Economic impact assessment of Land 400 Phase 2 investment ... · LAND 400 Phase 2 March 2018 Highlights 2 Executive summary 3 1 Introduction 5 1.1 LAND 400 Phase 2 6 1.2 Scope of

LAND 400 Phase 2

Economic impact assessment of Land 400 Phase 2 investment in Australian industry

March 2018

www.pwc.com.auDefence FOI 488/19/20

PwC

LAND 400 Phase 2Highlights of the total economic impact of the investment in Australian industry capability

211Predominantly Australianproduced, assembled and

integrated Combat Reconnaissance Vehicles

$1.2 billion

Investment in Australian industry committed between

2017-18 and 2053-54

40+Australian lead suppliers

involved in key acquisition and sustainment activities

$10.2b

$

Source: PwC analysis using costs and tender information provided by Department of Defence.Note: Investment and economic benefits are expressed in Australian dollars in nominal (outturned) terms on a 2018-19 base.

740Average annual

national jobs (2017-18 to 2053-54)

1,450Peak national jobs

Primary location of vehicle production

Ipswich, Queensland

Strong supply chain participation and

investment in

Victoria and New South Wales

Defence FOI 488/19/20

PwC

The LAND 400 program is the largest and most expensive acquisition project in the history of the Australian Army. Consisting of four discrete phases, the program aims to acquire and support the next generation of armoured fighting vehicles.

The LAND 400 program is now in Phase 2 which will modernise and improve the firepower, protection and mobility of its armoured fighting vehicles through the acquisition and sustainment of 211 BOXER Combat Reconnaissance Vehicles (CRVs). This acquisition and sustainment will enable the Australian Army to house a world class Mounted Combat Reconnaissance capability that is able to deal with increasingly lethal and adaptive adversaries well into the future.

In addition to upgrading the technical capabilities of vital defence assets, Phase 2 also represents a significant opportunity to develop Australian industries through the transfer of specialised production and sustainment knowledge of defence assets to Australian businesses. LAND 400 Phase 2 is sourcing the majority of goods and services from Australian suppliers, with Australian businesses involved in all stages of the LAND 400 program from design, production and assembly through to integration and sustainment of the 211 CRVs. This involvement is a key enabler to the development of capabilities within Australia’s growing defence industry.

This investment in Australian industries results in a significant contribution to the Australian economy, increasing economic activity, and retaining and creating new jobs across urban and regional Australia.

Rheinmetall Defence Australia (RDA) has been selected to deliver LAND 400 Phase 2 with a range of Australian suppliers who form part of their supply chain. A majority of the CRVs will be produced, assembled and integrated in Australia through the proposed production facility in Ipswich, Queensland.

The total results presented on the previous page reflect investment in both acquisition and sustainment activities, which creates an average of 740 jobs each year, peaking at 1,450 jobs in 2021-22.

Examining only the ten years of acquisition activities centred around the Ipswich facility, the net increase in employment in Queensland is estimated to be an average of 330 jobs each year.

However, the rest of Australia also benefits from the acquisition activities involving Australian suppliers, with employment across all other states and territories increasing by an annual average of 370 jobs. The economic impact in other states and territories reflects the broader dispersion of the Australian supply chain, with positive contributions to employment in most states and territories. Victoria and New South Wales are the major beneficiaries outside Queensland, with a net increase in average annual employment during acquisition of 170 jobs and 120 jobs, respectively.

The economic benefits of sustainment activities are also likely to be felt across the country including regional centres like Puckapunyal, Bandiana, Edinburgh, Meeandah and Townsville.

Executive summary

3

LAND 400 Phase 2 March 2018


PwC 4

March 2018LAND 400 Phase 2

Highlights 2

Executive summary 3

1 Introduction 5

1.1 LAND 400 Phase 2 6

1.2 Scope of this report 7

2 Australian industry involvement in LAND 400 Phase 2 8

2.1 Investment in Australian industry capability 9

2.2 The Australian supply chain 10

3 Economic impact 12

3.1 Measurement of economic benefits 13

3.2 National economic impact of all LAND 400 Phase 2Australian industry activities

14

3.2 Economic impact of acquisition activities 15

3.3 Economic impact of sustainment activities 16

3.4 Broader benefits not modelled 17

Appendices 18

Appendix A – Computable general equilibrium model methodology 19

Appendix B – Assumptions and limitations 21

Table of contents

Disclaimer

This Report has been prepared by PricewaterhouseCoopers Consulting (Australia) Pty Limited for the Department of Defence. In preparing this Report we have only considered the requirements of the Department of Defence. We do not accept or assume responsibility to anyone other than the Department of Defence in respect of our Report.

