Beware rent-seeking and picking winners

In this year’s budget, the government committed to establish a new “national interest framework”, to impose rigour on government decision-making on significant public investments. This framework is before parliament, as part of the Future Made in Australia (FMIA) bill.

Unfortunately, the bill does not provide the rigour the government promised.

The bill sets up a process for assessing sectors of the economy where Australia’s national interest may be served through public investment. The national interest is defined under two streams. The first is to support significant contributions to net zero where Australia has an enduring comparative advantage. The second is to support our resilience to supply disruptions or other external shocks. Under the legislation, these assessments must be tabled in parliament.

It’s a problem that the formal assessment against these two national interest streams is not an essential hurdle to getting the public funding. It is intended only as a guide to such decisions. The rigour provided by this public transparency is good, but it’s not enough.

The bill takes a first step to creating a better evidence base for public investment. But it fails to formally constrain spending on industry policy to only those areas that clear the assessment hurdle.

The opposition and several well-credentialed economists have raised the spectre of pork barrelling. And there is more to industry policy than splashing cash. Without government intervention in the energy transition, technology will be developed too slowly, early mover investment risks will be too high, and markets will struggle to take a long-term view in the face of uncertain climate policies.

However, well-designed policy can help develop new industries while addressing a key criticism of traditional industry policy: by creating markets that choose the “winners”, rather than leaving this up to government. The Howard government’s Renewable Energy Target is an exemplar.

Similarly, there is more to national resilience than spending. Concerns about supply chain security can be addressed in numerous ways, from stockpiling (as we do for medical goods and petroleum) and diversifying supply, to “friend-shoring”, to switching to products, practices or technologies less vulnerable to disruption. Companies consider all these options before insourcing part of their supply chains, and so should governments.

Then there are the community benefits. The bill attempts to enshrine five aspects of community benefits, around employment conditions, skills and training, community and First Nations engagement, local industrial capabilities, and tax transparency and compliance.

These are all areas where Australia could do much better. But the way to fix these problems is through existing laws in employment, industrial relations and tax, and through funding existing programs.

Without specifying the role that the assessments will play and how they will factor into decision-making, there is a risk of falling into the classic industry policy traps. The bill needs to be more explicit about how the national interest framework will inform and guide future policy and funding decisions, so these traps can be avoided.

Four amendments would improve the bill. These are not mutually exclusive and all four would mean a much better product:

• Put some clear substance into the purpose and scope of the bill. For example, identify the areas of manufacturing that would come under the FMIA framework. In doing so, greater transparency should be provided around the make-up of the government’s proposed FMIA investment of $22.7 billion.
• Make it mandatory for the treasurer to consider the assessments before allocating funding. This would impose the sort of rigour envisioned in the budget papers and enunciated by the prime minister in parliament. And it would add to the transparency of exposing the assessments to the scrutiny of parliament.
• Tighten the economic resilience test so that funding under the FMIA framework does not proceed unless other alternatives have been exhausted.
• Make the community benefit principles clear issues of merit, rather than mandatory funding requirements, so that firms that do better increase their chances of funding.

Australia needs this industry policy. Done well, it can firmly position Australia to capitalise on trade opportunities and boost our economy.

Creating new employment and economic opportunities will be important to sustain support among the Australian people for the transition to net zero. But there are also pitfalls in industry policy that governments should be aware of and do their best to avoid.