Enterprise Zones Pt 2

Enterprise Zone issues Concluded

But you are still asking Government to pick winners -picking areas to become EZs and picking businesses?

No, not in any way is government involved in picking winners.

The Federal Government is being asked to set in place legislation which will allow for Enterprise Zones to be designated if areas meet certain criteria -being economically distressed, being prepared to commit to a planning process and having prospects and commitment for the future. This means that local government areas or groups of areas can assess their situation and apply for designation as an Enterprise Zone. Far from Government picking winners – local government areas choose to nominate themselves. The next step is likely to be that any individual business can then apply to register as an EZ business. If they invest and expand and if they create net job growth they will receive concessions on the extra taxation liability created as a result of their expanded business.

The individual business chooses to activate the EZ mechanism -not government.

Are you picking losers then?

Some have referred to the EZ concept as ‘picking losers’. EZs seek to create the possibilities of equity amongst areas which have experienced an economic downturn. It does not serve Australia’s interests to have a large part of our country performing at a standard which most Australians would find unacceptable. There are many government policies and interventions which are seen as necessary in our daily lives to ensure that all Australians have access to a range services necessary for the common good. We seek an extension of this philosophy by Government to the economic circumstances of its citizens.

But isn’t Australia’s economy doing well enough without this proposed intervention?

Australia’s overall economy is performing reasonably well by international benchmarks but it is an ‘average’ in the sense that high and low results are combined to produce the result. There are times when commodity prices such as wool, wheat and pork may be high in rural areas, but most of Australia’s lower incomes are in regional areas and because they have lower population the overall effect for the nation as a whole, looks satisfactory. Regional areas are performing poorly in many key indicators because the economic structure combined with market forces has kept these areas as basically commodity producers. The challenge is to build a system that promotes private sector investment to encourage value adding of these commodities and move towards participation in higher technology areas.

We hear lots about present government initiatives to help regional Australia-why aren’t they working?

I briefly addressed this earlier.

It is because the tools are not the right tools for the problem.

Governments have for many decades relied on grants to deal with regional economic development issues and these are valuable in highlighting natural strengths and business opportunities. Regional communities however are faced with lack of business confidence and in most cases the good ideas generated by consultants go no further! No one doubts that every one wants to assist regional and rural areas to do better, but many are questioning whether small amounts of competitive grants will really make a difference to a large scale problem. Private enterprise generally finds regional and rural areas too risky and they have chosen to locate elsewhere. The tried and tested Enterprise Zone system attacks this very problem by creating a climate of less risk and more certainty for business.

So what are the guiding principles for Enterprise Zones for Australia?

The system must be designed for Australian conditions by the three spheres of government and business groups.

  • It is a tool to assist poorly performing regions not to benefit prosperous ones!
  • The system must be simple, transparent and substantial so it is easily understood, there are no secret deals and the benefits must be real and sufficient to be attractive to business to positively influence their investment decision
  • EZs should have a minimum size of a local government area with an expectation that areas will join together.
  • To be designated, an area must show it has prospects and commitment to development of an economic development strategy.

Isn’t it just more Corporate Welfare?

EZ’s arose in the United Kingdom from an idea developed by an academic at Reading University and were subsequently adopted by well recognised conservatives Prime Minister Thatcher and President Regan.

EZs were originally designed as an urban economic development tool to reduce dependency on welfare but looked towards business to assist in this process. The idea was then transferred to a regional context. It is an approach to development that improves low-income communities and replaces ‘do for and do to’ with a ‘do with’ model.

Enterprise Zones can’t be that simple …can they?

The basic idea is very simple. To a great extent, regional areas produce commodities that over the long term typically produce a roller coaster ride of incomes, but on average these are low incomes. EZ’s help to counter this situation by attracting businesses and encouraging expansions, especially for those industries which add value to regional commodities, thereby increasing employment and wealth. It is a system used throughout the USA in many different formats. Each state designs its EZ system to meet its objectives, but principally it is used for job generation and to improve the economies of regional areas and ultimately that of the state. It is a popular mechanism for poorer performing regions, which under the present ‘economic rules’ are unable to achieve substantial benefits from growing economies.

Why can’t we have EZ’s in Australia?

