Ms JULIE BISHOP (12:54 PM) —I welcome the opposition's belated support in not opposing the Bounty (Ships) Amendment Bill 1999, but what the member for Fraser overlooks is that the Australian shipbuilding industry supports the government's package of measures. No mind that he wanted to do it differently; the industry supports it. On a national scale, the traditional shipbuilding industry is small compared to other manufacturing industries. However, in Western Australia and in Tasmania—those two states in particular—a new generation of shipbuilders has emerged over the past decade. Today the shipbuilding industry based in my state of Western Australia occupies a significant world market niche in high speed, aluminium hulled ferries. It is a very important component of Western Australian industry and exports.

Our expertise in the design and manufacture of high speed passenger and vehicle carrying ferries has made us a world leader. The industry, in particular in Western Australia, is a fascinating case study of the local factors which can contribute to the development of an internationally competitive industry. In a competitive sense, the industry is an example of a growing market where entrepreneurial flair, superior design and technology, and a young, skilled and largely non-unionised work force combine to produce a new type of vessel on greenfield sites. The non-union, flexible labour force is a key element. It is an export oriented industry sector that employs almost 3,000 people across Australia and exports 90 per cent of its product which was valued at about $500 million in 1998.

Why then this legislation which, in effect, extends a government bounty, albeit as a mixture of construction support with innovation support, in a competitive, innovative industry? The answer is that the Australian companies which are leaders in the fast ferry industry at present must be able to keep ahead of the anticipated competition but in a particular time frame. I will elaborate, but we should embrace this legislation against the backdrop of the world shipping scene. Traditionally, the shipbuilding industry around the world has been characterised by a strong degree of government assistance, the prevalence of which is generally associated with strategic and defence considerations, the significance to many nations of exports and the direct employment and multiplier effects of the industry upon the local economy.

The perceived existence of significant beneficial externalities due to the numerous linkages that shipbuilding has with a wide range of related and support industries is also a significant factor in this tradition of national government assistance to shipbuilding industries. The conjunction of the skills and technology necessary to build high quality ships can be of vital importance in promoting other industrial aims. However, there is no doubt that the tendency for governments to provide assistance to shipbuilders has, over the years, led to a distortion of competition among countries and shipbuilding companies alike. Unfair pricing and dumping practices have emerged and the extent of support is said to be far from transparent in many cases.

As a result, in 1989 the United States initiated discussions to provide guidelines for acceptable practices in the shipbuilding industry. This United States initiative resulted in the development of the Agreement Respecting Normal Competitive Conditions in the Commercial Shipbuilding and Repair Industry. The goal of the agreement is:

. . . to establish in a legally binding manner, normal, ie. subsidy and dumping free, competitive conditions in the shipbuilding industries in the OECD countries. In this way it will provide a "level playing field" for nearly 80% of the world shipbuilding industry.

In 1994, the OECD shipbuilding agreement was signed by the USA, the European Union, Japan, Norway and Korea, which, collectively, equates to around 80 per cent of the world shipbuilding capacity. However, the agreement is yet to come into force because, despite support from the USA administration, the US Congress has not yet ratified it. They are being pressured to do so.

From Australia's perspective, this should be put in context. Most of the shipbuilding in the OECD countries which are party to the agreement at this stage is the traditional large scale construction of steel hulled ships, such as tankers, bulk carriers and container ships. The industry is a mature one, the technology associated with constructing steel hulled vessels is mature and economies of scale and scope dominate production and marketing. There is considerable overcapacity in steel shipbuilding. It is against this world market that the Australian shipbuilding industry was able to flourish in the niche market of aluminium fast ferries for passengers and vehicles.

