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Industry policy in the post-COVID world – strategic investment, picking winners or good old fashioned protectionism?

· Steve Cusworth,Manufacturing,Industry,Analysis

As Australia (and in particular Victoria) begins its long road of economic recovery due to COVID-19, governments state and Federal have been busy determining the extent of how they respond to the enormous economic challenge through their fiscal and policy response.

With the Federal Government ‘going hard and early’ with income support measures such as JobKeeper and JobSeeker and cash flow support, attention has shifted from the immediate dumpster fire of a potential collapsing economy to getting back on to the road of longer term recovery and growth.

Some measures from the Federal Government in the Budget of October 2020 outlined their response and priorities including such measures as the Modern Manufacturing Initiative which includes significant funding to invest up to 50% into capital projects under six priority manufacturing areas.

This focus on manufacturing in particular underpins an acute weakness for Australia which was exposed dramatically at the height of the pandemic panic in March and April – our position at the end of the supply chain for so many essential products from basic PPE gear to medical equipment such as ventilators.

Apart from the immediate health impacts, this weakness has been highlighted across the board including such issues as a lack of precursor chemicals for fertilisers and therefore potential to impact crop yields undercutting valuable export earnings at a time of emerging economic challenge.

Hence it is understandable government will be looking at two objectives with a focus on supporting manufacturing via industry policy in Australia – shore up our local supply chains for security and ‘onshore’ those jobs to help underpin our economic recovery.

However, market intervention in this way can have its downside and whilst support for businesses to invest domestically and create jobs is a long standing function of industry departments, there are some questions about how or why specific industries should be targeted.

In this regard, are we clear on the strategic rationale for why certain industries deserve support over others? Are they strategic industries with greater growth potential over others? Do they offer import replacement and supply chain strengthening? Do we really need to re-enter manufacturing of commoditised products for the next crisis or just get better at timely procurement and stockpiling?

Overlaying this is an assessment of how is the market responding to these challenges already. There are some wonderful examples of domestic innovation through the pandemic such as a Ballarat manufacturer designing, developing and putting into production a ventilator in a matter of weeks and months (and, it should be noted, government was a foundation customer to provide a ready market for the business to take the plunge).

There also runs the real risk that government intervention in certain industries has the effect of a quasi-protectionist approach – if support results in more expensive products for consumers, do we have a situation where higher costs also punish the poor who have less flexibility and purchasing power to choose so are we further entrenching the inequality exacerbated by COVID-19 in the interests of security and ‘buy Australian?’

There is also the potential at a sub-national level for a state versus state arms race to provide industry support – the shameless Qantas call for a bidding war for government support their new headquarters is a case in point. In a US context, Amazon has made this an unedifying artform.

However, overall it makes sense for government to seek to support industries with co-funding incentives, subsidies and in kind support at this critical time in our economic cycle and in a global era of increasing industrial nationalism.

We are in a competition for global investment and much of the investment in Australian industry capacity will come from multinational operators or global investors and we need to put our best foot forward on the competitive world stage.

It is also a fact that government has long supported industry through incentives and subsidies and at a time of economic distress there is a sense of a need to ‘super-charge’ that support from both the material support it offers and the signal it sends to business that government is prepared to assist.

In this context, it is a positive move for government to use the depth and power of their considerable procurement expenditure to underwrite new investment in critical industries such as the new $800m CSL-related vaccine production facility in Melbourne.

So while doubt may remain about how or whether government support should be focussed on specific industries, at a minimum government should be ‘in the market’ – and at this time of economic challenge, they should be yelling that from the rooftops to boost confidence and reduce uncertainty for industry to get on with their growth plans.

Steve Cusworth is Managing Director of FPL Advisory.

FPL Advisory is a team of specialists resolving risks and creating opportunities with respect to government. We work with public sector and corporate clients to execute strategies for owning and managing change.