“The politics and policy of services” - Speech to Australia Services Roundtable 7 November 2012

It is a pleasure to be here this evening to talk to the annual dinner of the Australian Services Roundtable.

My own background has been very much tied up with the services sector. I have worked as a lawyer, as a management consultant, as a telecommunications executive and as a politician.

I might also add that many Coalition parliamentarians share similar backgrounds and affinities. Deputy Leader Julie Bishop and Shadow Treasurer Joe Hockey were both formerly solicitors in private practice; Shadow Environment Minister Greg Hunt has a background in management consulting; and Shadow Communications Minister Malcolm Turnbull has extensive investment banking experience.

My workforce experiences have left me with some strong convictions.

First, services can generate substantial employment, prosperity and export earnings for Australia. It is not always an easy road however. I remember early in my career working as a lawyer at Mallesons Stephen Jaques at a time when the firm was taking early steps to establish a presence in Asia.

It has been interesting to observe, more than twenty years later, the recent merger of Mallesons into a China based firm to form King and Wood Mallesons.

Second, in the services sector Australia can be a world class player. The Mallesons merger is just one of many involving Australian and international firms in the last couple of years, with big name British firms like Clifford Chance and Allen & Overy either merging with existing Australian firms or establishing Australian offices staffed by well known Australian lawyers.

Third, there is a strong correlation between deregulation and the capture of economic opportunities in services. The telecommunications sector, in which I spent many years, flourished after deregulation in the nineties. A decade earlier, the removal of many outdated restrictions in the finance sector led to the entry of many new players.

Fourth, services can tend to be underappreciated. For one thing, it is not easy to understand exactly what “services” are. Indeed, the definitions used by Australian institutions and international bodies are somewhat different. But some key features of services are well accepted: they are intangible, non-storable and non transferable; and they require direct interaction between the producer and the consumer.[1]

The range of industries which falls within services is accordingly pretty wide: it includes financial and business and professional services, health and education, telecommunications, tourism and entertainment.

Just recently, as one indication of the growing importance of services, we have seen an announcement by the ABS that health care and social services sectors now employ more people than any other industry in Australia: the 2011 Australian Census found that 11.6 per cent of Australians are working in health care and community services, making it the single biggest sector.[2]

Tonight I want to talk about the politics and policy of services in Australia.

I want to make three principal points.

First, the services sector can be less politically visible than other sectors. Second, the services sector is increasingly important in Australia – as it is in all advanced economies.

Third, I want to talk about the ways that the services sector can make an even more important contribution to our economy and our prosperity – and some of the policy directions I think are desirable to achieve this.

Let me turn firstly the question of the political visibility of the services sector. The way that resources get allocated in our society reflects political preferences and allegiances. For the services sector, this is something of an issue – not so much because people are against services, but because they tend to be ‘for’ something else.

The residual affection in which Australians hold agriculture is one good example. Only 2.9 per cent of Australians work in agriculture today; but we all like to think we have some special connection with the bush.[3]

A more telling example is manufacturing. Last year Prime Minister Gillard held a jobs summit, at which she promised a Prime Ministerial taskforce on manufacturing, and announced a requirement for “Australian Industry Participation Plans” for government grants exceeding $20 million.[4]

Meanwhile, manufacturing unions like the AMWU and the AWU are regularly heard calling for more assistance for manufacturing. Last year the AWU called for a stronger ‘Victorian Industry Participation Plan’, saying the existing requirement for 40 per cent local content in Victorian Government projects was not enough.[5]

Australian Workers Union boss Paul Howes in a recent speech to the National Press Club complained that around 130,000 manufacturing jobs had gone since 2008. He called for more government assistance in the car industry and manufacturing industry more generally.[6]

Howes went on to say:

…the AWU doesn’t want to see Australian industry lose. We want Australian industry to win. We want Australia to rediscover its industrial policy vision.[7]

It is not surprising that union leaders who represent (some) workers in manufacturing have a strong interest in diverting public expenditure to buttress that sector. But of course the manufacturing sector already gets substantial government assistance.

