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Thursday, 25 May 1939

Mr CASEY (Corio) (Minister for Supply and Development) . - I propose to show honorable members that the Government's efforts to restrict profits to a reasonable figure are soundly based. The Government does not believe that it is possible to evolve a magic formula in three or four lines of an act of parliament which will automatically regulate profits. This view is supported by information collected by our officers over a long period of time, from many other countries of the world. I shall read some statements on this subject from British and Canadian official documents. In both Great Britain and Canada a policy and method similar to that of this Government is being applied. The outlook of the peoples of those countries is similar to that of our own people. . The Prime Minister of Great Britain said a year or two ago -

HisMajesty's Government are determined that the needs of the nation shall not serve to pile up extravagant profits for those who are called upon to meet them ... On the other hand, it is important to retain the goodwill of industry, for in peace time firms cannot be compelled to undertake contracts on terms which they consider unreasonable . . . It will be necessary also to co-ordinate the demands of the three Services so that proper priority shall be observed and competition between them, which might lead to higher prices, avoided. His Majesty's Government believe that all these difficulties can be overcome through the organization they have in mind.

Mr Brennan - The fact remains that the difficulties were not overcome.

Mr CASEY - Presumably, the British' Government is overcoming them through the Supply Department. The British Prime Minister also said-

Control to prevent excessive profits will be effectively exercised by inspection of books, adequate technical costings, audits on behalf of the State and arbitration in cases of dispute. The Government are satisfied that this cun he done without impairing the confidence unci enterprise of contractors undertaking novel and difficult tusks.

I new direct attention to the following statement in. the Report on the Estimates of Great Britain, which was issued a year or eighteen months ago: -

My Lords .concur in the committee's view that great difficulties are inherent in a system of non-competitive contracts and, in particular, that it is necessary that the question of oncost should receive the closest attention. They agree that the whole position calls for the utmost vigilance, and they assure the committee that the matter will be kept under close and continuous review.

My Lords are in general agreement with the view expressed by the committee that in appropriate cases where a firm price cannot be fixed without undue risk to the Exchequer, contracts . should be placed at a provisional or target price on the basis that if the contractor in practice reduces the cost of manufacture below the cost allowed for in the target price, the benefit of such reduction should be shared in prescribed proportions between the contractor and the contracting department.

The first Report on the Estimates of Great Britain issued a year ago states -

Your committee are glad to learn that the established methods of placing orders by competitive tender continue to be adhered to as far as possible by the defence departments, and that the type of contract known as time and line, in particular, is only admitted in isolated and exceptional cases.

Those extracts show the general trend of thought on this subject in Great Britain, where the contracts involve an expenditure of hundreds of millions of pounds as against a relatively few millions of pounds in Australia.

I now direct attention to the following comments made in a report received from an officer in out Trade Commissioners' office in Ottawa concerning the Canadian practice : -

It is the Government's declared intention that Canada's defences be materially strengthened and to this end the programme of modernization undertaken two years ago is to be further augmented, particularly in regard' to the air services. ' Together with the plans already under way for the production of bomber planes upon an extensive scale for the British Government, the enlarged Canadian defence programme should stimulate manufacturing and increase employment in a number of industrial fields. At the same time the Government has made known its intention to establish a defence purchasing board through which necessary equipment will be bought,, and, where private manufacture is necessary,, it will be the duty of this board to see that profits ure fair and reasonable. The Government does not propose that private manufacture of defence materials is to be undertaken without profit, but, as the Prime Minister stated to the House on Monday, the 16th January, the production of munitions is to beso safeguarded that profiteering will be impossible. The purchasing board, he added, will be one that will command public respect and confidence.

It will thus be seen that neither in Great Britain nor in Canada has any magicformula been evolved which automatically excludes the possibility of profiteering. The fixing of an arbitrary percentage could not possibly be effective.

The aim of the amendment moved by the honorable member for Martin (Mr. McCall) is to limit the net profit to 6 percent, on the value of the actual assets employed in the earning of such profit.. I presume that the honorable member envisages *he retention of the contract system. His idea is that tenders will be called and presumably the lowest tender tentatively accepted. Subsequently an investigation is to be made of costs, and if it finds a profit exceeding 6 percent, of the value of the actual assets employed in the earning of" it, the tender will be rejected and fresh tenders called. But the Government has no power whatever to compel any firm to sell its goods at a certain price. It cannot direct firms in "this matter. It cannot even say that the tender price shall be such as will permit of not more than 6 per cent. being earned.

Mr White - The Commonwealth Government has power to buy raw materials.

Mr CASEY - The honorable member for Balaclava probably has in mind section 67 of the Defence Act which gives the Government power, undercertain circumstances, to requisition goode and pay for them at a fair price - to be determined by arbitration. That power will, of course, still exist when this bill is passed, and, as the Assistant Minister remarked in his speech, occasion may arise to use it; but the power- does not enable the fixing of an arbitrary rate of profit. If this amendment were agreed to it would undoubtedly involve a long and exhaustive investigation of every contract and so cause considerable delay in the supply of materials. "When it is- remembered that about 10,000 contracts are let each year, and that the number of them is likely to be greatly increased in the next year or two, it will surely be appreciated that any procedure which causes delay will be serious. Reasonable expedition is essential in the supply of the materials which the Defence Department requires. If undue delay were to occur through the establishment of this new department, it were better that it had never been established, and that the existing practice had been continued. One of the main purposes of the creation of this new department is expedition.

