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Thursday, 10 June 1999
Page: 6675

Mr KERR (11:25 AM) —Manufacturing in bond is the subject of the Import Processing Charges Amendment (Warehouses) Bill 1999 and the Customs Amendment (Warehouses) Bill 1999 . Manufacturing in bond is a practice whereby Australian companies can establish arrangements with Customs to import component parts and to manufacture in Australia on the same basis as other countries establish free trade zones. So, for the purposes of manufacturing, when you establish a manufacturing in bond warehouse that is essentially treated as if it were foreign territory. Imports that are brought into the warehouse and that are made there but which enter Australia into domestic consumption obviously have to attract duty and they incur sales tax and duty liabilities at the time they leave the warehouse for sale in the Australian domestic market.

The idea of a manufacturing in bond scheme is not new. It existed in Australia until 1988 and was abolished as a result of the Industry Commission's 1987 report. It was suggested for reintroduction by the Australian iron and steel industry, in its report to the Minister for Industry, Science and Tourism, and by the parliamentary committee inquiring into the steel industry, chaired by David Hawker. In December 1997, the government announced that it would be introducing measures to facilitate manufacturing in bond. The objectives of manufacturing in bond are quite sound. We want to attract into Australia manufacturing capacity that would otherwise go to other regions and where Australia would benefit from our ability to have manufacturing in this country, for export, of goods that would not otherwise have been made here.

Arrangements exist in other jurisdictions: free trade zones and similar manufacturing in bond arrangements. Australia, to be able to compete effectively to attract manufacturing industry, needs to be able to look to measures of these kinds. What we want to do, of course, is to generate net additional economic activity and employment in Australia. One of the key objectives of manufacturing in bond is to facilitate trading operations by streamlining the administration of imports which are subsequently re-exported, whether in processed or in their original form. Obviously, if there are significant red tape or costs associated with bringing components and those parts of manufacture which are consumed in the manufacture of other goods into Australia, the cost advantage that should flow from manufacturing in bond in Australia becomes insignificant.

Indeed, that is the problem we have had with the government's arrangements to date. They have not worked effectively because there has been too great a set of transaction costs associated with the proposal. Although manufacturing in bond was introduced in December 1997, the restrictions within the scheme have prevented it from being fully taken up. The most important problem so far has been the cost recovery arrangements that have been applied by Customs. A cost recovery charge of $22.80 was applied by Customs on each and every imported component; so, for example, a manufacturer of a product who imported 100 components would face an additional cost of $2,280 from this cost recovery package.

That has attracted considerable criticism. I note sitting opposite me Peter Slipper, the Parliamentary Secretary to the Minister for Finance and Administration, who commented:

. . . up until now, operators of MIB warehouses were subject to import processing charges and fees that were introduced in 1997 to recover the costs incurred in processing what are known as `customs entries'.

Currently, a charge applies to entries lodged to allow imported goods to be moved into, and, if goods go into Australian commerce, out of warehouses.

Mr Slipper noted:

Industry has claimed these charges and fees make the operation of MIB warehouses uneconomic, and serve as obstacles to attracting international manufacturing and investment to Australia.

Those observations are absolutely right. Although the government did establish manufacturing in bond, basically there has been limited to no take-up of it. That means that we are missing out on the opportunity of building in this country manufacturing arrangements which will enable us to build employment and economic activity focused principally on re-export, allowing us to compete with areas of commerce right around the world which have cheaper and better facilitated arrangements for free trade zones. The government responded to the reports and the criticisms.

Senator Vanstone announced on 29 April this year that the changes were in response to industry representations that removing the processing charges on imports entering manufacturing and bond facilities would improve the ability of the scheme to attract international manufacturing and investment to Australia. Minister Nick Minchin said:

Removing these charges on the manufacturing in bond facilities will improve Australia's attractiveness as a regional manufacturing and warehousing site by exempting exporters from customs duties and sales tax on imported goods subsequently re-exported or used as inputs to exports.

The first question we would ask is why it took so long to do what is so obvious. If you are going to set up a scheme which facilitates Australia competing to attract international and domestic capital to establish manufacturing capacity in this country—competing so that we do not have transaction costs at the border, allowing people to bring product into Australia, transform it here and sell it again into the international market without additional substantial costs—I would have thought it would be pretty obvious that, if each particu lar import transaction attracted a fee of $22.80, the operation of the scheme was bound to fail. In other words, the transaction costs associated with it would doom it to failure from the outset.

The government must have been aware of this problem ever since the inception of the scheme. Certainly the opposition has been made aware of the concerns of industry that this was an impractical arrangement, and one in which the overwhelming desire of Customs to operate in a mandated cost recovery environment was in conflict with the government's stated objectives of creating some flexibility in manufacturing in Australia so we can compete against overseas free trade zones. Not only was the government made aware of this; colleagues on the opposition side have been quite vocal in this area. My parliamentary colleague the member for Newcastle, Allan Morris, has for a long time been quite vocal in his representations in the hope that the Newcastle region will benefit from investment and activity facilitated through the manufacturing in bond system. The member for Newcastle has said to me—and, I think, to members of the government—that the government has significantly underestimated the economic opportunities that could flow from developments of this kind. Our criticism is that the government has taken a very long time to wake up to the fact that, if you are going to set up a scheme like this, you do not handcuff it and put manacles around it so that essentially it cannot work.

