National Reconstruction Fund advocates, including chair Martijn Wilder AM GAICD, share their vision for the body.
When Federal Minister for Industry and Science Ed Husic used a speech to the American Chamber of Commerce in Australia (AmCham) to extol the economic virtues of the government’s $15b National Reconstruction Fund (NRF), he tapped into a theme that is resonating domestically and globally. Worldwide, countries are increasingly embracing industry policies that promise supply-chain resilience, advanced technologies (whether it be green or AI) and, in some instances, geopolitical advantage.
Not everyone is a believer. The Productivity Commission acting chair Alex Robson recently used an address to the CSIRO to argue that Australia responding fiscally to increasing industrial policy and protectionist sentiment was like “bringing a slingshot to a tank battle”.
“Living standards in small open economies like ours will be best served by continuing to focus where they are best placed to fit within global production patterns,” said Robson. “In other words, we should continue to focus on our comparative advantages and think carefully about new sources of comparative advantage that are likely to emerge.”
Noting that total federal government industry assistance was an estimated $13.8b in 2021–22, he cautioned Australia against turning inwards and using trade and other policy measures to encourage the domestic production of goods as a replacement for lower-cost imported goods. “Some commentators claim that such import replacing measures would constitute a ‘new’ approach to industry policy,” said Robson. “There’s nothing new about it.”
While urging caution, Robson does still note there may be scope for individual policies based on cost-benefit analysis.
The chair’s pitch
Inaugural NRF chair Martijn Wilder AM GAICD, also the founder and CEO of Pollination, says the NRF has robust legislative parameters that will establish its investment foundations.
“It’s a very well-crafted piece of legislation,” he says. “The government made an election commitment to reinvigorate manufacturing in this country in these priority areas, to transform Australia’s economy by growing and improving our industrial capacity, by improving our ability to add value, find new opportunities, support long-term economic diversity and attract private sector investment. It will encompass reducing our greenhouse gases, creating jobs, enhancing our resilience against supply-chain vulnerabilities — as COVID-19 demonstrated — and encourage the commercialisation of innovation and technology. It’s also about value-adding in our mining and agricultural sectors. Our mandate is crystal-clear, to revitalise manufacturing in this country.”
Challenges to come
In his AmCham speech, Husic emphasised that no-one should underestimate the magnitude of the task. “Over the past decade alone, national manufacturing output has declined by more than four per cent, compared with a 26 per cent rise in the broader economy. We have the highest dependency on manufactured imports and the lowest level of manufacturing self-sufficiency of any OECD country. And in less than 30 years we have fallen 38 places in Harvard’s Economic Complexity Index... to a lowly 93rd out of 133 countries.”
Certainly, Wilder is under no illusions about the challenges ahead. “The board’s initial focus is getting the correct procedures and governance structures in place, as well as hiring a CEO,” he says. (Since this time, Rebecca Manen has been appointed acting CEO.)
“We also must set up investment guidelines around the rate of return. Then we will need to prioritise how we invest. One thing I’m mindful of is that we don’t just have a lot of ad hoc investments, which is why I said the Act is a very good piece of legislation — it has clearly defined objectives.”
Wilder has been around the markets long enough to know that some investments will fail. “Thorough due diligence and rigorous inquiry will be the hallmarks of the NRF,” he says. “But for reasons outside our control, an investment may not work, even with the best will in the world. What we must ensure is that the totality of our investments meet the agreed rate of return.”
He also downplays the threat of political interference. “Definitely not. It’s been set up as an independent body with an independent board. The government has been absolutely clear about this all the way along.”
Wilder takes comfort in the experience of the Clean Energy Finance Corporation (CEFC), which he says has thrived under several changes of government. “Success breeds support,” he says, “and we intend to succeed.”
Structured along the lines of the CEFC, the NRF will need to achieve a return on capital, whether it be from debt, equity or guarantees.
“When you think about it, it’s an incredible opportunity,” says Wilder. “We’ve basically been tasked to help rebuild our industrial base. I believe the government has been careful to get the structure right and appoint a board that’s gender-balanced, experienced, boasts a deep level of expertise and, most importantly, is very keen to make this work. It’s going to be quite a ride, but everybody is up for the challenge and committed to making it work. At this stage, I don’t think many people appreciate just how significant this fund could be in rebuilding our manufacturing capability in areas where it’s really important, such as healthcare and AI. As COVID-19 graphically reminded us, we can’t always rely on global supply chains.”
Where the money goes
For the CEFC — which was established in 2012 and must target an average return of at least the five- year government bond rate, plus an average of two to three per cent a year over the medium to long term — that translated into $1.2b of capital returned in 2022–23, taking lifetime repayments and returns to more than $4.5b.
