Productivity Lift Overdue

The Australian Financial Review
28 June 2012

By Jennifer Westacott
Chief Executive, Business Council of Australia

After two decades of remarkable economic growth fuelled by fundamental reforms from successive governments, Australia is a beacon of economic resilience and prosperity in an increasingly uncertain world.

So why are we unhappy with our lot, worried about our jobs, and our future?

The answer is partly due to our own success, with an unprecedented resources and investment boom that has pushed our dollar very high and sparked huge change as our economy adjusts to shifts in demand, prices and relative competitiveness of different sectors.

Not enough of the benefits of this investment pipeline have been passed on to the communities affected through improvements in infrastructure and services. The community’s sense that it is not benefiting enough from the pipeline is amplified by rising costs, which are a symptom of an economy that has grown for many years while experiencing diminishing returns from major reforms that helped generate the growth a generation ago.

We have become a high-cost but declining-productivity nation when what we want to be to continue to improve our lifestyles for future generations is a high-wage and high-productivity nation.

The issue is we can’t have high wages and low productivity and remain strong. We don’t want to limit our wages so we must lift our productivity and increase the economic pie.

This is why the Business Council of Australia (BCA) has highlighted the importance of delivering an investment pipeline of almost $1 trillion in current and prospective projects in the resources and energy sectors, and in economic and social infrastructure. Investment to gross domestic product is projected to exceed 30 per cent and remain there throughout the decade, the highest ratio in the Organisation for Economic Co-operation and Development.

The projects in the pipeline have the potential to transform our cities, regions and communities through better economic and social infrastructure, job creation, skills development, and growing government revenue.

The BCA report, Pipeline or Pipedream? Securing Australia’s Investment Future, released last month, shows the challenges are substantial.

Across the economy there are 11 projects bigger in dollar terms than the Snowy River Scheme and around 160 projects worth more than $1 billion.

Over the past 12 months, we have consulted widely with member companies and other experts and have routinely heard that we are becoming a high-cost investment destination and that we need to do more to lift our competitiveness in project delivery.

Research drawing from extensive project data reveals a cost premium in Australia of more than 40 per cent for resources and industrial projects against projects in the US Gulf Coast.

Data on infrastructure projects is limited but surveys also reveal substantial cost premiums for projects like schools, hospitals and airports.

Australian labour is typically 35 per cent less productive than in the US for resources projects near cities, rising to 60 per cent in remote locations. The Australian Bureau of Statistics recently reported a substantial quarterly increase in productivity for the whole economy. That is good news, but does not compare directly to project productivity benchmarking.

Improving productivity will require better project management, improving access to skilled workers, reducing the time and costs of planning approvals, and more flexible work practices. More work needs to be done in this area, which is why we support an inquiry by the Productivity Commission.

Our report does not argue for cutting Australian wages as a means to compete nor does it argue for regulating labour costs. To deal with skills shortages and the wage pressures that have inevitably arisen from a sudden shift in demand for project-related skills, we promote labour supply measures that develop the workforce through skills and capabilities training, improving labour flexibility, and temporary and permanent skilled migration.

It will be through lifting productivity and competitiveness that Australia can continue to have rising wages and living standards. The persistently high dollar only makes it more important to address cost pressures and deal with the barriers to the effective delivery of investment projects in Australia.

We need to acknowledge the high costs that have crept into the economy, if our lifestyles are to remain the envy of the rest of the world for much longer.

Tackling the issues now is preferable to waiting until they turn into a crisis, as European governments did.