Event: Australian Financial Review Roundtable

Date: 26 July 2017

Topics: Budget, Business Regulation, Economy, Energy, Tax, and Wages

E&OE

Financial Review: Thank you for coming, we'll go through a number of areas about how the economy is going, government policy, some wages questions, energy, tax and budget. It is an hour. It'll go quickly.

Grant King: The sort of framing point is this: that business surprisingly has to be full of optimists and we're very optimistic about the Australian economy. Frankly, why would you want to live anywhere else in the world, relatively speaking? And we know that certainly if you look at data, and in a world obsessed with data this month compared to last month or compared to the month before, business conditions appear to be improving so we should be optimistic. But the general point we want to make that as business we take a very long-term view. You know, we spend money with the strange idea that we know what 20 years is going to look like. You know, we set strategies in place. We make employment decisions with the long term in mind.

And some of the trends are concerning and the trend that's most concerning is that we've fundamentally slipped into a low-growth world.

And the key point we make is that's not good enough. And so even though we could say Australia, relatively speaking, is a great country relative to the rest of the world and, yes, the more recent signs are a bit good, we are falling way short of our potential as a country. We've got to get back to growth with a three in front of it. If we do that, I think a lot of the difficult choices we face get a lot easier.

Financial Review: Google and Facebook and Apple and maybe Amazon are exposing much more of the Australian economy to more intense competition in the global marketplace. How much is this weighing on this sub-par world – low-growth world that you talk about?

Ian Narev: Yes. Look, I think it's a really strong structural trend and we're in the early stages of it. There are all sorts of different issues wrapped into it.

At one level in the lower-growth world large sections of the population are able to procure stuff cheaper than they used to be able to. So that's sort of the positive aspect of that on the household. And at the same time, in terms of its impact on job creation, the tax base and all those sorts of things there's a whole other angle. I think we're underdoing the extent to which major businesses are actually innovating.

There's appropriate attention on start-ups and the opportunities that they provide and that's good and we want more of it. But there seems to be a view that that's the only place innovation is going to come from and the facts just aren't consistent with that.

Richard Goyder: I actually think the biggest – from where I sit at the moment, probably the biggest – change coming will be driverless cars, you know, not Amazon. I think Amazon and businesses like that are using technology to give customers what they want, which is great, products at great prices with really good service. And I think we and others will be able to compete with them as long as it's a level playing field.

I think there's other technology changes that are going to be really profound in what they will do. So we've got to have an economy and a country that can embrace technology and technology change and get all the great things from it.

At the same time, I get pretty frustrated because I can only open my shops in Perth from 7am to 9pm today and Amazon is going to come in – and they won't say we can only shop, we can only trade in Perth from 7am 'til 9pm.

Financial Review: BCA is very much associated in the public mind with company tax cuts. Given politics is a short-term game, will that association make it even harder to pursue the campaign?

Grant King: So I'm very pleased you've asked the question: Why is it hard for us to get our message out? We think those arguments are compelling. We've talked about it in terms of the only real lever that can be pulled to drive business investment. I think for me anyway, just my observation is it goes back to this low-growth world where if you stood right back, I think just about every Australian would say, "We need to balance the budget."

You know, if you talked about sort of political imperatives, balancing the budget is sort of at the centre of everybody's economic narrative. But it's much harder in a low-growth world. And if you look at the budget, it relies enormously on wages growth to drive tax receipts to balance the budget. Yet, people's real experience in the world is, low wages growth, technological innovation driving change in workplaces. You know, it's quite a troubling world, I think, for many people.

And so we keep coming back to saying we need to create new jobs. We need investment to create new jobs. We want to see income growth. We need investment to drive income growth. The only lever to pull is taxes to change, you know, the economics and investment.

Financial Review: Do you feel that the argument is actually sort of moving away from this position?

Richard Goyder: At the moment we've got a two-tier tax system, which is ridiculous. Now, I would describe Wesfarmers as 4000 or 5000 small businesses that aggregate under a name as an entity with half a million shareholders, 220,000 employees and we pay our billion dollars plus in tax, we pay our $9 billion in wages and salaries, and $45 billion to our suppliers basically in Australia, and $2 billion to $3 billion in capex and a couple of billion dollars back to our shareholders.

But, at the end of the day, a job in Wesfarmers, I think, is just as valuable as a job at a corner store.

Alison Watkins: I would make the point also that we do recognise that this issue of community trust and business reputation is incredibly important, and our effectiveness in being able to be credible on these really important fundamental issues like tax and productivity growth.

Jennifer Westacott: When I ask all sides of politics, "Do you agree that low incomes are a problem?" "Yes." "Do you agree that productivity outside of a trade boom is what drives higher incomes?" "Yes." "Do you agree that investment drives productivity?" "Yes." "Do you agree that changing the tax rate would impact on that?" "Not really." "Well, then what would be the alternative?" "We'll come back to you shortly." Now, no one has come back to us. So, you know, if people all agree that that's the formula to drive higher incomes in a more competitive economy, then I think, collectively, we've got a responsibility to call out either doing nothing or the alternative.

