Industry Assistance in Queensland


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Final Report: Volume I
Industry Assistance in Queensland
July 2015

We wish to acknowledge the contribution of the following staff to this report: Dan Barclay, Kristy Bogaards, Richard Creagh, Tom Cunningham, Wei Fang Lim, Santhi Wicks and Sid Shanks
© Queensland Competition Authority 2015
The Queensland Competition Authority supports and encourages the dissemination and exchange of information. However, copyright protects this document. The Queensland Competition Authority has no objection to this material being reproduced, made available online or electronically but only if it is recognised as the owner of the cop2yright and this material remains unaltered.

Queensland Competition Authority

Table of Contents

Table of Contents

OVERVIEW

IV

What is industry assistance?

iv

Why evaluate industry assistance?

iv

Industry assistance in Queensland

v

Does industry assistance yield a net payoff for the Queensland community?

vi

What role should industry policy play?

vii

Recommendations

viii

THE ROLE OF THE QCA – TASK, TIMING AND CONTACTS

XIII

1

INTRODUCTION

1

1.1

What was the QCA asked to do?

1

1.2

Why review industry assistance?

1

1.3

What is industry assistance?

3

1.4

The QCA's approach

4

1.5

Conduct of this inquiry

6

1.6

Structure of this report

6

2

TRENDS IN INDUSTRY POLICY AND ASSISTANCE

7

2.1

Background

7

2.2

Industry assistance in Australia

8

2.3

Queensland industry

14

2.4

Industry assistance in Queensland

16

3

INDUSTRY ASSISTANCE: THE ROLE OF GOVERNMENT

22

3.1

Basis for governments to provide industry assistance

22

3.2

Market failure and industry assistance

26

3.3

Other suggested rationales for providing assistance

28

4

PERFORMANCE ASSESSMENT FRAMEWORK

41

4.1

Step one: Is there a case for government action?

43

4.2

Step two: Is it effective?

44

4.3

Step three: Does it deliver a net benefit to the Queensland community?

45

4.4

Step four: Could alternatives deliver a greater net benefit to the Queensland community? 46

4.5

Step five: What is the best option?

46

5

ASSISTANCE PROVIDED TO QUEENSLAND INDUSTRY

48

5.1

Assistance provided by the Queensland Government

48

5.2

Assistance provided by the Australian and local governments

57

5.3

Conclusion

58

6

OVERALL ASSESSMENT

59

6.1

Does industry assistance yield a net payoff for the Queensland community?

59

6.2

Aggregate impact of industry assistance on the Queensland economy

61

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Queensland Competition Authority

6.3

Transparency is generally poor

6.4

Robust evaluation is hampered by limited monitoring and assessment

6.5

When and how should governments provide industry assistance?

6.6

What role for industry policy?

7

INDUSTRY-SPECIFIC ASSISTANCE: AGRICULTURE

7.1

Level of assistance

7.2

Agriculture in Queensland

7.3

Drought assistance

7.4

Subsidised loans

7.5

Biosecurity arrangements

7.6

Assistance to protect the Great Barrier Reef

8

INDUSTRY-SPECIFIC ASSISTANCE: TOURISM

8.1

Tourism sector

8.2

Industry assistance provided to tourism and major events

8.3

Government intervention in tourism

8.4

Major events

8.5

Destination marketing

9

INDUSTRY-SPECIFIC ASSISTANCE: CONSTRUCTION AND RESOURCES

9.1

Construction industry assistance

9.2

Assistance to develop infrastructure

9.3

Affordability issues in the housing sector

9.4

Resources industry assistance

9.5

Role of government in the resources industry

9.6

Area Discounts for Mineral Development Licences

10

INDUSTRY-SPECIFIC ASSISTANCE: SERVICES

10.1 Assistance provided to the services sector

10.2 Vocational education and training services

10.3 Stadiums Queensland

10.4 Racing industry

10.5 Film and television industry assistance – Screen Queensland

10.6 Long-distance passenger transport services

11

TAX CONCESSIONS

11.1 Queensland state taxes

11.2 Industry assistance provided by tax concessions

11.3 Framework for evaluating tax concessions

11.4 The incidence of tax concessions

11.5 Are tax concessions effective and efficient?

11.6 Tax concessions and improving Queensland's tax system

12

NETWORK INFRASTRUCTURE

12.1 Background

12.2 The provision of industry assistance

ii

Table of Contents
63 65 65 66
68 68 72 72 79 84 90
95 96 96 99 99 107
117 117 118 125 133 133 139
144 144 146 150 154 160 168
180 181 182 186 189 192 200
204 204 205

