Enterprise Zones Pt 1

The concept is for Enterprise Zones to lower the disparity between regions. The idea of Enterprise Zones is for economically and otherwise disadvantaged areas is to get a time limited tax incentive to improve the regions economics, reduce unemployment etc. It depends on the area of disadvantage what criteria any particular Enterprise Zone is based on.

Before I get too involved with this, I must note, the majority of my views are quoted directly from a multitude of resources on the Internet. It is important to note however that not all are.

By now – if you are still reading – you will be wondering what an Enterprise Zone is.

Enterprise Zones would be geographic areas comprising a local government area (LGA), or group of areas, which are performing below defined standards. These areas would nominate themselves on a co-operative basis and would not be ‘chosen’ by government, but would be assessed against objective criteria. Once approved and designated, a zone would offer a range of attractive benefits to businesses. Any business locating to the zone, or an existing business expanding in the zone, would be eligibele for a range of benefits subject to that business creating new net employment for Australia and meeting set conditions.

Enterprise Zones was originally proposed as an idea by Professor Hall in the UK. The idea was embraced by Prime Minister Thatcher and then by President Reagan. Enterprise Zones were developed originally to counter urban poverty by developing a partnership between business and government to develop the conditions for job creation. In the USA the system was particularly popular but in the early years was primarily used in urban areas. It was later used to assist in job creation in declining rural locations and in the opinion of many observers is more suited to such areas. Over its twenty year history its single and most successful achievement is long-term job creation.

Why is a system of Enterprise Zones needed?

Many regions of Australia are hurting to the extent that is has become a significant matter on the national agenda, with ramifications for community and social stability. The current methods and tools for regional economic development have generated some success at the micro (small picture) level, however at the macro (big picture)level they are not reflecting national growth patterns and the general picture is one of decline.

If a single observation were to be made it would be that the government policy has not been able to create a climate which makes regional areas attractive for private enterprise

Long-term government policy has been based on limited numbers of competitive grants for communities to develop economic strategies. The problem arises in trying to get the private sector interested in the opportunity! If we accept that the “market” decides where business will establish, we have to ask why has regional Australia been so unsuccessful in developing its private sector. The answer lies largely in the comparative level of addition risk associated with a decision to invest at the regional level. Local economic development strategies can be extremely useful in identifying opportunities but they do not change the risk climate. Enterprise Zones on the other hand can have a signifcant effect in this area.

Enterprise Zones should be used in conjunction with grants ( Those who do not get the grants still face the problem of job and population loss) but will be more effective than just the current drip feed of grants being offered.

Why should rural and regional Australia be treated differently?

Those who live in regional Australia are Australians too. They have grown up in these areas or have moved there as a lifestyle choice. Regional Australia produces the raw materials for Australia’s wealth but the wealth imbalance between city and region has become increasingly apparent. Since Federation governments have been committed to providing government services at an equal level across Australia in areas such as health, education, policing and transport. We believe that government should have the same committment to economic equity by looking at mechanisms such as EZ’s to serve the needs of all Australians.

Isn’t there already a Zonal Tax System in place?

Yes, but only for personal income tax. It was introduced in 1945 as an incentive for people to work in remote areas. It continues to serve its purpose but it is not a mechanism to help create jobs and by simply extending the present system to businesses there will be no encouragement to develop value adding industries in regional Australia.

How can a LGA, or a group of LGAs, become ‘designated’ as an EZ and what does this mean?

The area needs to compare its peformance against a set of standard socio-economic benchmarks which would be determined by an independent taskforce. If it is found to be eligible, due to performance below these standards, it can apply to become designated, subject to satisfying the independent taskforce requirements including:

  • Attempts to group with adjacent areas if they are similarly affected.
  • A demonstration that the area has prospects for development.
  • The development of an an Enterprise Zone Economic Development Plan by the group (government funding may be available to assist).
  • A commitment by LG to be responsible for the monitoring of approved businesses.
  • The degree to which LGs are prepared to financially commit to the process.

You talk about distressed areas and benchmarks … how do you propose to measure the factors that will determine designation as a Zone?

Factors which might be considered are ultimately expressed in a region’s ability to generate jobs. Governments and communities are mainly interested in jobs. Whatever indicators are used, must be agreed upon by all three spheres of government, however the principals of transparency and simplicity must be followed. This means that all benefits that are avilable to participating businesses are able to be seen and understood by the average person.

