Response to Regional Business Development Analysis (RBDA) Plan for action: Australian Local Government Association

Response to RBDA Plan for action

18 November 2003

Introduction
Enterprise Zones

Introduction

ALGA is pleased to be able to respond to the independent report of the Regional Business Development Analysis (RBDA): Regional Business: A Plan For Action. ALGA has followed the progress of the RBDA with keen interest, particularly as the issues raised by the analysis relate to ALGA's submission to the RBDA Panel in August 2002. The Australian Government initiative to undertake the Regional Business Development Analysis and the subsequent report is a much needed step to identify the obstacles impeding growth in regional Australia and the possible next steps to overcome these obstacles. ALGA commends the panel for the wide-ranging consultation employed throughout 2002 and 2003 both through the consideration of submissions and the visits to regional centres and local communities.

ALGA submits that the principal impediment to business in regional australia is a lack of coherent policy which works to encourage and stimulate the private sector and which is effective at a microeconomic level. It must be recognised that there are a variety of regions in Australia, a number of which are under-performing. In the consideration of the RBDA Plan For Action it is appropriate to consider a new approach which recognises that a more direct and assertive process is needed.

The recommendations contained in Regional Business: A Plan for Action are commended by ALGA in so far as they recommend real policy initiatives that can be taken to begin to realise new economic and business development opportunities in regional Australia. These recommendations reflect the strategies and outcomes sought by ALGA's own submission to the RBDA in 2002.

However, we would also submit that in the consideration of the report's recommendations, some of the recommended actions do not go far enough. The establishment of new policy frameworks and mechanisms, regulatory processes, regional task forces, advisory groups and planning strategies in many cases defers a real policy initiative in favour of another addition to an already crowded system of regional governance.

ALGA argues that what is needed to assist regional Australia are real tools and incentives for businesses to overcome the significant challenges faced in regional communities. While the RBDA's recommendations may create a structure for the more effective and efficient delivery of such policy, without the tools themselves, regional Australia will struggle to realise its full potential no matter what structures are in place.

It was with these goals in mind that ALGA's submission to the RBDA strongly advocated for the consideration of Enterprise Zone Type Mechanisms (EZTMs). EZTMs represent a substantial policy initiative, successfully employed overseas with a demonstrated capacity to stimulate business activity and to counter the effects of market failure. In response to the RBDA Plan for Action we regret that EZTMs have not been recommended as a way forward for regional Australia. Further to this we believe that the reasons given for the rejection of EZTMs are not adequately justified and are indicative that the full benefits of EZTMs have not been fully considered.

In the government's consideration of the Plan for Action. ALGA submits that EZTMs are in fact consistent with many of the actions recommended by the RBDA. The following response to the Plan for Action serves first to counter the arguments in the Plan against EZTMs before exploring in more depth ALGAs response to each of the ten actions advocated by the Panel.

Enterprise Zones

We are disappointed that while there is recognition within the report of the benefits offered by Enterprise Zones, these benefits are not fully explored:

The concept of enterprise zones is just one of many ideas considered in the context of generating or revitalising growth in regional Australia. […] An enterprise zone could address some of the issues raised in submissions and through consultations.
(A Plan for Action; Page 34)

Without further exploring the potential of Enterprise Zones to address these issues the report goes on to state that:

we do not see them as the most desirable or most efficient way of addressing these issues, nor can they be considered a strategic solution.

This finding remains unsubstantiated in this report. We believe enterprise zones to be a targeted, regionally focused strategy. Enterprise Zones intervene to provide a stimulus to natural market mechanisms, they have the potential to improve investment and employment, effectively fostering business growth and expansion.

The key problems raised in the report with respect to Enterprise Zones and our response to these issues are as follows:

Enterprise Zones crowd out each other's window of opportunity: A key requirement of enterprise zones is that businesses cannot simply move from a non-zone to a zone to earn benefits. In Australia's regions most new jobs will be generated from existing businesses. Enterprise Zones provide a way to stimulate those existing businesses to think about expansion.
They create more artificial boundaries, which in turn can create winners and losers and replicate the problems created by state borders: It is a mistake to see enterprise zones as creating winners or losers. The implementation of enterprise zones does involve a recognition that in parts of the country market failure has led some regions to under perform in comparison to others. This is a current reality - not a product of boundaries (state or other) but a consequence of market failure. The provision of Enterprise Zones is not about picking winners or losers but about committing to a process of rejuvenation.
Declaration of a region as an enterprise zone implies that the region is disadvantaged thereby discouraging capital markets and investors: The Enterprise Zone system has a long and successful track record overseas. It should be noted that the RBDA report does not identify any Australian peculiarities to restrict the implementation of Enterprise Zones here. Commonsense and overseas experience tells us that businesses and capital markets are guided by profit. The improved bottom line offered by the benefits accrued in Enterprise Zones will encourage investment. In particular ALGA would highlight a recent report from California. The report entitled Cost Benefit Analysis of California's Enterprise Zone Program (Applied Development Economics; June 2003) is very supportive of California's EZTMs and the positive effects of Enterprise Zones on state finances.