It is a matter of highest priority that Australia ensures its regions have the ways and means to share in national prosperity. Our present system does not allow this to happen. Our principal problem is the Federal Government’s current approach to regional economic development and its blanket opposition to perceived interventionist methods, but there are signs this stance is being modified. While there are many types of government grants for feasibility studies, there is little emphasis on making regions more attractive to the businesses that have potential to add value to the products emanating from the regions. The EZ concept found in the USA on the other hand, has proven benefits to regions in a number of significant ways.

We need to understand that a commitment to economic rationalism has given the regions what they have today – low performing economies.

Contrasting the USA’s and Europe’s pursuit of the Knowledge/Industry Model of economic development with Australia’s fascination with the cost efficiency model. We became good at driving down costs and the producing low value products. By doing this we sentenced Australia to low levels of innovation and low returns. The USA and Europe fostered a climate of innovation and high returns.
Government can make a significant difference by committing itself to regional economic development by examining successful overseas concepts such as Enterprise Zones. While blighted communities in Australia no doubt appreciate the Federal Government’s funding of Rural Transaction Centres, what they really need are mechanisms that will get them back to work. EZ’s in conjunction with other programs can help the regions achieve their goals in the same way as the citizens of the USA and Europe have been able to achieve theirs.

The USA model differs from Australia in that the American Federal Government has backed its political rhetoric with real and substantial tools which regional communities can use. Our government risks increased regional disaffection by not making the necessary changes to an economic system that maintains the polarisation of regional and city economies. World experience has shown that Government intervention in partnership with responsible community action can become an extremely powerful economic development tool.

Is there a prescriptive model for Enterprise Zones we can follow?

We could simply pick up a model from the USA and use it, but there are differences in State and Federal Taxation, investment allowances etc that do not translate to the Australian context. EZs have a similar philosophical approach around the world but they are adapted and modified for local conditions. We need government to adopt the philosophy first, commit to the creation of the taskforce and then the stakeholders can work through the details and fully design the system.

Australia has an opportunity to draw upon 25 years of EZs and design a world’s best practice model.

Won’t politicians try and promote their areas as EZs when they do not really need it?

Politicians have an obvious interest in representing the interests of their electorates but it must be recognised that Enterprise Zones are a tool to help distressed regions perform to a better standard. If an area is already performing well it should not be designated as an EZ. If EZs became a ‘pork barrelling’ exercise, it would jeopardise the whole system and its ultimate demise would be guaranteed. All parties need to commit to a genuine approach to ensure its legitimacy and long term effectiveness. EZs should be above politics and for that reason all decisions about EZ rules and administration should be carried out through an independent body (the independent taskforce).

How can EZ’s work in Australia with our different system of taxation?

It is important to examine principles before we look at specific examples. In the USA companies pay State and Federal taxes. The important first step for the EZ model for Australia is to have all parties accept the general philosophical basis of special treatment for distressed areas and then translate that agreement to a mechanism appropriate to meet Australia’s needs. Businesses in Australia pay Federal Company tax and, in some states, Payroll Tax. A tremendous opportunity presents itself for the three levels of Government to work with business groups and design the EZ concept to meet Australia’s national objectives – and it will be local government’s job to ensure that it is committed to the local aspects of EZ administration.

Doesn’t the Australian Constitution forbid the mechanism you propose – differential taxation?

Independent advice from solicitors Phillips Fox, Constitutional Special Counsel, finds no impediment to the EZ concept of taxation measures for Enterprise Zones. I’ll attach a transcript if necessary. Also there are other precedences. Or you could just look at this post here that covers it.

What is likely to be the biggest hurdle in having Enterprise Zones introduced into Australia?

In spite of the 20-year success record seen overseas, there is likely to be resistance due to it being a ‘new ‘ idea. Australia has traditionally approached regional economic development through grant programs which means that only a few areas receive funding. This approach does not address the issue of making regional areas attractive for business. Saying “tried it before and it did not work” is unsatisfactory because the EZ concept has not been tried. Saying that “Australia is different and it will not work” is a denial of the fundamental truth that other countries have ade it work to their advantage. We all need to keep an open-minded pproach when examining Enterprise Zones. What we have now is not orking satisfactorily but EZs offer an opportunity for government and usiness to create a climate that will encourage private enterprise to take fresh look at regional Australia.