Financial Review: Has industrial relations just slipped off the agenda – industrial relations reform for business in general as well as governments?

Richard Goyder: We're at the forefront of what will happen to a lot of retailers in terms of our next EBA, and we're working hard to get good outcomes for the business and our employees. From a policy point of view, there's not a lot going on. The policy seems to be more who can trap who, so we'll just work our way through it. I'm – we're certainly not holding our breath that we'll get significant reform from any political party on the workplace front at the moment.

Grant King: I think there's some important points about the impact of new technology and the rate of change and innovation to the workplace and what that does to employment.

Obviously, many jobs are displaced through the adoption of those technologies and need to remain competitive. Yet, Australian businesses – and this is what I hear very often from our members – are operating in a regulatory and industrial environment that is slowing down, not speeding up. So you've got two forces heading in the wrong direction.

So there's these two opposing sort of forces and they're – the clash is getting bigger, in my view, because we're not addressing the regulatory and industrial sort of constraints that reduce flexibility in the workplace and reduce the rate at which businesses can do its proper job which is create jobs. And it's a fundamental oppositional course.

Richard Goyder: At the moment, Coles has got 16 federal inquiries under way – federal government inquiries, nine state government inquiries and four others. Of the federal government ones, eight of them are to do with the Fair Work Act, and several of them are the same other than one has got a hyphen in it sponsored by some senators, and the other one hasn't got a hyphen sponsored by the Labor Party. It is extraordinary. So you're right to say there's actually a big picture that needs to be addressed, and we're involved in 25 – 29 inquiries at the moment that just impact our capacity to do things.

Grant King: Cath probably knows the numbers, but the ... 50 regulators. How many – do you know the numbers?

Cath Tanna: Yes. So we have 53 regulators, and I think – we've actually stopped counting, but I think we've submitted to 55 inquiries in the last 18 months.

Financial Review: The Small Business Ombudsman has accused CBA of unfairly pulling the plug on a failed Queensland property developer CEC. How do you respond to this, Ian?

Ian Narev: I think that the contribution your paper has made has been really important, and I don't say that flippantly. These are really relevant facts that people need to know about some of the motivations behind some of what's going on. Before we get to that point which clearly we've got very significant concerns about, the starting point has to be we brought some of the stuff on to ourselves.

We haven't been able to say that we were doing enough. And now I genuinely think we are. But we need to sustain it over time, and we realise that for a period people will be sceptical about it.

Financial Review: Is there a misunderstanding about innovation, and what companies do it?

Alison Watkins: What you see and certainly we see it at Coca-Cola Amatil, is that a lot of these smaller companies and start-ups who are doing exciting things with technology with great support from companies like us. And – so there's that interdependency – a lot of these smaller companies are effectively a new way of getting innovation and work done because sometimes you can do it inside your own organisation and sometimes it's actually better to work with a small, nimble player.

Jennifer Westacott: I think that part of the misunderstanding comes from a very narrow view of what innovation actually is. People kind of want to kind of constrain it to people in garages in pyjamas inventing kind of new apps in the middle of the night versus what companies large and small have been doing for years.

Financial Review: In a low-wage environment is executive pay contributing to public resentment about big business?

Alison Watkins: I agree, and I think the only other comment I would add is I think that we are seeing executive pay come down.

Richard Goyder: I just should keep my mouth shut, but I won't. It was interesting when my retirement was announced that the headlines were "Scott to be paid less than Goyder". It wasn't "Rob Scott appointed to take over Wesfarmers". It was actually that he's being paid less. My sincere hope is that he gets paid more. My sincere hope is that he maxes out on his incentives every year because, as a shareholder, that will make me very happy. And one of the things I would say about this is that, when you perform, shareholders are happy. So we got no push-back from shareholders on the Ian McLeod salary arrangements because Ian achieved great things for Coles, which actually flowed on to the broader economy.

Financial Review: Okay. Now, on energy, obviously we're in this kind of gathering debate about the clean energy target. We're very interested in your views.

Cath Tanna: It's just extraordinary how much of the public conversation is around energy. We have to acknowledge where we are, and nobody has a licence to go around and say that the market is working for customers as intended.

But the solutions are clear and the solutions are around: investment in new supply and in energy efficiency. But in order to get that investment, we need certainty. We need certainty, and that will bring confidence, and then the market will solve these problems, and that's why it's so important to adopt the Finkel recommendations, and Finkel is the best chance, in my opinion.

Financial Review: Where should coal – and possible government intervention – fit into all of that?

Grant King: So when I said that, that sometimes when the consequence of past decisions is bad, one of those bad decisions was to pick one technology, which is renewable energy, and then set a target, which turned out to be too high and was disproportionately implemented in one jurisdiction to help that. That history you know. So if it follows that if that wasn't good, the best answer is not to try and pick a fuel or pick a technology.

