Address by the Hon Dr Peter Hendy MP, Assistant Minister for Productivity to the Food and Grocery Industry Leaders Forum

Type: Speech

Date: Wednesday 21 October 2015

Location: Parliament House, Canberra

Good Morning.

It’s a great pleasure to be representing the Prime Minister.  The Prime Minister unfortunately couldn’t join us, he would have been happy to do that.  As Gary was just referring to, he has a particular pro-business attitude to life.  A successful businessman in his own right, and he has brought that into his parliamentary career as well.

Your Industry Leaders Forum is now an annual event hosted by the Australian Food and Grocery Council.  This forum is particularly valuable because it brings together the membership of the Food and Grocery Council with not only political leaders, but also leading thinkers in the sphere.

You obviously have a diverse membership.  It brings together players from across the full spectrum of the manufactured food and grocery sector.

In a noisy and congested operating environment, unified partnerships like the Council are crucial to fostering a productive dialogue between individual members, sector opinion makers, and decision-makers.

Indeed, my background, as having formerly run the Australian Chamber of Commerce and Industry for six years, makes me acutely aware of the tensions that can exist between big and small players for example, and different industry sectors, but there are occasions – many, many occasions – where businesses get together and speak with one voice. 

And I particularly value, and I know the Prime Minister values, the work that the Food and Grocery Council does representing the sector.

You are, of course, Australia’s largest sector in the manufacturing sector. 

It would be no exaggeration to say that their products are to be found in every Australian household.  And can I say, that whilst the manufacturing sector overall in Australia has been dealing with challenging times over a number of decades; food, drink, and grocery manufacturing has been steady.

And just to put that in perspective – according to ABS data – in 2013-14, the contribution to GDP was $26.7 billion.  Furthermore, in 2014-15, the sector generated exports of $25.7 billion – that is a 36 per cent increase over 2012-13.  So very well done in terms of what you’ve been doing in export markets and growth.  So it is a very important component of Australia’s manufacturing sector. 

Today, I’d like, if I may, to focus on three areas. 

Firstly, the Government’s focus on innovation to create jobs and stimulate growth.  Secondly – and of particular interest to me as the relevant Minister – is the Government’s focus on productivity.  And finally, bearing those two elements in mind, I would like to speak about the Food and Grocery report released this week – some areas where we are winning and others where we need to rededicate ourselves – that is, the Government – to producing optimal outcomes.

Innovation

The Government is focussed on building a culture of entrepreneurship and innovation to create jobs and stimulate growth.  And we are committed to ensuring Australians have the skills and technological creativity to take advantage of new technologies and opportunities.

The industries of the future will be built by our very best innovators, researchers, and people ready to reach out into global markets.  We have a number of initiatives underway to support innovation and entrepreneurship right now.

Our $100 million per annum Entrepreneurs’ Program helps businesses improve management practices and turn cutting edge ideas into commercial reality.  We are capitalising on Australia’s competitive strengths through the $225 million Industry Growth Centres initiative.

The R&D tax incentive encourages companies to innovate and invest in R&D by offsetting some of the costs. And we are looking at ways to improve this through the Tax White Paper – and I’ll have a little more to say about that shortly.  We are investing $584 million in our world-class Cooperative Research Centres, supporting industry led research collaborations.

But of course, we can do more.  We need to get the fundamentals right, to create an environment where there is an incentive for people and business to innovate.  The Government is exploring initiatives to support the enablers of productivity and innovation, like science, research, education and infrastructure.

We are also looking at how to support startups, connect research with industry, and build a stronger innovation ecosystem.  You might have already heard that Minister Christopher Pyne and Assistant Minister Karen Andrews and Wyatt Roy are leading this important work.  The plan is that, before Christmas, to produce an innovation science statement.  I was talking to Christopher Pyne yesterday.  They’re very advance on that.

Food and Agribusiness Growth Centre

I’m sure this audience is aware that the first of the five Growth Centres to commence operations was the Food and Agribusiness Growth Centre, being delivered by Food Innovation Australia Limited, known as FIAL.  We value the ongoing support of the Australian Food and Grocery Council towards the work of the Growth Centre and FIAL.

FIAL is seeking to improve the level of commercial collaboration, innovation, productivity and competitiveness, right across the food and agribusiness value chain.  To help this objective, FIAL is developing a Food and Agribusiness Sector Competitiveness Plan to guide the Growth Centre’s efforts.  It is due to be submitted to Minister Pyne by end June 2016.