According to the Productivity Commission, total assistance from government in 2010-11, across all sectors, totalled $9.8 billion. This was a combination of direct payments from the Commonwealth budget, and tariff barriers. Manufacturing comprised 77 per cent of this amount and primary production 15 per cent.[8]

Now for everybody who receives assistance, somebody is else is paying for that assistance. This is where the services sector comes in! According to the same report, the services sector received “negative assistance” of $2.3 billion – primarily through paying tariffs.[9]

Unfortunately, the Rudd-Gillard Government is very heavily influenced by the priorities of the union movement. You need only look at the number of Labor MPs whose preselection is influenced by the Australian Workers Union: by some estimates it is over twenty members of the Labor caucus.

What this means is that sectors of the economy which are not highly unionised tend to get little focus from the Rudd-Gillard Government.

That is a good description of key parts of the service sector – particularly private sector service industries and professional services. For example, in the professional, scientific and technical services industry only 2.8 per cent of employees are trade union members and in the financial and insurance services industry this statistic is 10.9 per cent.[10]

Please do not misunderstand my argument. I am certainly not advocating higher levels of unionisation in the services sector; rather I am highlighting a particular factor in the politics of services under the present government. Of course, a key difference between Labor and the Coalition is that the Coalition seeks to govern in the interests of all Australians – rather than seeking to implement the agenda of one group of insiders such as union officials.

If we turn from the politics to the economic reality, it is clear that the services sector is becoming increasingly more important – in Australia and other advanced economies. The share of services in global production increased from around 56 per cent in 1980 to 71 per cent in 2007.[11]

Today, the services sector is the dominant part of our economy in Australia. In 2010-11 services comprised $923.0 billion, or 77.6 per cent of industry output.[12] This compares with the mining sector at 10.3 per cent and the manufacturing sector at 9.1 per cent.[13] Services has been steadily increasing its importance for many years; sixty years ago it stood at around 43 per cent.[14]

How does this fit with the standard narrative of the Australian economy, that our economy is increasingly dominated by mining and resources? Well, one important explanation is that the mining boom has also driven a boom in the provision of services to mining operations. A recent analysis by the Reserve Bank of Australia found that 65 per cent of the inputs into mining are services.[15]

It is true that mining has expanded at the same time as manufacturing has contracted. Mining has increased its share of output by over five percentage points in the last ten years, while the relative size of manufacturing has declined. [16] But at the same time services has maintained and indeed grown its share.

If we compare Australia’s economy to other advanced economies, we are towards the higher end of the scale in the share of our output which is from services. Our services sector as a share of total economic output is similar to the USA and UK.[17]

Services has also been a major contributor to economic growth. Since the eighties the services sector has grown more rapidly than the overall economy. Prior to the 2008 downturn, the finance and insurances sector was the fastest growing, at an annual rate of almost seven per cent in the eight years to 2008.

Since the downturn, there has been strong growth in professional, scientific and technical services, at 6.5 per cent and health care and social services at 5.7 per cent. Notably, this meant both exceeded the mining sector’s growth rate of 4.0 per cent over this period. [18]

A couple of years ago the Australian Services Roundtable issued a report in conjunction with ACIL Tasman entitled “The New Economic Challenge: Responding to the Rise of Services in the Australian Economy”.

Reading your report, I was struck by its analysis of some of factors driving the growth in services. To pull out just a few of them, the report mentioned:

• The dramatic growth of the finance sector
• Expansion of knowledge impacting on education and other sectors
• Expansion of telecommunications and IT
• Increased income to spend on entertainment and the media. [19]

Since the 2008 economic downturn, there has been a lot of criticism of the growth of the finance sector. There is a notion that finance is merely the useless shuffling of money, by contrast to useful and productive activities such as making televisions or building houses.

I think this criticism is misplaced. The Yale economist Robert Shiller recently wrote a book entitled Finance and the Good Society in which he argued for the benefits that the finance sector brings to society.