In response to these criticisms it should be reaffirmed that ALGA does not advocate Enterprise Zones as a single solution for regional Australia, but as one program operating with support from traditional infrastructure and other regional economic development programs. Government already recognises that some regions need special assistance and has provided direct funding for the disadvantaged regions of Wide Bay Burnett, South West Forests in Western Australia, specific regions under Rail Reform programs, Newcastle NSW, Eden NSW, the Kimberly and Atherton Tablelands. Government concern should extend to all those areas that exhibit poor economic performance.

We believe that Enterprise Zones should be reconsidered by the government in the context of the action plan advocated by the RBDA report. The action areas identified in the RBDA Plan for Action provide a framework in which Enterprise Zones, modified for the particular needs of Australia's regions, could be implemented.

Addressing the ten Actions put forward by the RBDA, as detailed below, ALGA submits a number of comments for further consideration:

Action 1 - To improve access to finance for regional businesses

the development of a small business financing program
the piloting of a revolving loan fund program in one or more of the Sustainable Regions Program areas
governments ensure specialist support services are available to assist regional small businesses
accelerated depreciation on certain classes of fixed assets where the collateral value is significantly less than the construction cost

In the ALGA submission to the RBDA Panel it was observed that in Australia, the Commonwealth directly matches only two of nearly fifty US programs relevant to regional business development (The Institute of Chartered Accountants in Australia and the Local Government and Shires Associations of NSW, Enterprise Zones - Creating Jobs and Prosperity in Regional Australia - Dr Ian Manning 2001). In regional Australia there is an acute need for programs to provide loan guarantees and capital for small to medium businesses and local government. The initiatives outlined under this action recognise this deficiency. ALGA encourages the widespread adoption of these initiatives in collaboration with all levels of government.

Action 2 - To improve the flow of investment capital into regional Australia

governments and regional networks act together to promote the positive features of regional Australia, especially the investment opportunities and its lifestyle advantages
a pilot business angel investment program to attract smaller amounts of capital to a region

We agree that it is necessary to promote the positive features of regional Australia to encourage investment. However this promotion must extend to the core reasons for businesses deciding to expand or locate. Businesses are attracted to or decide to expand in a regional area because of the bottom line of return on investment. Government may have some very small role in promoting opportunities or advertising but the real decision is made by the business. To substantiate the positive features of regional Australia it is vital to have focussed economic development programs which directly influence business investment decisions. We commend the angel investment program as just one example to encourage start-up businesses in regional areas. However more broad ranging initiatives are vital to ensure such start-ups and existing businesses have the capability for sustainable growth and expansion while maintaining a regional location.

Action 3 - To ensure regional businesses are able to compete effectively in national and global markets:

Heads of Government establish a specific taskforce to:

formulate a process to establish for each region a body to have responsibility for:
achieving long term regional planning outcomes that lead to business development and growth
delivering those government services that provide a solid foundation for business development and growth
develop a mechanism through which Commonwealth funding can be used to leverage a greater level of strategic coordination among, and where appropriate, the rationalisation and consolidation of, the various bodies involved in regional planning and development
recommend changes to the regulatory framework to reduce the level of uncertainty for business development and investment
develop a framework to underpin development of a solid management skills base for regional business operators through some form of specialist support service

ALGA recognises the importance of greater coordination between levels of government to develop strategies at the regional level to foster business development and economic growth. Local government has generated great leadership in collaborating with both the State and Commonwealth Governments and is committed to development at a regional level.

The benefit of the Enterprise Zone concept is that it provides just the "process" and "mechanism" sought in Action 3 above. Enterprise Zones provide local communities and regions with a predictable and positive regulatory framework for business. Enterprise Zones create the opportunity to effectively target and coordinate funding and administration through all levels of government. In developing "a mechanism through which Commonwealth funding can be used to leverage a greater level of strategic coordination" we strongly recommend the consideration of Enterprise Zones.

Action 4 - To assist regions seeking to maintain and promote their competitive advantage

the Regional Development Council prepare an information brief for distribution to regional bodies involved in preparing long-term regional economic plans to provide advice about the benefits to regions of the benchmarking process

We support the work being undertaken by the ABS to provide local governments and regional communities with accessible and meaningful intelligence about business development. In providing regional authorities with an information brief on benchmarking it will be important to emphasise the real utility of such a process. There is a sense in local government circles that continuous emphasis on plans and strategies achieve little without new economic development tools and impactful policies. Reference to "talkfests" and "paralysis analysis" are sometimes made in these circles.

In spite of this, the concept of benchmarking local councils is particularly important to identify those regions that are underperforming in comparison to others. ALGA's longstanding commitment to regional benchmarking and research indicators is demonstrated through our annual State of the Regions report. This type of benchmarking provides the data necessary to tailor revitalisation programs to individual regions. Without the recognition that some regions are "losing" under the current free-market approach it will be impossible to identify an appropriate solution.