The Sector Competitiveness Plan will also identify how new opportunities, such as technological change, can best be targeted and adopted in the sector.

Cooperative Research Centres (CRCs)

CRCs are supporting collaborations between researchers, industry and the community across various industry sectors, helping businesses commercialise leading edge research.  Six CRCs operating across the food sector: in pork, sheep, dairy, plants, pests, and poultry.  These CRCs are working closely with FIAL, and with CSIRO’s Food Innovation Centre, to help innovate and commercialise research within the sector.

Innovation Package

And just to say that again, the Government is planning to announce an innovation statement before Christmas.  This is much more than simply about facilitating more startups – as has been characterised in the media.  It’s actually much broader than that.  The focus is very wide-ranging. 

Indeed it may include quite a number of tax reform initiatives that would be very important in the innovation sector.  Those tax initiatives that might occur as part of that package predate anything that is in a bigger tax package that might occur next year.

Productivity

The Prime Minister has said on a number of occasions over the past few weeks that there has never been a more exciting time to be alive than today.  There has never been a more exciting time to be here in Australia.  The opportunities before us are indeed exciting.

But we need to forge an Australian economy that is well-placed to capitalise on – indeed optimise – those opportunities.  And this is an important point. 

You will often hear a call to structure and grow our economy so we are best positioned to weather headwinds and difficulties ahead.  This if often referred to as future-proofing our economy. We're not seeking to proof ourselves against the future. We are seeking to embrace it.

If we want to remain a prosperous, first world economy with a generous social welfare safety net, we must be more competitive, we must be more productive.  Above all we must be more innovative.  As the Prime Minister has said, we have to work more agilely, more innovatively, we have to be more nimble in the way we seize the enormous opportunities that are presented to us.

And this is a Government that has that as its focus.

There is little that determines a country’s standard of living more than its rate of productivity growth.  I’m reminded of a quote from Nobel Laureate, Paul Krugman – it’s an oldie but a goodie.  He said:

“Productivity isn’t everything, but in the long run, it’s almost everything.  A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

That quote, for those interested, was from his 1994 book, The Age of Diminished Expectations.

That is why the Prime Minister has created an Assistant Minister for Productivity and I am proud and honoured to take on that very important role.  As a former CEO of the Australian Chamber of Commerce and Industry I am particularly pleased to be continuing this important policy work for Australian businesses and individuals.  I should add; I was also formerly the Head of the NSW Regulation Reform Unit as a senior bureaucrat.

Let me say how this portfolio fits into the government structure.  My senior Minister is the Prime Minister.  So I answer directly to the Prime Minister.  So he is effectively the Minister for Productivity, together with all the other hats that he wears.  You might have heard that yesterday when he was asked about who is the controlling minister for cities, and he said, well, I am.  So he’s also the Minister for Productivity.

So let me speak briefly about Australia’s productivity.

Productivity performance has been the main source of Australia’s long-term economic growth, business competitiveness, and real per capita income growth.  There are essentially two ways of increasing the per capita income of our society – by producing more per person or by getting higher world prices for what we produce.

Currently, Australian labour productivity is in line with our long-term trend and multi-factor productivity is on the low side.  That labour productivity performance is directly related to capital investment in the Australian economy over recent years.  On multifactor productivity we have seen a long-term growth rate of 0.8 per cent – it doesn’t sound much, but it’s big – between 1973-74 and 2013-14.

That growth rate dipped dramatically in the period 2007-08 to 2013-14 to -0.1 per cent.  You might recognise that six-year period.

I am happy to say that the multifactor productivity growth rate has improved and in 2013-14, the MFP growth rate has increased to 0.4 per cent. This is still below the long-term trend, but it is an improvement on the years 2007-2013.  In 2013-14, the MFP growth and underlying proximate causes differ between the 12 industries that the Productivity Commission looks at.  This data all comes from the Productivity Commission’s report of July this year.

For example, the MFP rate in Agriculture, forestry, and fishing was -0.1 per cent.  Whilst in Arts and recreation services, the MFP growth rate was 5.4 per cent.  In Mining, it was -0.1 per cent.  In Financial and insurance services, it was 3.3 per cent.  In transport, postal, and warehousing, it was -3.1 per cent, whilst in wholesale trade, it was 3.1 per cent.