Queensland Competition Authority

Table of Contents

12.3 Basis for assistance

209

12.4 Specific electricity sector measures

214

12.5 Specific rail sector measures

227

12.6 Specific water sector measures

233

13

RESEARCH, DEVELOPMENT AND INNOVATION

240

13.1 Rationales for public support

241

13.2 R&D investment in Queensland

257

13.3 Industry assistance

264

13.4 Performance of the industry assistance measures

271

13.5 Policy principles

281

14

GENERAL BUSINESS AND SMALL AND MEDIUM-SIZED ENTERPRISE ASSISTANCE

PROGRAMS

284

14.1 Industry assistance for general business programs and SMEs

284

14.2 General business assistance measures

286

14.3 SMEs in Queensland

301

15

PUBLIC PROCUREMENT

309

15.1 The procurement policy framework

310

15.2 Scope for assistance

316

15.3 Rationales for the policies and measures

321

15.4 Are local preference policies effective?

330

15.5 Are local preference policies efficient?

332

15.6 Local preference policies as a risk to good governance

342

15.7 Reducing risks and achieving improved value for money

343

16

REGULATORY RESTRICTIONS ON COMPETITION

346

16.1 How regulatory restrictions can provide industry assistance

347

16.2 Assessing regulatory restrictions in Queensland

348

16.3 Ensuring regulation is effective and efficient

358

17

THE WAY FORWARD

360

17.1 Improving the design and review of industry assistance

361

GLOSSARY

370

REFERENCES

377

iii

Queensland Competition Authority

Overview

OVERVIEW
The Queensland Government provides more than $5 billion per year in assistance to industry, which equates to over $1000 per annum for every Queenslander. In 2014, the Queensland Government asked the Queensland Competition Authority (QCA) to:
 investigate and report on Queensland Government industry assistance measures
 assess the effectiveness of the measures
 evaluate the contribution of the measures to Queensland's economic performance and productivity.
What is industry assistance?
This inquiry's terms of reference define industry assistance as:
any measures implemented and/or funded by the Queensland Government, directly or indirectly, that are intended to assist any industry in the State of Queensland as determined by the Authority as part of its investigation.
Industry assistance generally involves a transfer of benefits (for example, financial resources) to a recipient business and the assistance will usually be selective (that is, some businesses, industries or types of businesses receive the assistance while others do not).1
Industry assistance includes grants to businesses, subsidised access to assets and services, programs supporting specific industries, tax concessions and regulatory restrictions on competition that benefit some businesses. It is provided through a wide array of measures, such as research and development programs, electricity and water subsidies, film and major event attraction incentives and environmental programs.
Why evaluate industry assistance?
In 2013, the Queensland Government found that it was not possible to identify or quantify industry assistance in Queensland, or evaluate its objectives, effectiveness or value for money. While welldesigned assistance can potentially provide a net benefit to the Queensland community, poorly designed assistance comes at a significant cost to other industries, taxpayers and consumers. The aim of this inquiry is to provide the necessary information and analysis to the Queensland Government to identify:
 assistance measures that do not provide benefits which outweigh the costs
 policies that might be reformed so that they either cost less to achieve the same objectives or can achieve more with the same level of funding
 policies that should be retained because they provide significant benefits to the community.

1Assistance to community or not-for-profit businesses and transfers to households are considered out of the scope of the inquiry, although many programs and policies in this field can still have a significant industry assistance component.
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Queensland Competition Authority

Overview

Industry assistance in Queensland
The QCA has identified 112 measures providing $25.3 billion in assistance from 2013 to 2018, including $5.6 billion in budget outlays, $17.1 billion in tax concessions and $1.3 billion in underpriced assets and services.
The industry assistance estimates should be viewed as approximate indicators of the magnitude of assistance provided in Queensland. Measurement and data deficiencies mean that the level of assistance may be overestimated for some programs and underestimated in others. In addition, the estimates do not include the assistance provided through a range of policies, including regulatory restrictions on competition, recently announced measures or confidential agreements between the Queensland Government and individual firms.

v

Queensland Competition Authority

Overview

The main recipients of industry assistance from 2013–18 are the:
 services sector ($11 billion, primarily for small businesses, private health insurers, transport, education and training and tourism)
 construction sector ($2.1 billion)
 electricity, gas and water sector ($1.7 billion)
 agriculture, fisheries and forestry sector ($1.5 billion)
 manufacturing sector ($1.2 billion)
 mining sector ($700 million).
A further $7.1 billion in assistance could not be allocated to a specific industry.
Does industry assistance yield a net payoff for the Queensland community?
The rationale to provide industry assistance is strongest where there is a significant policy problem that could be corrected through government action. Where markets function well they promote efficiency by allocating resources to their highest valued uses. In those cases, government intervention to alter consumption or production (through industry assistance) will generally lead to a net loss for society. Industry assistance is more likely to be beneficial where markets fail to allocate resources efficiently — for example, where polluters do not fully bear the costs of environmental pollution.
But even then, assistance must be implemented through measures that meet their goal without giving rise to costs that exceed the benefits. For industry assistance to have a net benefit, the assistance must shift resources in the economy to higher value uses. The benefits must be sufficient to outweigh the costs of achieving this shift, such as compliance burdens, the distortions from raising taxes to pay for the assistance, and any unintended inefficiencies.
The evaluation of industry assistance measures in Queensland has been severely constrained by the widespread absence of supporting evidence or monitoring (save for a few commendable exceptions). Many programs have no (or poorly specified) objectives, making it difficult to judge their success or failure. Further, few are monitored or evaluated beyond meeting certain process requirements — only 16 of the 112 measures have been formally evaluated since introduction. Even less assistance is publicly reported. As a result, there is limited transparency in the provision of significant amounts of public resources to the private sector, particularly for highly selective assistance measures.
The evidence that is available suggests that, although a number of industry assistance measures are beneficial, many others are ineffective and result in a range of costs, including resource allocation distortions, lower productivity, lower household incomes and harmful environmental impacts.
Some industry assistance measures fail both the rationale and net benefit tests
A significant portion of industry assistance in Queensland is directed towards supporting certain businesses or sectors over others, rather than towards correcting market failures. In a number of cases, the primary objective is to directly increase the profitability of private sector businesses. This assistance is unlikely to lead to a higher level of economic activity than would otherwise occur. Much is captured by private firms with limited or no positive effect on the welfare of Queenslanders as a whole.
While measuring the aggregate impact of all forms of industry assistance was not possible, an assessment of the impact of budget-funded industry assistance suggests that it comes at a net cost to the Queensland community. Economy-wide modelling indicates that the removal of budget-funded industry assistance would increase gross state product by $590 million in the short run and by $1.1 billion in the long run (in 2010–11 dollars).
vi