Mr Archie Cameron - The Assistant Minister said, not 20 minutes ago, that there was no need for this department.

Mr CASEY - With great respect I suggest to the honorable member for Barker that he did not say quite that. He said that some of the powers to be exercised by this new department already existed.

Mr Archie Cameron - He said" that all of them existed and that this bill was not necessary.

Mr CASEY - I cannot accept that as a true interpretation of the Assistant Minister's speech. I did not hear all his remarks, but, for myself, I would say that some of the so-called powers set out in this bill arc not powers, but rather functions.

Mr Blackburn - This bill merely expands the powers contained in section 63 of the Defence Act.

Mr CASEY - I mentioned that on another occasion.

Mr Thorby - But additional matters are also included.

Mr CASEY - A great many additional, matters are covered. If a department of supply and development is to be established, surely it is appropriate that Parliament should approve of it by legislative action. The functions of the new department are stated in clause 5 of the bill. I call them functions rather than powers, for possibly all the things set out in the bill could be done to-day under the provisions of a large number of existing acts. The honorable gentleman will agree that that would not be appropriate. There would be interminable delay in discovering the amount of capital and assets employed in the earning of profits on any particular government order as, fox example, an order for 50,000 tooth brushes or 200 pairs of hoots. As was mentioned by the honorable member for Darling Downs (Mr. Fadden), the information could he obtained in respect of a public utility company, such as one which supplies electricity or gas to the public, or performs some service week in and week out throughout each year. In such cases, it would be possible to know the amount of capital and assets involved, and to determine the price which should be charged for gas or electricity, in order to yield a predetermined rate of profit.

Mr White - Could it not be arranged that A statutory declaration be submitted with the tender, and for checks to be made subsequently?

Mr CASEY - That would not be appropriate. The honorable member for Werriwa spoke of watered capital. It is impossible to go back over the history of any company, and ascertain the actual capital involved, particularly, when large numbers of small contracts, each for a relatively few hundred pounds, are involved. The cost would be a great deal more than any saving which might be effected.

Mr White - It is done in the Customs Department. The inspectors of that department do not check the whole of each consignment.

Mr CASEY - When I spoke earlier during the committee stage, I said that, as the result of my short experience in this new department, I was convinced that the Government was getting extremely good value from the contract system, under which public tenders for supplies are invited in widely circulated advertisements. I still adhere to that view. I have from the department - although I do not propose to use the information in this discussion - a list of practically all the major items or materials that are purchased by it in a normal year, and, in particular, the purchases so far during this financial year. The statement contains two columns, in the first of which is set out the lowest tender price, and in the other, the price of the same article charged to wholesale houses. In every instance - and there are many scores of items - the contract price obtained by the Government under the tender system is appreciably below that charged to wholesale houses. If I were at liberty to give to honorable members the details - but, for obvious reasons I cannot do so-

Mr Beasley - The committee should have them.

Mr CASEY - I think that it would be unwise to supply the information, because, by so doing, I mightprejudice prices inthe future. Honorable gentlemen may take my word that there is a very appreciable difference between the ordinary wholesale prices and the prices charged to theGovernment.

Mr White - That is only with respect to manufactured goods; we want a check on the prices of raw materials.

Mr Lane - What about manufacturers' prices?

Mr CASEY - I havereferred to manufacturers' prices; I am speaking of the prices of goods sold in bulk to wholesale houses, and comparing them with the prices at which the Government buys similar goods under the contract system. The latter are very much lower. That being so, I do not think that it is possible to say rightly that there is any profiteering in respect of goods purchased by the Contract Board.

Mr Beasley - That may be so, but the public does not believe it.

Mr CASEY - I have a number of facts to prove it, but I believe that it would be against the public interest for me to give to the committee the details which I have in my possession.

Mr White - Does the Contract Board get the benefit of discounts?

Mr CASEY - No question of discount arises.

Mr White - In some instances, there are definite discounts.

Mr CASEY - I am sorry that I must disagree with the honorable gentleman; in respect of goods obtained by public tender, the prices are net. The honorable member for Werriwa mentioned a contract let to Broken Hill Proprietary Company Limited for shell cases, and said that that company had returned to the Government 7s. in respect of each shell case made by it. In his opinion, that action proved that the contract price in the first instance was too high, and he accused the Contract Board of not having been sufficiently vigilant in the policing of prices. The facts are that the Broken Hill Proprietary Company Limited obtained a contract at a price which, when compared with the price of manufacture in government factories doing the same job, was quite reasonable. However, when the job had been completed, the company said that it would accept no profit, and would charge no overhead or depreciation, but only the cost of materials and labour. That patriotic gesture on the part of the company led to its returning 7s. in respect of each shell case. I do not think that that action supports the case presented by the honorable member for Werriwa.