Over the past decade, Australia’s ability to produce more per person has been masked by the rise in our terms of trade.  As we adjust to new terms of trade – a down-turn in commodity prices and mining investment – we must focus like a laser on productivity.  Australia will need a big lift in productivity growth if our living standards are going to continue to grow.

The Prime Minister recognises this and it is now the central focus of my portfolio responsibilities.  The key to achieving this is through substantive reform.

We refer to the maximum level of output as an economies productive potential.  Economies that are well below their productive potential can experience rapid and dramatic productivity growth by being exposed to international competition.  And we saw a very good example of this with the Asian Tigers of Hong Kong, South Korea, Taiwan and Singapore – who all experienced rapid growth between the 1960s and 1990s.  Australia too, experienced strong productivity growth in the 1990s as a result of competition and trade reforms that created incentives for firms to reach their potential.

You can think of this like the top Formula One teams extracting those critical increases in horsepower performance at the margins.  Increased performance at the lower end can be made with blunt measures that are easily – and relatively cheaply – achieved.  The difficult – and expensive – work, is to produce that extra horsepower at the margin – where every increment can give a team a competitive advantage.  This is true of Formula One motor racing, and it is true of our $1.6 trillion economy. 

But reform that leads to even modest productivity gains is worth doing.

Former Chairman of the Productivity Commission, Gary Banks, made this very point.  He compared the projected rate of economy-wide labour productivity growth between the first Inter-Generational Report in 2002 with that of ten years later in 2012.  He noted that it fell from 1.75 to 1.6 per cent.  He found that this 0.15 percentage point difference translated to a reduction in per capita GDP of nearly $7,000 per person by 2050.

So what is to be done?

Returning to Gary Banks, he identified three channels of policy influence that have been the focus of government initiatives over the years.  He compiled a to-do list of productivity policies that I think provides a very good point of reference for my endeavours over the next 12 months and beyond.

Banks’ list is compiled under the rubric of incentives, capabilities, and flexibility.  The Productivity Commission characterises the incentive channel as a driver of productivity enhancement, whilst capabilities and flexibility are enablers.

In thinking about policies to improve incentives, we might focus on promoting competition, such as reducing barriers that inhibit international trade or new entrants to markets.

Policies to enhance capabilities might focus on the development of human capital, improving infrastructure and institutions to devise productivity-enhancing changes and provide an effective level of support.

And finally, policies to provide a more flexible regulatory environment and undertake a substantive regulatory reform agenda.

The channels are strongly interactive, and the key to optimising government’s influence is to harmonise and coordinate the reform agenda across all three.  We are already making headway in this area.

Regulatory Reform Agenda

A key responsibility I have as the Assistant Minister for Productivity is to progress the Government’s regulatory reform agenda.  We are working across Government to reduce unnecessary red tape costs on individuals, businesses and community organisations.

As at the 2015 Autumn Repeal Day (18 March), announced $2.45 billion in red tape savings since September 2013.   The fourth Repeal Day will be on 12 November 2015 with an even larger level of savings to be announced.

We are continuing to improve Commonwealth Government regulatory requirements.  For example, on 1 July 2015, the Regulator Performance Framework commenced.   Commonwealth regulators now have a common set of performance measures to hold them accountable for the regulatory burden they create.

In October 2014, as part of the Industry Innovation and Competitiveness Agenda, the Government committed to adopt trusted international standards and risk assessments.  Australian regulators should not impose additional requirements beyond those already applied under trusted international standards and risk assessments; unless it can be demonstrated there is good reason to do so.

Just recently one of my colleagues, a Federal MP, was relating that he was dealing with a constituent who had a product already approved under European safety standards – it is in the air-conditioning sector.  The Australian authority would not register the product for use in Australia based on the European accreditation.  They said he needed to get Australian approval.  They helpfully gave him a 100-page user manual to fill out his application form.  That can’t be right, but it is.

Ministers have been asked to consider where opportunities to adopt standards may exist.  We will be expanding our Regulatory reform agenda to pursue substantive, productivity-enhancing reform.  This will focus on pursuing regulatory reform that, whilst not necessarily producing headline-grabbing savings, will address directly red tape that impacts on business.  So there will be a slight tweaking of the approach to red tape from now on.