Suggested factors are:

  • income
  • poverty
  • gross regional product (GRP)
  • property values
  • etc

How does a business sign up for Enterprise Zone Benefits?

A business intending to operate within a designated Enterprise Zone would need to apply to become an EZ qualified business. Information would be supplied to the business by the local council including indicative benefits. The business would factor relevant EZ concessions and rate of return calculations in their business planning when assessing the viability of the investment in the region. The process of designation would have prudential checks but should not be overly bureaucratic. It should be as simple and transparent as possible so that anyone could read the eligibility criteria and know whether they would be accepted. It is not expected that the number of businesses would in anyway be limited once a zone is designated, as ultimately these businesses would only be receiving rebates on the additional taxes they paid. For example, a business which has 20 employees and then employs an extra 10 employees after being designated as an EZ participating business, will receive credits based on the 10 extra jobs and not the 20 original jobs. EZ’s operate for a limited time span of approximately 10 to 20 years and businesses usually receive credits in any 5 year period in this time span. The business can choose in which year it wishes to use the credits.

What are the benefits to eligible businesses?

The components of the benefits’ system have yet to be finalised but they must be significant enough to encourage business expansion. Benefits should generally fall into the categories of tax incentives at both the State and Federal level (for example rebates back to the business of part of their increased tax liability), investment allowances, accelerated depreciation and wage subsidies. A significant design feature is that tax incentives are limited to and linked to the excess tax associated with investment in the EZ. Tax incentives are therefore conditional upon successful outcomes regarding production and employment within the zone. Business activity and job creation generates the benefits to the business.

If you are still reading I thank you

Are Enterprise Zone benefits proposed to be the same across Australia’s zones or can they vary?

Zone benefits should be the same across Australia wherever zones are designated. In special circumstances however, it may be desirable to write into the legislation that certain industry types could receive an additional benefit if they were to locate into specific areas to process raw products from that area, ie timber mills into areas which have plantation forests, vegetable processing where vegetables are grown etc. This level of detail however, should be left to the relevant stakeholders when they meet to design the EZ system for Australia.

Who pays for this system?

As the system uses tax incentives as the principal component of the benefits provided, together with investment allowances, accelerated depreciation etc, it is principally within the domain of the Commonwealth Government. However other tax concessions may come from State governments, for example payroll tax concessions and Local Government through land rating tax. There will be some initial administrative costs in establishing Enterprise Zones, but in the medium to long term, the EZ system is expected to be self funding because it is rebating only the part of the increased tax liability resulting from the new investment into the regional area. Government will benefit from new and expanding businesses through increases in personal income tax, savings on those people moving from welfare to work, increased company tax and additional GST on consumption generated from new employment.

The USA and Europe have enormous taxation bases -surely Australia can’t afford a scheme like this?

Enterprise Zone benefits are not based on population scale but on the performance of individual businesses. Enterprise Zones are designed to stimulate new growth in the economy. Businesses in EZs do not receive money as a government expediture but a concession on their new tax liability when their business expands. In the medium to long term EZs would be self-funding. One thing is certain; our regional areas cannot afford to keep going the way they are, using the same old economic development tools so we urgently need to explore viable alternatives.

What about Local Government – what is its interest?

Local Government has a vital and continuing interest in the social, cultural and economic welfare of its communities. Local Government exists to serve its community but if the community is poor, the Council is unable to deliver the increasing number of services required by its residents. Thus councils want to see their communities prospering and to share in this growth. It has been suggested that councils could receive a percentage of the total tax credits generated in their area, in return for their administration of the system at the local level.

What about an existing company which tries to relocate to the zone just to get the credits?

Firstly it is unlikely that the level of credits could ever offset the substantial costs of relocating a factory or large business. Secondly there will be checks and balances in place to ensure those businesses only receive a benefit that is linked to their new investment into an Enterprise Zone. A credit is generally available only where there is net employment generation and new investment in a region.

What about an established business in a newly designated
EZ – can it get credits?

Existing and new companies operate under the same rules and receive the same types of benefits if they expand and employ additional people. In reality most new jobs are likely to be created by existing businesses. In some areas in the USA, financial institutions that lend to EZ businesses also receive credits to encourage their support of regional enterprises.