Mr Ward - Will the company do that in every instance?

Mr CASEY - The Broken Hill Proprietary Company Limited can be relied on to do the patriotic and decent thing in relation to the supply of munitions for government requirements.

Mr Gregory - It was ashamed to charge prices equal to the cost of manufacture in government factories.

Mr Price - Could the Minister give to the committee a few examples from the list in his possession?

Mr CASEY - By doing so I could strengthen my case, but it would be against the public interest.

Mr Beasley - If public interest is involved in the manufacture of munitions, why would it be against the public interest to give the information?

Mr CASEY - As I have said, it might prejudice prices in the future.

Mr.Fadden. - Evidently the Minister anticipates that manufacturers will attempt to profiteer.

Mr CASEY - It would be useless to give figures unless I also gave the names of the contractors and the materials to which they relate.

I come now to the subject of annexes. Recently an air mission from the Old

Country visited Australia in order to advise the Commonwealth Government with respect to the manufacture of aircraft on a large scale in this country. At least two of the gentlemen comprising that mission had had considerable experience in the manufacture of munitions, because during the Great War they controlled their manufacture in Great Britain. The policy of the Government in relation to annexes was discussed with them, and their advice was sought. When they had been told the conditions under which annexes were to operate, they expressed the opinion that the contracts that the Commonwealth Government had entered into with respect to annexes, under which the amount of overhead was reduced by the exclusion of about ten items, and, at the same time, the possible profits were reduced to a maximum of 4 per cent., were the stiffest they had ever seen.

Mr Beasley - Are those gentlemen connected with any industries for the manufacture of munitions?

Mr CASEY - No; they were advisers to the British Government during the last war. The Government has given a good deal of consideration to this subject, and it believes that it would be impossible to fix any arbitrary percentage of profit which would stop profiteering. The Government believes that no general rule can be laid down; each case must be dealt with on its merits. It believes that the checks and safeguards that already exist are adequate but it is not certain, and therefore it proposes to set up an accountancy panel, before which all the facts of each case, as well as the procedure followed in purchasing requirements, will be laid. It will be open to its members to advise the Government in any direction that they think fit, and to say what additional safeguards, if any, should be instituted. In this way, 'the Government believes that it will be able to carry out its policy of ensuring that no exorbitant profits shall be made out of the supply of materials for defence purposes.

Mr Ward - What does the Minister mean by reasonable profit?

Mr CASEY - What is a reasonable profit will vary in each case. A profit of 4 per cent, may be exorbitant in some cases; in others it may be quite insufficient.

Mr McEwen - Will the Minister cite a typical instance?

Mr CASEY - I shall hp happy to do so. Materials involving a considerable outlay on the part of the supplier for a relatively few articles come within a different category from materials supplied in large quantities and requiring no considerable expense in providing jigs, dies, and fittings. Unless the Government is to allow the writing off of those costs, no manufacturer supplying a small order could carry on at a low percentage of profit. ' In respect of standard lines as, for instance, toothbrushes or boots, the position would be different. There are many instances of goods in the manufacture of which a considerable outlay has to be made, even though only a few articles are sold. It would be impossible for a manufacturer to recoup his outgoing in respect of jigs, dies, fittings and tools from a comparatively small order. Either he must be allowed to write off a considerable percentage of the capital cost of those jigs, dies, fittings or tools, or he must be allowed a profit considerably more than 4 per cent. The circumstances of each case will be different, and they will have to be met differently.

Mr Beasley - The Minister has sustained his point in respect of certain aspects of manufacture, but will manufacturers have first to provide themselves with jigs, dies, patterns and tools?

Mr CASEY - Manufacture to-day is different from what it was only a few years ago; instead of making isolated articles, manufacturers now engage in mass production. I refer to manufacturers who have carried on largely with jigs, dies, fittings- and tools in various establishments largely built especially for one job.

Mr Beasley - I appreciate that; but military equipment, shells and the like, do not come within that category.

Mr CASEY - I am speaking of all defence supplies, amongst which shells and actual munitions are in a minority this year.

Mr Beasley - Can the right honorable gentleman give to the committee some instances in which heavy costs will be incurred in connexion with jigs, dies, fittings, &e. ?

Mr CASEY - Instances occur in connexion with everything that is not absolutely standard with civilian requirements. We know, not only from our own experience, but also from the experience of other countries that have faced and are facing this same problem, that we would be fooling the Australian public if we were to set an arbitrary percentage, rely largely on that for the control of profits.

Mr Fadden - Would the Minister regard a profit of 4 per cent, as fair and reasonable ?

Mr CASEY - In the circumstances in which the annexes are to be run, 4 per cent, would represent a very low profit.

Mr Fadden - Four per cent, on turnover ?

Mr CASEY - Considering the conditions which the businesses to which the annexes are attached have to abide by, including the provision of fully-trained personnel at very short notice to man these works, I believe that 4 per cent, would be a very -low profit.

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