Nevertheless, the Australian shipbuilding industry does operate in the global environment where other governments heavily subsidise their shipbuilding industries and tariff and non-tariff barriers hinder access to potential markets. The high level of government assistance provided to shipbuilding industries in other nations is a major distortion of the global market for ships, but the existence of subsidies overseas does not justify per se the provision of similar assistance in Australia. The importance of this legislation is that it recognises the need of Australian companies to increase the pace and level of innovation, if they are to keep ahead of competition. It allows a time frame for changes to Australia's current bounty arrangements.

The OECD shipping agreement is before the US Congress. That is the last step of ratification required. But the recent developments in the European Union give good grounds to believe that the high subsidies afforded to shipbuilding overseas are all but temporary. The current legislation before the House seeks to provide modest assistance for a limited period of time with a new emphasis on innovation, while the industry seeks to become more competitive by virtue of an increasingly level playing field around the world.

One could point to the tension between the economic benefits of adherence to trade liberalisation concepts, on the one hand, and the existence of a government subsidy for a competitive exporter, on the other. But, first, the bounty is extremely modest, with a total entitlement of five per cent. The European Union currently allows production subsidies of up to nine per cent and also supports generous regional policies under which major investment subsidies are payable. Secondly, there is no doubt that Australian shipbuilders see the bounty as a necessary contribution to ensuring the competitiveness of the Australian industry during this transition phase while the worldwide environment moves away from heavy subsidies.

The key provisions of the bill are important: first, to extend the payment of the shipbuilding construction bounty currently in existence from 1 July 1999 to 31 December 2000 at the rate of three per cent; second, to establish a phasing-out arrangement for vessels which are contracted for sale on or before 31 December 2000 and are delivered on or before 31 December 2003; third, to provide for the payment of a research and development bounty to registered shipbuilders for eligible research and development expenditure—and this is important—at the rate of 50 per cent of innovation expenditure up to a total of two per cent of the eligible construction cost of a bountiable vessel; and finally, to provide for the research and development expenditure bounty to apply to the construction and modification completed on ships on or before 30 June 2004. The bill thus sets a time frame for the continuation of the bounty and this time frame is set to coincide with the cessation of European Union subsidies.

There is no doubt that the most important recent development on the world scene is the new shipbuilding policy in the European Union announced by the Council of Industry Ministers in May 1998. As a result of this strategy, shipbuilding will not receive special treatment after the year 2000; direct operating subsidies to European shipbuilders will not be available to vessels with final contracts signed after 31 December 2000; and from the beginning of 2001 aid to shipbuilders will be confined to assistance for the purposes of innovation, research and development, restructuring and environmental protection.

The current legislation before the House is very much in line with the European Union position. The member for Fraser overlooks the significance of the shift in emphasis to innovation support rather than construction support. This is no compromise by the government—not at all. The government recognises the fact that research and development innovation is the key to a sustainable industry. No single technological development is expected to give shipbuilders a significant competitive edge. Rather, several innovations are necessary to ensure future competitiveness, including designing ships with better resistance properties, improved sea keeping properties and more efficient structures. That is why the legislation introduces the shipping innovation scheme. The government recognises that technological innovation will be a significant factor for sustaining advantage and for growth of the industry.

Clearly, over the years the existence of this bounty has had a profound impact on the development of Australia's lightweight shipbuilding industry. The bounty has provided a classic policy framework for the development of the new industry. It has been a significant contributor to Australian producers being able to compete in a market widely recognised as containing a range of distortions.

I turn to a specific case in point which illustrates why this legislation is necessary and appropriate in its terms. There is no doubt that Australia has captured a vast share of the world fast ferry market, and our two leading players in Western Australia and Tasmania have a substantial international presence. They are, however, small in the global context. The industry could be overwhelmed by superior production resources in major shipbuilding economies or by some breakthrough technology accruing as a result of much higher levels of fundamental R&D undertaken overseas.