How does an Enterprise Zone benefit a regional area?

Principally through the creation of new jobs. EZs provide the ways and means for businesses to operate within a regional area in an improved climate of certainty and reduced risk. Businesses must still plan their futures with their financiers and business planners, but they will be able to factor EZ benefits as part of the planning process. Businesses have a ‘mutual obligation’ to create new jobs and invest new capital and will be rewarded for doing so. The ultimate aim of EZs is to improve the depth of regional economies and the quality of regional life in Australia.

You talk a lot about regions. Is this ‘the bush’, towns, regional centres, the coast, outer parts of cities – what is regional Australia?

The use of the word “region” is problematic in that it appears to mean all things to all people. Politicians, government agencies, consultants, academics, the media and the general public all apply different definitions. This causes a great deal of confusion and can be a significant problem in communicating ideas. To some, “regional” is synonymous with “country” or “rural”, for others it also includes all or part of major urban areas. Regional may include the Hunter or Western Sydney and may also include mining areas such as the Pilbara.

The concept of EZs does not exclusively relate to “country” regions however, as determining the economic boundaries of regions within urban conurbations is extremely difficult, the concept more readily applies to country areas. This does not preclude the applications to urban/semiurban areas, as the UK, USA and Europe have demonstrated.

What about governments – don’t they object to giving subsidies and aren’t they reluctant to intervene in market mechanisms?

That just it – EZ’s do not operate on a subsidy principal. They simply rebate back to the business part of the extra taxes paid because of the increased profits or wages paid within the designated region. Rebates and concessions occur after the investment has taken place so in effect there is nil risk to government. In fact government will receive a net increase in revenues over time as a result of an EZ because it saves on welfare payments and generates additional personal income tax from the new jobs created and GST from additional consumption – it is a win/win for everyone.

In the USA, Europe and the UK, governments are pro-actively establishing these mechanisms where they are needed to help these regions get back on their feet. Some areas in Ireland will have their preferred status removed shortly because these EZ mechanisms have substantially improved their economic situation. The EZ concept works to complement and supplement other schemes to promote business
development and exports.

The Australian government may argue that it should not interfere with market mechanisms but the reality is that these very market mechanisms are causing the decline of regional areas NOT their growth. It is arguable that in such circumstances we should use the tools that have been successfully used by our competitors for over 20 years.

There are many examples where government already intervenes and regulates. The number of media outlets is regulated, as is the number of doctors, banks and taxicabs. Regional areas are arguing for a change to the economic regulations and mechanisms for the short/medium term to ensure success in the long term. The EZ system is another interventionist mechanism for the common good, which allows businesses and people to share in the overall wealth of the nation.

It may not be a subsidy, but aren’t Enterprise Zones simply propping up inefficient industries and giving them a handout?

All businesses look at ways to achieve better profitability but many have difficulty justifying a regional location due to perceived higher costs and risk. This often means that the regions miss out on the types of industries that can add value to the products typically found in their areas.

Enterprise Zones are not designed to provide windfall benefits for businesses – they are designed to provide a measure of equity for the regions to allow businesses to operate on a level playing field.

The EZ system can address many of the shortcomings of regional areas by matching private enterprise’s needs to make a profit and manage risk, with the regions’ needs to improve employment outcomes. This matching principle is well recognised in Europe where it is stated that economic disparity for the regions does not bode well for Europe as a whole. Under the present ‘free market’ system in Australia, these joint benefits occur in only a limited way. There are many mechanisms, which differentiate government policy and taxation in Australia due to special circumstances, and it is government’s right and duty to intervene where necessary to serve the common good.

Isn’t a system of picking winners again like the old Growth Centres of the 1970’s?

It is certainly not about picking winners – it is about enhancing regional Australia’s natural advantages and developing a positive climate to foster job creation.

The old Growth Centres policy was a reaction to the scattergun economic development processes of the 60s and 70s. The policy attempted to concentrate resources via State and Commonwealth programs and was a reaction to the high growth rates in Sydney and Melbourne. They concentrated on land acquisition for industry and residential purposes, rather than creating a business climate and developing value adding on top of natural resource bases. As criticism mounted and city growth slowed the political will to continue with the program waned. Unlike Enterprise Zones, growth centres did not work on the basis of a mutual obligation on business to create jobs and increase investment.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s