The information, statements, statistics and commentary (together the ‘Information’) contained in the Report have been prepared by PwC from material provided by the Department of Defence and from other public sources.

The Information contained in this document has not been subjected to an audit or any form of independent verification. PwC does not express an opinion as to the accuracy or completeness of the information provided. PwC disclaims any and all liability arising from actions taken in response to this Report. PwC may at its absolute discretion, but without being under any obligation to do so, update, amend or supplement this document.


PwC

1 Introduction

5



PwC

The LAND 400 program

The LAND 400 program aims to acquire and support the next generation of armoured fighting vehicles. The program consists of four discrete phases:

• Phase 1 - a scoping and project definition study

• Phase 2 – developing the Mounted Combat Reconnaissance capability through acquisition and support of Combat Reconnaissance Vehicles (CRVs)

• Phase 3 - establishing the Mounted Close Combat capability, enabled primarily through the Infantry Fighting Vehicle

• Phase 4 - implementing an Integrated Training System.

LAND 400 Phase 2

LAND 400 Phase 2 is modernising and improving the firepower, protection and mobility of the armoured fighting vehicle capability through the acquisition and sustainment of 211 BOXER CRVs.

At a total cost of $14.9 billion* across the 37 year program (10 years of acquisition and 33 years of sustainment with some overlap), Phase 2 addresses the emerging capability gap between the ageing Australian Light Armoured Vehicle fleet and the increasingly lethal and adaptive operational threats faced by the Australian Army.

Rheinmetall Defence Australia (RDA) has been selected to deliver LAND 400 Phase 2. A majority of the CRVs will be produced, assembled and integrated in Australia through the proposed production facility in Ipswich, Queensland. Key details relating to LAND 400 Phase 2 are presented in Table 1.

*All costs throughout this report are presented excluding contingency

A range of accompanying investment to support the acquisition of the CRVs will also occur. This includes upgrades to supporting base infrastructure and sustainment contracts.

Table 1: LAND 400 Phase 2 key facts

Note: Investment is expressed in Australian dollars in nominal (outturned) 2018-19 terms.

1.1 LAND 400 Phase 2


6

Acquisition

Duration2017-18 to 2026-27

Location of assembly site Ipswich, Qld

Total acquisition costs $5.3 billion

Contract costs $3.8 billion

Supporting costs $1.5 billion

Australian Industry Capability (%) 53%

Australian Industry Capability ($) $2.8 billion

Sustainment

Duration2021-22 to

2053-54

Location Australia wide

Total sustainment costs $9.6 billion

Contract costs $185 million




TOTAL - Land 400 Phase

Total investment $14.9 billion




PwC

This report presents the economic impacts on the Australian industry component of LAND 400 Phase 2. In particular, it presents the economic benefits associated with the production, assembly and sustainment activities in Australia and the effect on upstream and downstream Australian industries, Australian households and the Australian economy as a whole.

The results presented in this report:

• include only the Australian industry component of the investment. This specifically refers to the investment that will occur within Australia, as opposed to investment that occurs overseas and imported into Australia.

• focus solely on economic benefits. It does not seek to weigh these benefits; it should not be seen, and results should not be used, to undertake a cost-benefit analysis of the investment.

• do not include the impacts associated with the sovereign capability benefit of producing the new CRVs in-country or the comparative benefits of the technical capability being delivered through the production and sustainment of the CRVs.

• have not assessed or considered the costs associated with increasing government spending to procure LAND 400 Phase 2, or the deadweight losses associated with increased taxation to finance such an undertaking.

Importantly, when interpreting the result of an economic impact assessment it is necessary to understand the variables that can drive different outcomes. Specifically:

• the industries attracting the investment. Investment in different sectors, or with different mixes of investment across the same sectors, delivers different results.

