© 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
19
66
19
70
19
74
19
78
19
82
19
86
19
90
19
94
19
98
20
02
20
06
20
10
20
14
% C
han
ge i
n G
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
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
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
400
600
800
1000
1200
20
00
20
02
20
04
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
100
110
120
Jun
-20
08
Sep
-20
08
De
c-2
00
8
Mar
-20
09
Jun
-20
09
Sep
-20
09
De
c-2
00
9
Mar
-20
10
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
($m
)
Tasmanian Retail Trade Turnover
Trend Seasonal
200
220
240
260
280
300
320
Oct
-20
07
Jan
-20
08
Ap
r-2
00
8
Jul-
20
08
Oct
-20
08
Jan
-20
09
Ap
r-2
00
9
Jul-
20
09
Oct
-20
09
Jan
-20
10
Ap
r-2
01
0
Jul-
20
10
Oct
-20
10
Jan
-20
11
Nu
mb
er
of
Dw
elli
ng
Un
its
Dwelling Approvals - Tasmania (Aug 2007 - Jan 2011)
© TCCI 2011 14
Business Confidence Drops
An index score above 50 represents growth and below 50 signals a contraction.
Business expectations are for a flat National economy, and a contraction in Tasmanian economy over the
next 12 months.
The National and Tasmanian indexes both weakened during the December quarter.
>National Index: from 51.1 to 49.5 index points, Tasmanian Index: from 39.9 to 36.7 index points.
© TCCI 2011 15
Investment in Equipment Weakening
>Investment in buildings index was unchanged at 45.3 and investment in plant & equipment fell, from
45.5 top 42.4 index points during the December quarter.
>Expectations are for further falls in investment in buildings and plant & equipment during the March
quarter.
© TCCI 2011
State Budget is CriticalDeficits drag down confidence
-230
-130
-30
70
170
270
25
30
35
40
45
50
55
60
65
70
75
80
19
99
-00
20
00
-01
20
01
-02
20
02
-03
20
03
-04
20
04
-05
20
05
-06
20
06
-07
20
07
-08
20
08
-09
20
09
-10
20
10
-11
* 2
01
1-1
2
* 2
01
2-1
3
* 2
01
3-1
4
Stat
e G
ov
Ne
t O
pe
rati
ng
Bal
ance
($
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