And I have to say, having been involved in it back for a long time, we way too much listened to a group of people who said "The answer is X." The answer is never X in almost any field of endeavour. It's – innovation, all of those things we've talked about, nearly always surprise us as to where the solution lies.

Financial Review: The government has backed all 49 out of 50 Finkel recommendations apart from the central one of the clean energy target. Should it it back that one?

Cath Tanna: We should get in a room and work out how a CET can work because it's the policy certainty that's going to drive the confidence and drive the investment. There's no need for government intervention in the investment space. So I don't think the government – and we – well, I say government intervention should be discouraged. Focus on policy certainty.

Financial Review: But you've got to set a target, don't you?

Grant King: Yeah. So you set it too low you've got a renewable energy target. You set it too high you have no impact. But the discussion has not been had as to where can the community land. That's a discussion we need to have. Can we land at a place where it does knowingly create the right balance ... and I will be critical here ... the community has been misled for years on this issue that a transition is costless.

You know, that's the core issue that the community has been misled by all of those that have advocated, "Pick solution A; pick solution B and it will be costless." It was never going to be costless.

So someone has got to be truthful and say we've got to find the balance that the community is happy with, because it is a balance.

Grant King: Cath and I spent a lot of time in these areas – the first important point to remind people is that the renewable energy target has been through several legislative iterations supported by all sides of politics. So no political party is blameless or has no skin in this issue. So for those of us in the industry, we find it a bit rich when some have suddenly seen fit to be critical of choices that they were, in fact, a part of.

They did not listen to industry when they made those choices, and the gravest mistake they can make today is not listen to industry today when they have to make choices going ahead because more bad decisions don't solve past bad decisions. So, you know, Finkel, I think, was a genuine attempt to get real and knowledgeable industry input into the issues – give it a chance.

Financial Review: Anything you want to add on that?

Cath Tanna: Well, I just think we have to get the right people in the room. Even though it comes at a cost, you've got the generators and the retailers and customers advocating for the same thing. So there's an enormous amount of alignment. Get the right people in a room, work out the details of how to implement Finkel and in the meantime I don't think the government should be intervening and making investments in the market.

Financial Review: But you're still going to have very high cost energy for the foreseeable future.

Grant King: Well, for those who look at the detailed modelling, the current modelling says prices will fall. You know, the wholesale electricity – you know, the forward market is already falling.

There's a whole bunch of reasons why that's happening.

Cath Tanna: It's not possible to forecast with any accuracy exactly what's going to happen with prices. What is true is that there are no short-term silver bullet decisions to drive prices down to the very low historical prices that have been enjoyed by customers.

And anybody who pretends that there are silver bullet short-term solutions should be treated with scepticism. So – but there are solutions. And the solutions are around investment in new supply and managing efficiency.

And if we could get the policy settings right and get the certainty, the confidence will be there for both market participants on the supply and on the consumer side to make the investments needed.

Financial Review: What are the chances Australia's traditional competitor advantage in fossil fuels is still part of the energy mix going forward?

Cath Tanna: The first thing I would say about that is coal is a legacy technology. And I'm not saying that it can't be part of the future mix. I'm just saying that it's a solution, you know, that my grandfather would have built. I think it is very, very unlikely to find a market participant will fund such a new investment.

So that's why I'm completely agnostic as to whether it's inside the CET or not. It can be in there. I don't know that it will make the difference to create it actually happening because the third truth about it is it's not cheap. So this myth that if there was another coal-fired power station in the mix that, suddenly, energy prices would go back to what we enjoyed three or five years ago, I just don't think it's borne out by the economics of those projects.

Financial Review: What about the cost and supply of gas?

Grant King: It is particularly concerning for manufacturers who burn gas as a major cost. Again, we've just got to recognise that's where we are. It won't be quick to change. My personal view based on a little bit of industry experience is that as the LNG industry in Queensland settles down – when I say settles down, it's just a factual matter that new plants that come on have been running production tests, have had to use high, you know, large amounts of energy to pass their completion tests and all sorts of things.

So I don't think the market is yet fully functioning because of those requirements. But we do have a structural problem, that we do not have enough – or enough access to enough gas resource in that sort of 10, 15, 20-year period. That's where the focus of policy has to be.

Cath Tanna: Which means the moratoria have to be lifted.

Financial Review: Is the gas squeeze now so severe that the Resources Minister, whoever that may be, might have to carry out the threat to, effectively, renege on export contracts from the LNG investments?

Cath Tanna: Well, our experience in the market over the last couple of months is that the volume is available. So suppliers, producers are making volume available in the market. It's at prices that are higher than what was traditionally enjoyed. So the cost of the fuel has gone up.

Financial Review: Okay. Well, look, we have gone over time. Thanks very much for a frank discussion. It's been terrific.