• the nature of the investment. Investment in export industries generates additional revenues and hence, will often generate higher economic returns than similar investment that is consumed locally.

• the location of the investment. An identical investment in two different locations will deliver different returns, governed by the depth, linkages and productivity of the industries in that location.

• the techniques used to model the impact. Different investment scenarios can be better reflected by adopting different modelling techniques (e.g. dynamic versus comparative static models).

Appendices A and B include more information on modelling and describes the key assumptions and limitations applicable to the modelling of economic benefits relating to LAND 400 Phase 2.

1.2 Scope of this report

7



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2 Australian industry involvement in LAND 400 Phase 2

8



PwC

The 2016 Defence White Paper and 2016 Defence Industry Policy Statement both highlight the important role that a strong local industry has in delivering and sustaining Australia’s defence capabilities. Key to this are policies designed to develop in-country expertise through providing opportunities for Australian companies, facilitating the transfer of technology and encouraging investment in Australian industry.

The importance of the program to Australian industry can be demonstrated through the Australian Industry Capability (AIC) as a dollar value and percentage of total costs. A considerable portion of the total contract value of LAND 400 Phase 2 will constitute investment in Australia. The value, nature and location of this investment is the key enabler to the development of capabilities within Australia’s growing defence industry and the driver behind the economic returns associated with the LAND 400 Phase 2 investment.

RDA have committed to an AIC value of $1.9 billion. Additional spending on supporting facilities and non-contract items during acquisition increases the investment to $2.8 billion and 53% of the total acquisition cost of LAND 400 Phase 2.

Given the nature of sustainment activities, a higher proportion of investment is expected to occur within Australia. The total estimated value of investment in Australia during the sustainment stage is $7.4 billion, representing 77% of the total sustainment cost.

Table 2: AIC of LAND 400 Phase 2


2.1 Investment in Australian Industry Capability

9


Figure 1: Proportion of AIC value expended during acquisition

Value

Total acquisition costs $5.3 billion

Contract costs $3.8 billion




Total sustainment costs $9.6 billion



0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028

% o

f A

cqu

isit

ion

AIC

ex

pen

ded

Total - Acquisition Phase

Acquisition contract elements

Non-contractual Acquistionelements

Australianproduction ends

Australian vehicleproduction start

Centre of excellence vehicle facility commissioned

Start of training equipment production in Australia

Start of Australian design


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Sustainment activities cannot be accurately mapped to a specific location as contracts are yet to be scoped and finalised. Therefore, the nature of the sustainment supply chain and the companies involved are not necessarily those involved in the acquisition stage of the program.

Table 3: Proportional AIC value and Australian suppliers by location


LAND 400 Phase 2 is sourcing a wide range of goods and services from Australian suppliers during the production, assembly, integration and sustainment of the CRVs.

RDA will be using Ipswich in Queensland as their prime Australian base for production and assembly of the CRVs. The first block will be manufactured in Germany and integrated in Australia to address current capability requirements. The remaining vehicles will be produced in Australia from 2022.

The diversity of this supply chain is an important part of enhancing Australia’s defence industry capability and contributing to the economic impact of the program.

Supporting the CRV production is investment in a range of non-contract items such as explosive ordinances and upgrades to major facilities at bases where the CRVs will be deployed, tested and maintained. The facilities upgrades currently focus on the prime contractor scoping the work in such a way that local companies play a meaningful role during construction. Puckapunyal Military Area in Victoria will be the primary location for a $175 million facility upgrade. There are other upgrades to be completed as part of the LAND 400 program, but these are not included in the costs of Phase 2. These include Bandiana, Edinburgh, Meeandah and Townsville.

In addition, the sustainment of the CRVs will provide further opportunities for Australian businesses, including those in regional and rural areas of Australia.

2.2 The Australian supply chain


10

Location AIC value ($)Australian suppliers

(no.)