The story of Austal Ships, a company established in Western Australia in 1988, is worth the telling. It is only one of the new shipbuilding firms but it is in fact the largest. In the early 1990s, Austal established its reputation as the leading supplier of 40-metre catamarans to the Pearl River Delta area in the People's Republic of China. By 1997, Austal had delivered its 29th high-speed ferry to Chinese owners. During 1994, Austal introduced its `AutoExpress' range of large passenger and vehicle carrying fast ferries and was quickly established as a world leader in this growing market.

Austal's work force has grown from about 40 in 1988 to over 1,100 people today. The Western Australian Department of Commerce and Trade states that for every one person employed by the industry another three are employed in support industries. The industry has been a catalyst in the development of other internationally competitive activities, such as the production of life raft systems and aircraft style seats, the majority of which are exported. With over 175 employees involved in accredited training programs, Austal was named Australia's Training Employer of the Year in November 1998 by the Australian National Training Authority. The number of apprentices is probably over 200 by now. The training award was followed up with the Large Advanced Manufacturers Award in the Australian export awards announced in December 1998.

More recently, Austal has delivered its eighth high-speed vessel, an 86-metre vehicle and passenger catamaran to Turkey. It has showcased its product diversity with the delivery of the first of eight 35-metre aluminium patrol boats for the Australian Customs Service National Marine Fleet on 16 February of this year, as scheduled. This new class of patrol boat will be used for coastal surveillance, and this experience could open up even more overseas markets. Austal currently has 18 vessels either under construction or on order, including a vehicle and passenger ferry for Ireland, one for charter to Denmark, a 60-metre cruise boat for the French Caribbean, a 52-metre passenger catamaran for Germany, a 52-metre passenger catamaran for New Caledonia, and two 42-metre passenger catamarans for Norway.

There is no doubt that the aluminium shipbuilding industry in Western Australia has been achieved in a number of ways. Austal is headed by an innovative and determined man, John Rothwell. Together with his skill and creativity, the most vital input into shipbuilding in Western Australia is the skill of its labour force—a highly skilled and highly flexible work force. Technology and innovation have been crucial in achieving a competitive advantage for Western Australian shipbuilding, but one cannot escape the fact that government policies have been important to the establishment and success of the aluminium shipbuilding industry. In line with the European Union regime, and in anticipation of the OECD shipbuilding agreement, we should maintain as far as we are able the conditions in which Australian shipbuilders have been able to achieve competitiveness.

The recent Asian financial crisis has shown how quickly industry has to react to radically changed domestic or international environments. Long term, with the phasing out of construction support, the government can still assist firms to achieve competitiveness in new and sustainable ways, such as in research and development emphasising innovation. This legislation recognises that the provision of the ships bounty has been useful in redressing the uneven playing field, but it also recognises that its availability will be phased out with the adoption of the new European Union measures.

This government recognises that long-term access to government subsidies is not conducive to fostering an environment in which world-class companies can grow and compete. But this legislation recognises that shipbuilding offers the level of technology and value adding which is lacking in many other sectors. As an industry, it acts as a stimulus in developing skills and competencies which can be applied to other sectors.

Currently our aluminium hulled vessel sector is facing increasing international competition and the continual dissemination of our technology and skills around the world. The government has a role in ensuring that our shipbuilders retain their current edge until the new era of the shipbuilding regime around the world is ushered in by the European Union and, in time, the OECD countries.

The opposition wants the five per cent production bounty until the OECD agreement comes into effect. Our position is far more sustainable: we will phase out bounties yet maintain support for innovation. This is in the long-term interests of the industry. The government of course strongly supports the OECD agreement. At the meeting of the OECD council working party on shipbuilding in Paris in December 1997, OECD and non-OECD countries indicated strong support for the agreement, and indicated that they would probably become parties once the agreement was enforced.

In the meantime, this legislation responds to the recommendations of the Shipbuilding Industry Review Panel. This panel was commissioned by the government to examine the long-term strategic direction of the Australian shipbuilding industry under a range of scenarios. The key findings of the review are reflected in this legislation. I commend this bill to the House.