices($'000s)

© TCCI 2011

Thank you