Acquisition

New South Wales $90 million 4

Victoria $635 million 12

Queensland $1,840 million 11

South Australia $160 million 5

Western Australia $50 million 1

Tasmania $15 million 1

Not identified N/A 6

Total $2.8 billion 40

Sustainment

Australia wide $7,414 million TBD


PwC


11

Figure 3: Confirmed Australian suppliers by local industry activity

2.2 The Australian supply chain

Figure 2: Location of tier 1 Australian suppliers


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3 Economic impact

12



PwC

The economic benefits measured in this report are those that are created from investment in Australian industry. The total impact to the economy of this investment (including indirect benefits resulting from inter-industry interactions through the Australian supply chain) are estimated using a static computable general equilibrium (CGE) model.

To determine the total economic impact, the exact amount of investment in Australian industry must be established. Additional determinants include:

• the profile and duration of the investment

• the industries in which the investment is made

• the location of the investment, including the Australian supply chain.

To establish the level of investment in Australian industry each relevant year, the following sources were examined:

• RDA’s AIC Plan

• RDA’s AIC Schedule

• RDA’s Project Management Plan

• RDA’s Contract Master Schedule

• RDA’s Finance Schedule

• Department of Defence’s cost model for acquisition and sustainment.

These documents were also used to inform the location of investment (through identification of specific suppliers) and the industry of investment (through information on specific cost items).

The investment in Australian industry was then allocated to one of the following five categories:

• Production and materials acquisition –spending associated with the purchase of materials, parts, and direct labour to assemble and manufacture the CRVs

• Supporting services – spending associated with project management and support activities

• Supporting infrastructure (facility) – spending associated with the investment and construction of facilities

• Maintenance and sustainment – spending associated with the support contract, representing the maintenance and upkeep of the CRVs

• Design engineering – spending associated with engineering the design of the CRVs, including sub-systems and parts.

Each category was mapped to at least one of the following Australian industries (or their relevant subcomponents as defined in the CGE model): Manufacturing; Professional, scientific and technical services; Administrative and support services; andConstruction.

The total investment in Australian industry by state and industry were put into the CGE model to examine the total economic impact to the Australian economy. Results are reported as ‘net benefits’ (in terms of GDP and jobs) above the ‘base case’ of no investment in Australian industry from the LAND 400 Phase 2 program.

Appendices A and B include more information on modelling and describes the key assumptions and limitations applicable to the modelling of economic benefits relating to LAND 400 Phase 2.

3.1 Measurement of economic benefits

13



PwCLAND 400 Phase 2

Figure 4: Economic benefits of LAND 400 Phase 2 above base case

Note: Economic benefits are expressed in Australian dollars in nominal (outturned) 2018-19 terms.

The LAND 400 Phase 2 program will involve significant investment in Australia, including extension of Australian operations for the prime contractor, establishment and use of a local supply chain for components and services and government investment in facilities for testing and training in the CRVs. This investment in Australian industry has an economic benefit, not just in those companies directly involved in the program, but to the Australian economy as a whole. Benefits flow through the economy in supply chain links, or from more employees having increased income for consumption.

Across the 37 years of acquisition and sustainment activities, the LAND 400 Phase 2 spending on Australian goods and services is estimated to increase net national employment by an average of 740 jobs per year. Over the life of the program, it is estimated that gross domestic product (GDP) is increased by $5.1 billion (or an average of $139 million per year) and tax revenue is increased by $561 million (or an average of $15 million per year).

3.2 National economic impact of all LAND 400 Phase 2 Australian industry activities

14

March 2018

$5.1bGDP increase(total, 2017-18 to 2053-54)

Average annual jobs(2017-18 to 2053-54)

740

Peak jobs

1,450

Why does a dollar spent by government not equal an additional dollar in GDP?

Capital is finite, and capital going into one part of the economy means that there is less available elsewhere. There is some form of economic cost to government spending on new Defence capabilities. This is captured in the form of dislocation of raw material inputs as well as capital and labour towards LAND 400 Phase 2 spending, which would have, in part, been used elsewhere.

The more government spending required to support this new capability, the greater the priority the private sector places on supporting the activity. This results in a dollar spent by government not being equal to an additional net dollar in GDP, as other areas of the economy sacrifice potential growth and jobs to support.

Additionally, as GDP is a value-added measure it does not include the value of intermediate inputs (raw materials) inherent in the contract price paid by government.

However, this pure economic benefit does not consider the sovereign capability benefit of producing the new capability in country.