How can Local Government and economic development groups help to promote the idea of Enterprise Zones?

Principally by being united about the need for new economic development ools which address the issue of market failure in regional economies. econdly we have to call upon the Federal Government to exercise its rue leadership role in respect of regional restructuring mechanisms ather than insisting that communities find their own solutions! The Commonwealth is the principal taxing power in Australia a system of Enterprise Zones must be a Commonwealth initiative. It will be the Australian Government that will provide the ways and means for this to happen through legislation and regulation. State and Local governments must also review their roles in making regional areas more business friendly. It is important in any discussions on the subject of EZ’s to remember that EZ’s should be designed to meet local, state and national objectives that best serve the needs of regional Australia. Individual Councils should be required to develop an Economic Development Management plan as a pre-requisite for declaration as an EZ and should also be prepared to provide administrative support for the administration of the EZ credits system in the same way that it occurs in the USA.

Summarise the situation for me please!

In spite of talented and energetic people, Australia’s regions are facing challenges unable to be solved by local action alone. It is not fiction and not a media beat up – all the economic and social indicators show a looming problem and we have already seen the results in national and state elections! Many people in regional areas recognise the macro-economic nature of their problems and know that the battle cannot be won if we are simply told to try harder with the old tools! Enterprise Zones are not a cure-all, however they offer real hope for Regional Australia especially in partnership with the three spheres of government working together with business.

EZs address the real issue – getting private enterprise interested in the regional areas. They are used successfully overseas and deserve close scrutiny here in Australia.

That pretty much summarizes the situation and should quash most arguments.

What continues below are possible arguments that have not been addressed and their appropriate responses.

ARGUMENT AGAINST EZs 1

A recent survey of unemployment rates across LGAs suggests both that many regions have experienced recent declines in unemployment, and that many non-metropolitan (particularly inland) regions have very low unemployment levels (Department of Employment, Workplace Relations and Small Business 2001).

COUNTER ARGUMENT FOR EZs 1

Electrolux job losses account for 0.56% of employment in the Central West compared to 1000 job losses at Mitsubishi accounting for just 0.29% of South Australian employment. That is nearly twice the loss in Central West Employment compared to Adelaide and Adelaide is getting a $50 million assistance package. (2004/05)

Employment in Telstra declined from more than 86000 in 1987-88 to around 67000 in 1997-98. The decline in Telstra employment between 1992 and 1999 was larger in non-metropolitan than in metropolitan areas. The reduction in employment and incomes from the closure or reduced size of a Telstra depot is likely to represent a larger share of total employment and income in a country town that in a metropolitan centre or larger town. For example, the loss of 70 Telstra jobs in the town of Narrandera represented nearly 3 percent of the shire’s total workforce.

ARGUMENT AGAINST EZs 2

The NFF rejected the EZ proposal in its discussion paper. According to the paper (NFF 2001, p. 24):
– for reasons of sound economic principles, transparency and good governance, use of the Commonwealth’s tax powers should be confined to setting the broad parameters of business rather than seeking to determine what activities are worthwhile, or precise recipes of how they should be organised.

COUNTER ARGUMENT FOR EZs 2

This can more or less be answered by echoing earlier comments

The NFF and its constituents have long been the beneficiaries of non-market based economics and should be the last organisation to put this argument forward. If Australia was to rely entirely on the effects of market based economics we should ask why governments (State and Commonwealth) then ‘interferes ‘by making rules about the numbers of Doctors, medicare provision numbers, Pharmaceutical benefits, numbers of media outlets, university places etc. Surely ‘the market’ would sort these issues out. There are many areas in which government plays with market forces to achieve desirable social outcomes. The notion of adhering to ‘sound economic principles’ is often trotted out by an organisation so long as they benefit from those principles.

Since Federation, Australian Governments have adhered to the principle of Horizontal Fiscal Equalisation whereby government finances are distributed in such a way that no matter where any Australian lives they have, more or less, equal access to government services. This exemplifies a strong equity based philosophy by government. The argument which follows is that Australians no matter where they live should also have the ability to share in the overall wealth produced by the nation. Market forces will in any society gravitate wealth to cities but it is the extreme divergence between city and country that should concern the law makers. In other countries where this disparity has been identified, governments have made decisions to create a more level playing field through mechanisms like EZs.