Professor Shiller has a substantial track record in this area. For example, his work has highlighted the risks facing people who are in the housing market – and people who are not in the housing market but would like to get into it.

Shiller has long argued that it would make sense if people could buy financial instruments linked to the value of house prices. In fact, the Case-Shiller index of house prices in the US is now the basis for futures and options contracts traded on the Chicago Mercantile Exchange.

There are many examples of financial sector products which bring great benefits. Insurance lets people protect against low probability but catastrophic loss. Mortgages let people buy a house (which costs a multiple of your annual income) without needing to save up the cash first. Superannuation allows people to build up savings to fund a comfortable retirement.

These are just as real as the benefits delivered to consumers by the products of a company which makes televisions or builds houses.

I have laboured this point somewhat because in a lot of what is argued in this area, there seems to be the notion that the provision of services is somehow a second rate way to earn money. The real test, I would argue, is the willingness of consumers and businesses to pay for services.

It is no coincidence that as the wealth of a society rises, the proportion of the economy made up of the provision of services increases. If few people are wealthy enough to own assets, what need do you have of insurance? If few can afford a home, then there is no point in providing mortgages. If few live long enough to enjoy a period in retirement, there is little point in saving for it.

This brings me to the third area I wanted to address. If the services sector is a very important part of Australia’s economy, that raises the obvious question: how can we build on its potential to generate greater employment, prosperity and export earnings?

The public policy prize is significant. Let me focus on employment for a moment. The services sector is labour intensive: its share of employment is even higher than its share of economic output. On the latest numbers there are 9.9 million people employed in the services sector – making up 86.3 per cent of total employment.[20] This means that growth in services will translate into growth in jobs.

Certainly the landscape looks rich with opportunity. As was noted in your 2010 report which I cited earlier, the service sector is only likely to grow, thanks to factors including:

• The growth of emerging economies, in Asia and elsewhere, and the associated growth of the middle class
• The ageing population – driving growth in health care and aged care sectors particularly
• Technological change and growth.[21]

I want to mention three areas. In doing so, let me make it clear that in these remarks I am of course not stating Coalition policy – rather I am indulging in the privilege of a backbencher to express some personal views.

The first area I want to discuss is continued regulatory reform. In my view regulation continues to be a barrier to growth in services.

As we all know, Australia went through an economic reform program which started in the eighties and lasted twenty five years. It was not limited to services – but it certainly delivered a major boost to the services sector.

Over this period, we saw the floating of the dollar, the entry of foreign banks, the deregulation of telecommunications, the Hilmer competition process, empowering the RBA to set interest rates, privatising Qantas, CSL, the Commonwealth Bank and Telstra and introducing the GST, just to mention a few.

This reform process has been key to unlocking growth in services industries such as financial services and telecommunications.

To take one example of the consequences, industry value added for the financial and insurance sector – that is, the contribution to GDP – has grown from 6.6 per cent in 1990 to 11.5 per cent in 2011.[22] Relative prices of financial services have fallen around 40 per cent since 1993-94.[23]

Under the Rudd-Gillard government, the policy direction has been the reverse: rather than deregulation it is reregulation. Just ask financial advisers, who have been hit with a tsunami of prescriptive and detailed new rules under the so-called ‘Future of Financial Advice’ reforms. Look at the broad remit of the new Road Safety Remuneration Tribunal to determine business and commercial practices in road transport. Or there are the legal prohibitions on offering high speed broadband services in competition against the National Broadband Network.

If we are to unleash the potential of the services sector, this frenzied regulation-making has to stop – and we need to get back on a path of deregulation. Tony Abbott has recently announced Coalition policy commitments in this area, including spending two days a year of parliamentary sitting time to repeal unnecessary regulation.