Queensland Competition Authority

Overview

Improving industry assistance through policy design, monitoring and transparency
Careful design and analysis can help improve the likelihood that industry assistance will have a positive overall impact. This report sets out a range of principles that underpin a performance assessment framework to guide the review of existing measures as well as the development of new industry assistance proposals.
Central to the principles is that government should provide industry assistance only when it can:
 address a policy problem of sufficient size and scope to warrant government assistance
 induce socially valuable change that would not occur without assistance, and this can be done in a way that avoids unintended consequences such as higher prices or large transfers overseas
 be provided in a transparent manner.
To be successful, the assessment framework must be supported by appropriate institutional arrangements and a commitment from the government and policymakers to an evidence-based approach to industry assistance.
What role should industry policy play?
The findings from this inquiry suggest that selective industry assistance is generally not a successful policy to generate economic growth — it is only suitable to address a specific set of policy problems and, as such, should be reserved for those circumstances. There is general agreement, even within assisted sectors of the economy, that businesses not government assistance, drive productivity and economic growth.
Notwithstanding this, state governments still have a significant role to play in facilitating economic growth. Stakeholders to this inquiry cited economic factors, such as the relatively high cost of doing business in Australia, as overshadowing concerns over government-provided industry assistance. This suggests state governments are best placed to help the efficiency of all businesses by creating a sound policy environment. This includes providing the right taxation, labour market and utility sector frameworks, best practice regulation, appropriate infrastructure and efficient public services.
Focusing industry policy in this way means: (1) it is likely to be less distortionary than selective industry assistance, (2) it addresses the main concerns of business (the relatively high cost of doing business in Australia), and (3) it is likely to have the greatest impact on Queensland's economic growth.

vii

Queensland Competition Authority

Overview

Recommendations
6.1 The Queensland Government should consider the following principles for the design and provision of industry assistance:
(a) The Government should provide industry assistance only where there is a sound rationale for government intervention (for example, where there is a genuine market failure of sufficient size and scope that could best be addressed by the Queensland Government).
(b) Policymakers should assess whether industry assistance is likely to:
(i) induce socially valuable change that would otherwise have not occurred (ii) provide the right incentives and avoid unintended consequences (iii) have benefits that outweigh the costs, and if so, whether it maximises the net benefit
to the Queensland community.
(c) Policymakers should consider all feasible alternatives, including whether different types of industry assistance and non-assistance measures, could better address the problem.
(d) Where industry assistance is appropriate:
(i) it should be provided by the level of government (Australian, State or Local) that can best target the policy problem
(ii) the costs and benefits of providing assistance should be transparent. The amount of assistance, as well as the evidence base that underpins the government's decision to provide it, should be publicly available
(iii) monitoring and evaluation should be built in from commencement. Assistance should be evaluated at regular intervals to assess and identify opportunities for improvement and foster policy learning.
(e) Social and equity objectives are normally best achieved using policy instruments other than industry assistance. Where adjustment assistance to industry is provided it should be strictly time-bound, facilitate rather than impede change, and be subject to review.
Industry-specific assistance — Agriculture
7.1 The Queensland Government should:
(a) remove drought assistance provided through input or transaction based subsidies, with appropriate transitional arrangements
(b) abolish the Drought Carry-on Finance and Recovery Scheme.
7.2 The Queensland Government should ensure that any drought support provided by the Queensland Government is consistent with the National Drought Policy and:
(a) encourages farmers to improve self-reliance and resilience to climate variability
(b) avoids distortionary impacts among farm businesses, and between farm and non-farm businesses
(c) complements Australian Government programs so that the joint implementation of these measures results in effective policy
(d) ensures that farm and rural households can access welfare support payments that are commensurate with assistance afforded to all Australians.

viii

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Industry Assistance in Queensland