As its CEO Ian Learmonth says, “Repayments and refinancings have averaged close to $1b for each of the past four years, reflecting the strength of the CEFC model. This demonstrates the crowding in of private sector banks and investors, allowing us to continue to reinvest capital from our original $10b allocation.”
Dr Jarryd Daymond, from the University of Sydney Business School, notes the CEFC is regarded as a success story across the political spectrum, from groups such as the Australian Conservation Foundation to businessman Clive Palmer, with the latter frustrating the then Coalition government’s move to abolish it in 2014.
Like the CEFC, the NRF will be a financier, overseen by an independent board (see breakout, left), with mandated investment areas that play to Australia’s natural and competitive strengths. Already, the government has identified $8b of the NRF’s $15b for these areas:
$1.5b for medical manufacturing
$1b for value-adding in resources
Up to $3b for renewables and low-emissions technologies
$1b for critical technologies
$1b for advanced manufacturing
$500m for value-adding in agriculture, forestry, fisheries, food and fibre.
Global notes
In the US, two pieces of legislation symbolise this style of industry policy. First was the CHIPS and Science Act, which became law in August 2022. It provides US$280b to boost domestic research and the manufacture of semiconductors. In the same month, Congress passed the Inflation Reduction Act (IRA), a legislative program boasting US$500b in new spending and tax breaks to accelerate the transition to net zero in the US.
Across the Atlantic, the European Commission (EU) launched its €250b Green Deal Industrial Plan in February with the goal of providing a more supportive environment to scale up manufacturing capacity for the net zero technologies and products required to meet its ambitious climate targets. EU president Ursula von der Leyen said, “We have a once-in-a-generation opportunity to show the way with speed, ambition and a sense of purpose to secure the EU’s industrial lead in the fast- growing net zero technology sector. Europe is determined to lead the clean tech revolution.”
It’s not just the US and EU. Although not net zero specific, India and China launched their “Made in” schemes in 2014 and 2015, respectively, while South Korea passed its K-CHIPS Act to encourage semiconductor investment in 2023.
A familiar refrain?
From a domestic point of view, it’s arguable that the NRF isn’t out of step with initiatives of the previous Coalition government, such as the 2020 Modern Manufacturing Strategy (MMS) that planned to invest $1.5b over five years in six national manufacturing priority areas with a “perceived advantage or strategic priority” — a list that almost mirrors Labor’s NRF priorities.
The language former prime minister Scott Morrison used to announce the MMS would have fitted comfortably into Husic’s AmCham address — building supply-chain resilience after COVID-19, creating a business environment that allows manufacturers to be more competitive, aligning resources to build scale in areas of competitive strength and securing sovereign capability in areas of national interest.
Organisations as diverse as the Australian Council of Trade Unions (ACTU) and Business Council of Australia (BCA) have, with some caveats, endorsed it. To ensure the NRF delivers, the BCA submitted in its NRF consultation paper, investments should leverage, not crowd out, private investment, be “truly productivity enhancing”, support diversification of the economy or “back in” an existing area of strength.
In seeking to address an ageing population, impacts of digitisation, a decarbonising economy and other macro-environment challenges, the BCA pushed for a reshaped “high wage, high productivity” economy.
These guardrails, the BCA submitted, are crucial to ensuring Australia does not return to an idealised past of Australian manufacturing, thereby trading off its global competitiveness.
“Australia is not going back to the old ways of building a car from bonnet to boot.”
Fighting fragmentation
In October, the International Monetary Fund’s first deputy managing director, Gita Gopinath, cautioned against uncritical embrace of popular industrial policies at the Ninth IMF-WB- WTO Trade Research Conference.
“The surge in government intervention is tightly linked to a resurgence in industrial policy.
In 2023 alone, the number of industrial policy measures increased nearly sixfold. Most of that increase is driven by advanced economies and has largely been motivated by strategic competitiveness, climate or national security objectives. Emerging markets have also increased their use of industrial policies, although they have relied less on subsidies and more on trade restrictions such as tariffs and export controls.
While industrial policies can help address market failures, they have historically been costly and often failed. Many of these policies have an explicit trade policy component. Even in the absence of discriminatory features, industrial policies may still distort trade and [foreign direct investment] patterns, create negative spillovers and risk retaliation.
According to one study, when the US, China or the European Union put in place a subsidy measure, there’s a 73 per cent chance that one of the other countries will retaliate within 12 months.
Design matters and practical steps are needed to promote a more common perspective across governments on the use of industrial policies.”
This article first appeared under the headline 'Automation Blueprint’ in the December 2023 / January 2024 issue of Company Director magazine.
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