Let me turn next to the question of how to stimulate the export of services. For many years this was a very bright story. Services exports grew strongly through the 1980s and 1990s, rising at 14.5 per cent a year in the nineties. By the year 2000 almost one in four of Australia’s exports dollars were attributable to the services. [24]

However, since then this trend has reversed, and services exports have fallen in relative terms, now accounting for only 16 per cent of Australia’s exports.[25] Part of that of course reflects the extraordinary boom in mining: our two biggest export earners in 2010-11 were iron ore at $58.4 billion and coal at $43.9 billion. Even so, education came in third at $15.3 billion, so a services sector industry was not far from the top.[26] Since that time education has fallen off a little, particularly following changes to the visa rules and the rise of the Australian dollar.

The services exports story has been achieved in many ways quite independently of government policy. Australian law firms and other professional services firms, for example, have been pushing into Asia for many years. I worked at TNT in the mid nineties when that company was starting to build an express parcels business in China. The rapid growth in export revenues from education reflected initiatives taken by universities, more than any centrally determined policy direction.

The recent idea that you need a white paper from government to encourage business to seize opportunities in Asia is really quite odd – and reflects the Gillard government’s lack of familiarity with how business is actually done.

Another fascinating aspect of the services export story is the growth of the mining and resources services sector. This was highlighted in a recent paper by Port Jackson Partners, which looked at the growth opportunities for the ‘commodity industry support sector’.

The paper gives examples of services companies which have grown as a result of the mining boom, including Worley Parsons (engineering services), and Campbell Brothers (testing services.)[27] It also speaks of the way that many services companies are now operating around the world – serving both Australian owned and internationally owned mining companies at facilities in many different countries.

Clearly another target area for services export growth is in building Australia as a regional financial hub. This is widely recognised as an opportunity and the Australian Financial Centre Forum chaired by Mark Johnson has done good work.

But as Coalition frontbencher Mathias Cormann has noted, we have actually gone backwards under the Rudd Gillard Government. This is due to factors including complex and increasingly uncompetitive tax arrangements, and regulatory structures which are not recognised globally.

In a recent speech, Mathias had this to say:

A future Coalition government will pick up where we left off back in 2007. That is, we will work with all relevant industry stakeholders to leverage our skills and the strength of our domestic financial services sector to increase our exports of financial services and to make Australia one of the genuine financial services hubs in the Asia-Pacific region.[28]

The third issue I want to raise is industry funding, and whether there is scope to make it more contestable across different sectors. Here I want to emphasise that I am not expressing a view about the quantum of direct industry support – rather in the way it is allocated.

At the moment there are specific funding programs for specific industries. There is not much contestability between sectors and not much opportunity to weigh up the benefits obtained from spending a dollar in one sector as opposed to another.

As Shadow Minister for Industry Sophie Mirabella has highlighted, the processes adopted by the Gillard Government have been very poor, with secret agreements reached with automotive companies outside existing funding programs.

In my view there would be merit in allocating industry funding out of a pool which was open to a broader range of sectors, using a competitive selection process, with criteria including an assessment of likely export earnings, as well as employment and other metrics.

Of course I am not talking about changes to any existing commitments. Under the Rudd-Gillard Government there have been plenty of unfortunate instances of the rug being pulled out from under companies in the automotive and other sectors, after they have made plans in reliance on announced funding commitments. As Sophie Mirabella has made clear, the Coalition’s approach will involve greater certainty, accountability and transparency.[29]

I am however arguing that as we design such policy schemes in the future, a sensible design feature would be to start by setting the public policy objective – be it employment Australia wide, or employment in a particular region, or export earnings, or return on taxpayers’ funds invested – and the amount of funding available, and then allocate that through a competitive process.

This might well attract proposals which would not otherwise have been thought of. They could be for new types of smart manufacturing; they could be for new types of services ventures.

Imagine for example if a consortium of universities could put together a case for a health sciences school with a focus on training doctors and other health professionals in the Asia-Pacific. I am sure there would be many other possibilities.

No doubt there are plenty of more imaginative examples that could be found – what matters is the principle. My argument is that if there were contestable funding that businesses in any sector including services could apply for – not funding specific to one sector – that might produce some unexpected benefits.