PwC

Acquisition activities focus on the production of the CRVs themselves, including design engineering and procurement of required materials. Acquisition also includes construction to set up supporting facilities. The distribution of the economic impact from these activities is dependent on the location of production operations. It can be seen in Figure 5 that, with the production facility being located in Ipswich, a larger share of the net contribution to GDP will be centred in Queensland.

However, the rest of Australia also benefits from the acquisition activities involving Australian suppliers and non-contract investment in infrastructure upgrades, with GSP across all other states increasing above the ‘base case’ by $756 million over ten years.

A similar effect across the states and territories can be seen in the estimated increase in net employment, shown in Figure 6. For each year of acquisition activities, Queensland is estimated to have an average net increase of 330 jobs. On average, it is estimated that an additional 370 jobs will be created across the rest of Australia each year, mostly in Victoria and New South Wales.

The maturity of key industries, the skill and mobility of the labour market, and the effects of inter-state trade all influence how the net economic impact is spread across the country. In particular, investment in Queensland results in gains across the country because the structure of the Queensland economy tends to pull employment from other local industries, while also having to rely on a greater volume of inter-state imports to support the increased levels of production.

This can be particularly seen in the benefit for New South Wales which has a relatively small amount of investment. The vast majority of the jobs created there are to meet demand for goods and services that Queensland no longer provides due to its focus on delivering the LAND 400 supply chain.

3.3 Economic impact of acquisition activities


15

Figure 5: Contribution of acquisition activities to GSP across Australia (total, 2017-18 to 2026-27)


Figure 6: Net employment impact (average annual jobs) of acquisition activities (2017-18 to 2026-27)

Note: Jobs are rounded to the nearest 10 and totals may not sum due to rounding.

$555m258

$202m

$374m

$18m

$556m

-$2m

$97m

$48m

$19m

GDP: $1,312m

120

170

<10

330

-

30

30

20

Avg. annual jobs:700


PwC

Sustainment activities are ongoing for the life of the vehicles and include consumables, parts, training and facilities, and a range of professional and supporting services.

Sustainment activities are generally more likely to involve the purchase of Australian goods and services than acquisition activities (which have a comparatively higher reliance on imported goods and services). This is because the earlier acquisition activities allowed for the development of Australia’s defence industries. It also strengthens the partnerships between the Department of Defence and industry, increasing the level of investment in Australian businesses and delivering vital capabilities that are able to protect Australia’s national interests. This enables the sustainment stage to be set up for success in drawing on Australian industry. Additionally, sustainment activities are less likely to be capital intensive and therefore have fewer start up costs and are able to leverage the investment from the acquisition phase.

The sustainment stage is a national program of activities, rather than being focussed on a single site of production. The CRVs will be stationed and used for training across the country, so direct support services will be spread across the country also. The supply chain for parts and consumables has not been set yet and therefore is also assumed to be spread nationally.

Therefore, the economic impact of sustainment activities are presented as a national estimate in Table 4.

Over 33 years of sustainment activities, GDP is estimated to increase by $3.8 billion (or an average of $116 million per year).

For each year of sustainment activities, Australia is estimated to have an average net increase in employment of 620 jobs.

Table 4: Economic benefits of LAND 400 Phase 2 sustainment activities


3.4 Economic impact of sustainment activities

16


GDP (total) Average annual jobs

Sustainment during acquisition stage(2021-22 to 2026-27)

$241 million 220

Core sustainment (2027-28 to 2047-48)

$2,790 million 710

Final years sustainment(2048-29 to 2053-54)

$788 million 690

Total (2021-22 to 2053-54)

$3,819 million 620


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3.5 Broader benefits not modelled


17

The Australian industry involvement in LAND 400 Phase 2 also presents a range of qualitative benefits to Australia, which have not been formally modelled as part of the economic impact assessment.

However, highlighting these factors makes it possible to present a more complete picture of the full array of benefits resulting from the involvement of Australian industry in Phase 2.

Some of these qualitative benefits are likely to arise in the form of:

• export opportunities – reflecting the future capacity of Australian industry to produce, assemble and service specialised defence assets that could be in demand internationally. These export opportunities would present a substantial benefit to the Australian economy. However, the extent of export opportunities would be dampened by exchange rate risk and the willingness of other countries to import content.

