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Monday, 4 May 1987
Page: 2526

Dr WATSON(5.55) —I rise to speak on the Ships (Capital Grants) Bill 1987. As has already been stated, the Opposition does not oppose this Bill. In fact, the Opposition welcomes part of the package that the Minister for Transport (Mr Peter Morris) has put forward. There is no doubt that this package is designed to increase productivity in the shipping industry. We all know how one increases productivity in general. We can do it basically in one of three ways: We can reduce relative wage rates or costs; we can increase our investment in people; or we can increase our investment in plant and equipment. In many ways this package has attempted to do all three things. The package has attempted to reduce the number of people on ships to 21 or 23, depending on whether one is trading internationally or locally-coastal shipping-although I must admit that, when I look at world shipping, I understand that the number is falling to about 16. So in comparison with the rest of the world we are perhaps still suffering a 25 per cent disadvantage.

I have also noticed that, over a period, as we have reduced the number of personnel on ships we also seem to have been increasing the amount of leave. So while we are reducing the numbers on ships we are not really reducing personnel costs in total because in some respects that is a trade-off between the numbers on ships versus the amount of leave. Of course, we might explain this by the fact that we have a monopolistic industry and a monopolistic union. The increase in productivity is also due to the new training program-the multi-skilled ratings that are being introduced for the first time-and for this the Minister and the Government should be congratulated. I will not go into that as the honourable member for Charlton (Mr Robert Brown) and other honourable members spoke earlier in depth about it.

But I notice that one thing that is missing is the non-crew costs. There is an assumption in the legislation and also in the Minister's speech that non-crew costs of Australian and overseas ships are the same. I suggest to the Minister that they are not. The honourable member for Mitchell (Mr Cadman) has already addressed some of these things, such as looking at repairs and maintenance, but we also have a more complicated system of industrial relations in Australia which increases costs of shipping for shipowners. We have higher administrative costs and we have higher workers compensation and insurance costs in Australia than any comparable country. These aspects are simply not addressed in the Minister's second reading speech nor in the justification for the legislation. At the moment I want to concentrate more on the final aspect in the legislation-the encouragement for new ships. As the Minister has indicated, there is a 7 per cent taxable allowance. One important aspect of its introduction into the legislation is to encourage Australian shipowners to purchase new ships.

There is no doubt that the Opposition welcomes increased investment in Australian industry. We have already noted in previous speeches to this Parliament that business investment in Australia peaked in 1971. That is shown as a percentage of gross domestic product in paper No. 10 of the Economic Planning Advisory Council. It rose for a short period under the Howard treasurership but it has fallen each year under this Government. In fact, if I recall correctly, in the last Budget the Treasurer (Mr Keating) predicted a further one per cent fall in the 1986-87 financial year.

We applaud any increase in investment in Australian industry. However, I was puzzled by the fact that the 7 per cent was chosen. I read the Minister's second reading speech and could not find any justification for 7 per cent. I would be interested in finding out exactly what the justification is. I presume, because the Minister said, and the honourable member for Charlton just read out, that the legislation is based upon the Maritime Industry Development Committee report entitled `Moving Ahead'. I have reviewed that report and I found in a number of places some interesting quotations. Let me assume for a moment, given that it has not been stated, that what I find in that report is the rationale for the 7 per cent. I notice on page 28 of the report the following quotation:


that is, the Transport Industry Advisory Council-

recommends that the Government should assist the development of Australian Flag Shipping by changing relevant income tax provisions to:

Allow depreciation on new vessel buildings which are to sail under the Australian Flag to be claimed over a period of 3 years commencing in the year prior to commissioning.

Further on that page, a detailed cost structure is given for a modern bulk carrier. On the top of page 29, following that typical cost structure detail, appears the following:

The foregoing cost structure is calculated on the present 5 year depreciation rate and on the assumption of a 10% real rate of return being required for an investment to proceed.

One makes the assumption, in the absence of any information from the Minister, that those recommendations in the report have something to do with arriving at the figure of 7 per cent. If, for example, one discounts at a 10 per cent real rate of return the cash flows associated with the depreciation schedule of five years versus cash flows associated with a depreciation rate over three years, one finds, believe it or not, that the present value differs by 7 per cent.

Mr McGauran —It is hard to believe it.