Let me conclude as I began with the observation that the services sector makes up a very large part of advanced economies – including Australia’s. For a number of reasons, though, the sector is underappreciated – particularly by the current government.

If we are to capture the full potential of this sector, I believe there are some key directions that services industries should pursue. Government has a role to play, for example through winding back regulation. Most of the heavy lifting, though, must necessarily be done by the sector itself.

What has been achieved in the services sector in Australia in recent years is impressive. I am confident that the future for the sector is bright. A Coalition government will be eager to work with you to help secure that future – for the benefit of the sector and the benefit of all Australians.

[1] Business Council of Australia (2007), “Why Australia’s Services Economy Deserves More Attention” p.4

[2]http://www.abc.net.au/news/2012-10-30/2011-census-employment-education/4341852, downloaded 6 Nov 2012

[3] ABS, 6104.0, 2011 Labour Statistics in Brief

[4] ‘Future Jobs Forum Closing Remarks’, Canberra, Thur 6 Oct 2011, www.pm.gov.au, downloaded 7 Nov 2012

[5]www.manufacturingalliance.org.au, downloaded 10/10/11

[6] Labor captive to drivel, says union boss Howes, M Franklin, :The Australian, May 23, 2012, downloaded 2/7/12, http://www.theaustralian.com.au/national-affairs/industrial-relations/labor-captive-to-drivel-says-union-boss-howes/story-fn59noo3-1226363942636

[7] Paul Howes, speech to National Press Club, downloaded 4 July 2012, http://australianpolitics.com/2012/05/22/paul-howes-npc-address.html

[8] Productivity Commission (2012), Trade and Assistance Review 2010-11, p.26

[9] Productivity Commission (2012), Trade and Assistance Review 2010-11, p.26

[10] ABS, Employee earninings, benefits and trade union membership, August 2011, cat. no. 6310.0

[11] World Bank, World development indicators database, extracted 30 October 2012.

[12] Australian system of national accounts, 2010-11, cat. no. 5204.0

[13] Australian system of national accounts, 2010-11, cat. no. 5204.0

[14] Business Council of Australia (2007), “Why Australia’s Services Economy Deserves More Attention” p.3

[15] Reserve Bank of Australia, Research Discussion Paper, Connolly and Orsmond (2011) “The Mining Industry: From Boom to Bust”.

[16] Australian system of national accounts, 2010-11, cat. no. 5204.0

[17] World Bank, World development indicators database, viewed 26 October 2012

[18] Australian system of national accounts, 2010-11, cat. no. 5204.0

[19] Australian Services Roundtable & ACIL Tasman (2010), The New Economic Challenge: Responding to the Rise of Services in the Australian Economy, September 2010, p.7

[20] ABS, Labour force Australia - detailed quarterly, Aug 2012, cat. no. 6291.0.55.003

[21] Australian Services Roundtable & ACIL Tasman (2010), The New Economic Challenge: Responding to the Rise of Services in the Australian Economy, September 2010, p.8

[22] Australian system of national accounts, 2010-11, cat. no. 5204.0

[23] Department of Industry Tourism and Resources (2007), “Australian Services Sector Trends”, p.27

[24] ABS, Balance of payments and international investment position, Australia, Jun 2012, cat. no. 5302.0

[25] ABS, Balance of payments and international investment position, Australia, Jun 2012, cat. no. 5302.0

[26] Composition of Trade, Australia 2010-11 DFAT

[27] Port Jackson Partners, ‘Earth, Wind, Fire and Water: Economic Opportunities and the Australian Commodities Cycle’;

[28]http://www.mathiascormann.com.au/speeches/2012AnnualStockbrokersConference01062012.pdf, downloaded 7 November 2012

[29]http://www.sophiemirabella.com.au/Media/PortfolioMedia/MediaReleases/tabid/78/articleType/ArticleView/articleId/671/STATEMENT-ON-HOLDEN-JOB-LOSSES.aspx, downloaded 7/11/12