The fundamental error in the extract from the NFF however is that EZs somehow are a policy tool that determines what specific activities will happen. In broad terms EZ can be designated areas able to grant participating business a menu of performance based incentives. Because an area is designated an EZ does not mean the area receives uncontrolled largesse. What it does mean is that if any particular business wishes to expand and in so doing create additional jobs then it can be rewarded for doing so if it achieves its goals. Moving people from long term unemployment to work offers government some significant savings. If the business does not achieve pre-agreed goals then it receives no tax rebates etc. There are no budgetary outlays only future taxation revenues foregone. In that way EZs are a very low risk tool.

ARGUMENT AGAINST

Tax concessions have actually been tried in Australia before at State level. In most States in the 1980s, governments offered complete payroll tax rebates to firms locating in regional areas. What is the evidence for their success?

All State Governments across Australia, however, did away with open-ended tax breaks (payroll tax concessions) for regional areas, largely because they did not work. They were not successful in attracting new firms to regional areas in sufficient numbers to warrant the cost to taxpayers. They were simply rewarding firms already there. Only a handful of firms had actually relocated in the late 1980s, according to analysis by the NSW Treasury and the Department of Business and Consumer Affairs (1989, 1990).

Previous attempts to influence location and investment decisions through tax concessions, including in New South Wales, have not generally achieved their objectives. While it has been argued that tax concessions in the 1980s helped retain existing jobs in regional areas, analyses undertaken at the time suggested strongly that the old payroll tax concessions were not a sufficient incentive to create new employment.

The targeted approach has been found to be more effective, though limited tax breaks do have a place within the context of this approach. Current government thinking correctly stresses the need for a business case to be made out before regional development assistance is forthcoming.

It might be argued that the payroll tax concessions were simply insufficient as incentives for industry relocation to regional areas. However, the concessions on offer were generous, and cost the NSW govt 18 million per year in 1990 dollars

COUNTER ARGUMENT FOR EZs 3

The EZ idea with its performance based requirements has not been tried in Australia in the way that EZs have been operated around the world. EZs need to draw on the level of govt which levies company tax. They have worked as a State based mechanism in the USA because many of those states levy state company tax. The Commonwealth simply has almost no economic development Policy plan or vision for regional Australia other than the aforementioned drip feed of grants. Those who do not get the grants still face the problem of job and population loss.) State Governments in Australia however have little power to greatly affect positive outcomes for businesses as per the EZ concept practiced overseas. Payroll tax is a disincentive and is viewed as an anti-development tax (the more I employ the more tax I pay).

ARGUMENT AGAINST EZs 4

An enduring concern about enterprise zones has been the fear that, if successful in attracting new investment to regions, it may be that the investment would simply be drawn from neighbouring (or other) regions.

COUNTER ARGUMENT FOR EZs 4

Targeted programs means that Canberra chooses. Inspite of Regional Area Consultative Committees it is Canberra which signs off on programs. In grants based programs there are more losers than winners. What do these areas do to fix their problems when they are unsuccessful?
Our alternative with the EZ mechanism is to use similar methods to the USA where EZ designation may only be considered if an area/s develops a proper Economic Development plan and commits its own resources. So rather than approving a grant for this area and not approving a grant for another area, the designation of an EZ depends on each area getting its act together. Designation means that a business that wants to register under the EZ program does so in the knowledge that if it meets certain criteria ie certain levels of jobs etc it may receive taxation and other incentives. A guiding principle for EZ in the USA is that ultimately the government receives more back through increased taxation because people are now tax payers rather than tax takers.

The Sustainable Regions Program does not clearly identify the real problem. Take Wide Bay Burnett (known as the black hole of Government funding). It has received many millions of grant monies over many years. 36% of all income in the area is social security. The real problem is not in Wide Bay Burnett but in other places such as Roma which on the surface has very low unemployment-reason the young people have left to go to Wide Bay. So economic policy should look further than just where there might be a statistic. The solution to Wide Bay Burnett is to be found in job creation in other areas.

If you have any more arguments against EZs, I’m happy to hear them and to put them to rest

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