• improvements in Australian productivity –derived from the successful transfer of technological know-how and upskilling. Given the size and scale of LAND 400 Phase 2, t the technology transfer may act as a catalyst to improve the production efficiency and capacity of Australian industries (such as manufacturing or professional, scientific, and technical services).

While these qualitative benefits represent opportunities, both theoretical and tangible, that benefit the Australian economy, they are difficult to quantify with an acceptable degree of reliability. Therefore, they were excluded from the economic modelling.


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Appendices

18



PwC

The economic impact assessment of the Australian industry content of LAND 400 Phase 2 has been undertaken using a computable general equilibrium (CGE) model, specifically the Victoria University Regional Model (VURM) developed by the Centre of Policy Studies (CoPS) at Victoria University.

A CGE model is a mathematical model of an economy that is capable of capturing economy-wide impacts and inter-sectoral reallocation of resources that may result from a ‘shock’ (i.e. change in the status quo) to the economy.

CGE models are widely used in economic analysis of policies and projects around the world including in Australia by both government and the private sector.

A CGE model places a change or ‘shock’ on a base input-output table by solving a set of equations that capture neoclassical microeconomic theory to determine behaviour of economic agents (such as households, governments, and industries) when they are faced with changes in the economic conditions they face (i.e. changes to key economic variables), especially relative prices.

The equations are solved simultaneously, where some variables are determined by the model (endogenous variables) and some are determined outside the model (exogenous variables).

The classification of endogenous and exogenous variables is determined by the user, based on the set of assumptions derived for the specific modelling exercise (our assumptions for this exercise are in Appendix B).

In this way, CGE models recognise that complex macroeconomic mechanisms and inter-industry interactions exist in the economy and, in light of this, replicate how the economy will adjust to ‘shocks’ resulting from significant proposed projects and policies.

PwC uses CGE models developed by the CoPS. These are preferred because they have been peer reviewed, meaning the inputs and assumptions are fully and publicly documented, providing greater modelling credibility.

The CoPS models have wide use in Australia by both government and the private sector, increasing the credibility of the findings derived from their use.

Specifically, the VURM is a multi-regional CGE model that distinguishes up to eight Australian regions (six States and two Territories) and up to 144 commodities/industries. The model contains explicit representations of intra-regional, inter-regional, and international trade flows based on regional input-output data developed at CoPS, and includes detailed data on state and Federal governments’ budgets.

As each region is modelled as a mini-economy, VURM is ideally suited to determining the impact of region-specific economic shocks. Total effects are captured via the models input-output linkages and account for economy-wide and international constraints.

Appendix A – Computable general equilibrium model methodology


19


PwC

CGE is a methodology commonly applied by Australian governments to estimate the economic impacts of policies and projects on the whole economy.

CGE modelling examines the difference between a ‘base case’ forecast and the economy if a ‘shock’ is implemented (the ‘policy case’). It does this by capturing both direct benefits and indirect benefits.

Appendix A – Computable general equilibrium model methodology


20

Figure 7 is a simplistic diagram to illustrate the way the CGE model calculates total value added to the economy. However, in reality all these transactions will interact with each other and industries will compete for the same inputs (factors of production) of labour, capital, and land.

The CGE model solves for all these impacts simultaneously allowing the most realistic and properly constrained total value add (i.e. GDP) impact, which is not decomposable.

All numbers in this diagram are indicative only, and will depend on the structure of the industries involved and other economic factors such as availability of inputs and relative prices.

AIC value for LAND 400 Phase 2$1,000,000

Raw materials$600,000

Labour$300,000

Profit$100,000

Direct value add$400,000

Contracts to supply chain industries$500,000

Indirect value add (supply chain)$300,000

Same process as initial contract, but recursively back through supply chain many times

Contracts to consumer industries$200,000

Indirect value add (consumer spending)$100,000

Some labour income goes to

savings and purchase of

imports

Total value add$800,000

Same process as initial contract, but recursively back through supply chain many times

Figure 7: Simplistic illustrative representation of interactions captured by CGE

Purchase of imports


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CGE assumptions

As described in the previous page AIC value was used as an input to CGE modelling, broken down by:

• categories - reflecting the industry of the underlying local industry activities described

• Australian states and territories - based on the location of Australian suppliers and contractors.