Action 5 - To address anomalies in the current Zonal Tax Rebate Scheme

remove eligibility for the rebate from those people who are employed under a fly-in/fly-out arrangement and whose principal place of residence is not in one of the designated zones
review the Zonal Tax Rebate Scheme with a view to:
aligning the boundaries with generally accepted Australian Bureau of Statistics boundaries for remote' and 'very remote'
introducing provisions that limit access to the scheme for people on high incomes
introducing provisions that provide for regular indexing of the rate of the rebate in line with shifts in the consumer price index for regional and remote Australia

ALGA is supportive of a review of the Zonal Tax Rebate scheme and commends the Panel on these recommendation which would see the Zonal Tax Rebate scheme achieve a new relevance for regional communities. However, in the context of regional business development zonal taxation should be examined on its ability to stimulate business activity. The present Zone A/B system and the reforms proposed under the RBDA remain as a rebate for employees not employers and as such, provides little incentive to the private sector.

Further to this, we would submit that taxes such as State Payroll Tax are acting as a significant disincentive for business expansion. There is anecdotal evidence that many businesses may deliberately choose to maintain their employment levels below the employment threshold for this tax. A tax based on increasing employment numbers seems to run counter to any philosophical commitment to assist businesses to expand.

Action 6 - To attract skilled people to regional Australia

regions actively pursue regional marketing strategies that:
focus on both attracting skilled people and creating the right climate to make people and business feel welcome
identify skill shortages in their area and make more effective use of existing business migration initiatives
governments improve their marketing of business migration initiatives to regional business and other regional development organisations

Social and cultural marketing of regional areas are important strategies that assist regions to attract skilled workers and business. However ALGA believes that stimulating the business sector first will ultimately provide the resources for improvements to amenity. Success in attracting skilled workers to regional Australia is more likely through specific mechanisms to trigger higher levels of economic activity. The marketing and more effective use of business migration initiatives by government and the community is supported by local government. ALGA's participation in recent initiatives by the Regional Development Council to more effectively market skilled migration programs are demonstrative of an ongoing commitment to attracting skilled people to regional Australia.

Action 7 - To increase the commitment of skilled and unskilled workers to a region

the Government undertake detailed research into the potential benefits of providing regionally based incentive payments over and above the existing First Home Owners Scheme

The proposal to undertake research into the benefits of a regionally based First Home Owners Scheme should be commended; particularly for the potential of such an incentive to stimulate building activity and business development. The current Productivity Commission Inquiry on First Home Ownership may serve to substantiate such research.

However, such a scheme is potentially a relatively minor initiative that could better act as a component of broader policy position providing a range of financial and other incentives. In a more substantial project ALGA suggests that the government undertake research into the potential benefits of financial incentives (such as that proposed above) and also alternative tax-based initiatives. It should be noted that at least 78 of the 132 submissions to the RBDA Panel specifically mentioned the need for taxation incentives in regional Australia. Research should be undertaken to identify the most appropriate incentives for regional Australia. Such work has the potential to more effectively tailor policy to the particular demands of regions where a First Home Owners Scheme may not necessarily be the most effective approach.

Action 8 - To assist in fostering regional leadership

the Regional Development Council develop a framework that links existing Commonwealth and state and territory leadership programs to provide a more effective network for the development of leaders and potential leaders in regional communities, especially young people

Learning Communities programs provide another method by which regional communities can galvanise to foster the development of local leadership, education and skills. The Learning Communities Catalyst (http://www.lcc.edu.au), partially sponsored by ALGA, provides a number of models of learning communities that regional communities can build on to more effectively network existing agencies together to cultivate local leaders and regional skills.

Action 9 - To ensure an objective prioritisation of major infrastructure projects of national significance that are not likely to attract private sector investment

the establishment of an independent national advisory group, to advise the Council of Australian Governments on:
priorities for infrastructure development, which are based on connectivity between regions and national and global markets

In considering the prioritisation of infrastructure projects, it is worth revisiting recent research by the Australian Council for Infrastructure Development (AusCID) advocating a National Infrastructure Strategy. Further work undertaken by the Australian Automobile Association (AAA) in response to the AUSLINK Green Paper, highlights the benefits of public investment in national road infrastructure. Examples already exist of Federal infrastructure funding that has generated great regional benefits, for example Roads to Recovery and the Blackspot Program. It should also be noted that the proposed AUSLINK arrangements to establish a National Transport Advisory Council may support or act as a subcommittee of the National Advisory Group recommended in Action 9.

Action 10 - To overcome the chronic under investment in small regional infrastructure projects

Government facilitate the development of a regional infrastructure bond market

In recognising the multiple challenges facing infrastructure provision in regional Australia the recommendations for a prioritisation of major infrastructure projects and a regional infrastructure bond market are to be commended. However what these recommendations reaffirm is the vital role to be played by government in financing critical infrastructure for regional Australia.

While a regional infrastructure bond market provides a useful model to trial it is possible that private investors may be reluctant to participate in high risk projects where the return on investment is less certain. Looking outside government to finance infrastructure projects it may be worth reflecting on overseas models. One example is the USA's Community Reinvestment Act which requires lending institutions to conduct part of their business in regional areas.

Australian Local Government Association

Regional Business Development Analysis (RDBA)