Dr WATSON —It is hard to believe it, but it is true. What concerns me is that one has to make some assumptions, and one of the things that we really do not know, because it is not detailed anywhere in the report, is the effective tax rates of the various shipping companies. One cannot work out how that 7 per cent is arrived at without knowing the effective tax rates of the various companies involved. If one assumes a 46 per cent or 49 per cent tax rate, one gets a linear transformation of the pre-tax cash flows and still comes up with a difference of, say, about 3 per cent or 3.5 per cent. If one adjusts for tax at 7 per cent, one comes up with the same answer.

I presume that the object of the 7 per cent taxable grant was to give the shipowners meeting the requirements of the package the equivalent of a three-year depreciation schedule without actually changing the taxation legislation. That is the financial impact, although it is not stated anywhere. One should examine the assumptions underlying that procedure as well as what it means to the rest of Australian industry. Implicit in my presentation and in the report is a 10 per cent real rate of return. I did not see this being questioned anywhere, but I suggest to the House that a 10 per cent real rate of return is substantially greater than the general assets in our market receive. If one looks at any of the studies of the real rates of return in the financial markets, which really reflect the underlying assets, one finds that over a significant period of time the real rate of return is about 5 to 6 per cent. What is the justification for a 10 per cent real rate of return? What this is implicitly saying is that shipowning is twice as risky as owning other assets in the Australian economy. Nowhere do I see any justification for that kind of assumption, neither in the report `Moving Ahead' nor in the Minister's speech.

Perhaps internationally shipowning is a very risky business, but what about coastal shipping? Coastal shipping is virtually a monopoly situation. It operates under a significant amount of government interference, or government protection. No distinction is made in the legislation between international shipping and coastal shipping except in manning levels; no distinction is made for the 7 per cent taxable grant. One would like to know what is the justification, in a government-protected industry such as the coastal shipping industry, for giving the shipowners a 10 per cent real rate of return. I am not saying that there are not some economic justifications for giving any kind of protection to shipowners. The honourable member for Charlton will certainly know about the theory of second best in economics. There is a significant amount of government interference in and protection of shipping companies in other countries. Using that theory, there might be some general justification for protecting or giving special grants to shipowners here. Again the honourable member for Charlton mentioned the exporting and importing of Australian goods, which was also mentioned in the Minister's second reading speech, as another justification for helping our balance of payments.

I do not deny that in some circumstances those are quite legitimate justifications, but the question I raise in relation to the depreciation schedules is: Why help this particular industry, and this particular segment of the industry? Returning to what I said earlier, private investment, or business investment, in Australia has fallen consistently since 1971, except for a few years during the Howard treasurership. Every industry in Australia would benefit by having the equivalent of a three-year depreciation schedule as against a five-year depreciation schedule, except of course those already on a three-year depreciation schedule. What is missing from the Minister's second reading speech is the justification for picking out this particular segment of this industry and giving it a special advantage. Where is the economic justification vis-a-vis other industries in Australia for this particular capital grant? The Government has already done significant damage to all Australian investment by not renewing the investment allowance. The point was made in the report that shipping in Australia suffered after removal of the investment allowance. Investment generally in Australia suffered after removal of the investment allowance. The report mentioned that not since early 1985 had any new ship been purchased by an Australian company. To broaden this out, one might even say that since early 1985 interest rates have significantly increased in Australia, from around 15 per cent to 16 per cent to roughly 18 or 19 per cent right now-an increase of 20 per cent over that period. If one wants to look at the reason for investment in shipping falling, look at the removal of the investment allowance and at the increased interest costs paid on capital.

In general, there are two major problems inhibiting Australian investment. One is after-tax returns, and that is one of the matters I have been trying to address. The depreciation schedules that are available to Australian industry in general are critical in determining after-tax returns. The second problem is interest rates, which make the raising of capital very expensive and also contribute to lowering after-tax returns on investment. The Government has to address in general public sector borrowing requirements, the Government debt, the gross domestic product ratio, government spending in general and, of course, its taxation practices in general-such as introducing the capital gains tax and removing the investment allowance-to get at the general problem.

I conclude by asking for elucidation by the Minister of the justification for the 7 per cent taxable grant. I ask why this industry has been given it rather than other industries, and in particular whether or not the 7 per cent is an attempt by the Government to give this industry a three-year depreciation schedule when it is denying that to most other industries in Australia.