Modelling of total economic impact of AIC value was done through a short-run comparative static CGE model. This approach was used to represent a short term stimulus, reflecting the short-term nature of AIC value and dates of key activities as reported in the tender information over the period of analysis. Standard macroeconomic assumptions for short-run simulations were used, which includes ability for short-term increases in net employment and no creation of new capital.

The modelling was conducted based on reported AIC value provided by the Department of Defence in relation to the Australian component of LAND 400 Phase 2. The AIC value represents prospective values, which have not been realised as of the date of this publication.

To measure the incremental impacts of Australian industry involvement in LAND 400, two modelling scenarios have been employed.

• The ‘base case’ assumes that LAND 400 Phase 2 will go ahead, with all production, assembly and sustainment activities consisting of only imported goods and services.

• In comparison, the ‘policy case’ represents the scenario where a considerable amount of production, assembly, and sustainment activities are based in Australia, leveraging Australian content and engaging Australian businesses.

Importantly, these model scenarios are purely designed to measure and report on this incremental impact of different level of Australian industry involvement in the program, as opposed to reflecting procurement options considered by Defence.

The ‘import replacement’ shock effectively reduced the demand for imports while allowing the demand for Australian factors of production (i.e. capital, labour, and land) to fluctuate in response to the amount of AIC value.

Activities relating to the construction of the production facility was treated as an investment shock to manufacturing, which is a standard way of modelling an increase in construction activity to service a particular industry. This investment shock effectively increases the rate of return to capital to such a level that RDA saw it as advantageous to build an assembly site in their target State of production and assembly activities (i.e. Queensland). State tax incentives were not included in the modelling of the construction shock, although they may apply, no information was available for use in the model.

Economic analysis around the impact to government revenue was related to, but not directly derived from the CGE model. Instead, tax revenue estimates are based on our Intergenerational Fiscal and Economic Model (IFEM), which are better able to reflect the relationships, trends, and budget projections of government finance. Tax revenue estimates subsequently benefit from being derived from a model that factors in established long term forecasts around structural factors and population changes. CGE results were used as in input to this analysis. The IFEM model allocates GST revenue to the Commonwealth government, which is then transferred to the States.

Appendix B – Assumptions and limitations

21


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Limitations to modelling

The modelling approach described previously has certain limitations that should be highlighted.

Some limitations reflect the inputs used, while other limitations relate to the CGE and IFEM models themselves:

• Modelling has been conducted using information provided to PwC by the Department of Defence. Any material changes to these values will influence the economic impacts estimated in this report.

• Inputs to modelling associated with the acquisition and support contracts of LAND 400 Phase 2 were assumed to occur without any specific government expenditure (including deadweight losses) required to secure the contract, assist the bidder, or operationalise the phase or the broader program. This is because the ‘base case’ and ‘policy case’ assume purchase of the CRV.

• Direct costs to State government, including any proposed subsidies, have not been included in the inputs to modelling. While they may exist in practice, there is no reliable quantitative information to use as a basis for modelling.

• Economic impact estimated was allocated to years based on a weighted distribution that reflected the date of key activities. Changes to the proposed scheduling will therefore affect the yearly distribution of AIC value and its associated economic impacts.

• The CGE model has a set of assumed coefficients that have not been calculated via econometric estimations. Further specification of the relationship between, and the magnitude of, these coefficients would influence the economic impact estimated.

• The CGE model also assumes that the economy starts at equilibrium, which may not necessarily reflect the state of the economy at the time the ‘shocks’ are to occur.

• The IFEM model leverages historical and forecasted relationships, trends, and budget projections of government finance. Changes in any of these variables may result in fluctuations in the estimated amount of tax revenue collected by government.

• Tax revenue estimates derived from the IFEM model represent net tax revenue resulting from the broad economic impact of the ‘shocks’ modelled and do not account for any specific arrangements of LAND 400 Phase 2.

Appendix B – Assumptions and limitations

22


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Documents

Economic impact assessment of Land 400 Phase 2 investment ... · LAND 400 Phase 2 March 2018 Highlights 2 Executive summary 3 1 Introduction 5 1.1 LAND 400 Phase 2 6 1.2 Scope of