Another area I will be focussing on over the coming months will be harmonising and coordinating regulatory reform across all levels of government.  This is in order to address the problem whereby reduction of the regulatory burden at the Federal level is lost or diminished by regulation at State or local level.   More effective coordination across COAG will amplify the impact of our regulatory reform agenda.  Ensuring that the changes we make are felt in the business community.

Free Trade Agreements

The Government is opening up new premium markets so that Australian food and grocery exporters can do even better.  Our powerful trifecta of Free Trade Agreements with China, Japan and Korea will create new opportunities in these important markets that account for nearly 40 per cent of Australia’s two-way trade in goods and services.  These agreements give the food and agribusiness sector unprecedented access to some of our key Asian markets – China, Japan and Korea are among Australia’s top five markets for food and agricultural exports.

The recently concluded Trans-Pacific Partnership involving 12 countries in the Asia-Pacific region will create further opportunities for increased trade and investment by eliminating 98 per cent of tariffs amongst those 12 countries.  The FTAs also reduce unnecessary red tape on exports to allow you to get on with the job.

As I said, this is the work that I will be focussing on like a laser over the coming months.

But to more immediate matters.

Food and Grocery Industry Report

As I said before, this forum provides an important opportunity to promote relationships between food industry leaders and government.  I met many of the members of the Council last night and look forward to meeting many more over the next few months. 
I met last week with the Council’s CEO, Gary Dawson, and he provided me with a very thorough brief of the state of play.  Indeed the report from the Food and Grocery Council released on Monday provides a very useful snapshot of this important sector.

The Council has a great story to tell.

A 28 per cent increase in exports over the last year.  The US FTA and lower Australian dollar being big drivers.  Double digit growth across the board, especially meat to the United States.

Can I just highlight a few other key points with respect to the sector.  Industry turnover on 2013-14 data is $118.8 billion – that is an increase of 0.9 per cent in real terms.  The industry is made up of some 26,500 businesses.  Those businesses directly employ 323,000 people – an increase of over 3,000 jobs or 1 per cent.  Total international trade stands at $61.7 billion in 2014-15 – an increase of 12 per cent.  We spoke about productivity – Labour productivity growth stands at 2.4 per cent on 2013-14 data.

So you are an important sector and you are a healthy sector.

Now, a major policy issue exercising the Council is the Food and Grocery Code of Conduct.  This, as members would know, was tabled in March and all signed up in June.  We made a commitment at the last election to work with the retail industry to improve commercial relationships in the grocery sector for the benefit of suppliers and customers.

For some time there had been a concern about conduct across the food and grocery supply chain, particularly in respect of commercial dealings that big retailers have with small grocery suppliers.  We worked collaboratively with the industry to develop a code to improve commercial relationships in the sector.

Woolworths, Coles, and Aldi have all signed up and I understand it is leading to a change in behaviour.  Gary Dawson remarked to me that this is a good example of Industry cooperation and I agree.

An area that we may need to try harder is the adoption of international standards by FSANZ.  I understand that there is a sense of the Council that our performance on this to date has been sub-par.  It is difficult for your members to become part of the supply chain if standards are misaligned.

Likewise, Mutual recognition laws.  I think it would be fair to say that the sense of the Council is that these measures are not working.  I have some history in this particular policy area.  In the mid-1990s, I was working in the NSW Cabinet office and played a part in drafting the laws.  I thought and hoped then that this would be a significant change.  It is evident that it has not delivered the reform that I envisaged then and it is something we need to reapply ourselves to.

And whilst speaking about reform, can I make a very quick comment on the Competition Policy Review by Professor Ian Harper and his team review.  Much of the commentary on the Harper review has focussed on S46 and the application of an effects test on the abuse of market power.  I was talking to Professor Ian Harper two weeks ago and he made it clear that, while this is certainly important, the truly big reforms coming from the Competition Policy Review are in the Transport and Human Services areas of the economy.  So there will be a big concentration on those elements of the report in the Government’s response in addition to any consideration of Section 46.

Conclusion

I think I have probably spoken for long enough.  So let me just say in conclusion, that forums like these are very important.  Yours is a sector that is important to the Australian economy and, importantly, it is a sector that is travelling comparatively well.  That said, I know you have concerns and we have heard some of those already.

Rest assured, the Turnbull Government is listening and we will work with you to optimise this very important sector.  I thank you all for making the time to come and speak with us and I hope you enjoy the remainder of what promises to be a very interesting and productive program.

Thank you.