The framework of the scheme is actually quite a sound one. It avoids some of the difficulties that were involved in the theoretical construction of physical free trade zones. If we were to establish physical free trade zones, there would no doubt be argument as to which parts of Australia would be entitled to the benefit of those zones. For example, Tasmania would certainly like to be favoured by being named as Australia's free trade zone. But I fear that I would then come into competition with my colleague the member for Newcastle—and with, no doubt, other members on both sides of the House—who wished for their regions to be the beneficiaries of the increased economic activity that could be attracted to the physical location of such free trade zones.

Manufacturing in bond as an idea is quite good because it frees us from those debates about which areas will be favoured by the allocation of a free trade zone. It says, essentially, that if you provide the proper information to the government, to Customs, so that they are assured that you are a sound and credible operator and that you operate a business that is focused on increasing its exports overseas and will monitor and report those transactions in a sound way, then wherever you are in Australia you can set up in a sense a virtual free trade zone. That is an excellent idea because it means that enterprises seeking to increase their penetration of overseas markets will be able to do so, and they will be able to operate in an environment which parallels the environments in which a lot of manufacturing occurs; places like Ireland and many of the Asian countries where free trade zones or similar manufacturing in bond arrangements have been established.

But of course you cannot do that if, at the same time that you set the scheme up, you cripple it by putting charges on the system so that you make it uneconomic—and that has been the problem. There is simply no justification in terms of the fundamental underlying principle of trying to build economic activity in Australia and to provide our local industry—and those who would seek employment in it—a competitive playing field with overseas countries. You cannot do that unless you also provide a fees regime which is competitive. So the first question we ask, and the first criticism we make, is about the inordinate delay from the time of introduction of this to this bill coming before the House. There were obvious problems—the scheme was never going to work as it was proposed—and this bill seeks to do something to rectify some of those problems.

The explanation for the failure of the government to do anything about it until now was set out in the Bulletin magazine in January this year in a report by Fred Brenchley, where the article says:

Despite meetings and pressure from then industry minister John Moore's office through 1998, Customs refused to budge. Cost recovery had been foisted on it by the Finance Department and was a major source of the agency's own revenues.

So what we really find is essentially that the government had two conflicting policy agendas. On the one hand, it said it wanted to establish a scheme in Australia whereby manufacturing in Australia would be facilitated on a level playing field with free trade zones in other countries for products principally focused on overseas markets. On the other hand, we had Customs burdened by a Finance decision that whatever it did it had to have full cost recovery. Of course, in a situation of that kind, were Customs not to impose full cost recovery in the manner in which it did, it would simply not have funds available to undertake its functions. So the government had conflicting priorities and, unfortunately, those conflicting priorities were resolved in favour of the tax man or those who want to facilitate additional costs on Australian industry.

This bill is a recognition that you cannot have the cake and eat it too. You cannot set up a scheme in Australia which builds larger economic performance over the complete range of industries that could be advantaged in this way and, at the same time, impose fees and costs on the system which make it uncompetitive and uneconomic. Former industry minister John Moore has known of this since it was introduced, so too did the minister for customs and the government as a whole. But the government has gone through the farce of pretending that it is offering an opportunity for Australian and international investors to build a free trade related sector in Australia without actually putting in place measures which would facilitate that. Our criticisms go beyond simply this timing issue because the measures that have been put forward in this bill do not go to what industry really wants.

Manufacturing in bond representatives, who have been pressing the government on this issue, have been arguing that a manufacturing in bond facility should be treated as an export destination for Australian domestic manufacturers and suppliers, so that it would allow domestic suppliers to compete equally with suppliers from overseas. They are particularly concerned about the introduction of a goods and services tax, which we are led to believe will see these treated as duty free imported goods. As things stand, domestic supplies will be disadvantaged by 10 per cent when compared to imported products, although the GST is refundable if the goods are exported. By allowing the duty and GST to be refunded on entry to a manufacturing in bond facility, business cash flows would be improved.

They want to encourage small businesses to expand, using manufacturing in bond facilities as a halfway stop to full exportation, and they want to be able to facilitate job growth in Australia. They want to see the removal of duty paid on consumables used in the production process. And they are particularly anxious to see a system which would allow a single licence to cover multiple user applications, so that you could have multiple tenants serviced in one bonded warehouse and the process controlled by a software system so that goods could travel under bond between production lines and stores. The government does not seem to be particularly concerned or even aware of these issues. Representatives of those who would seek to take up these opportunities have not had the opportunity of meetings at a senior level with the government, despite pressure from those industries and representations from members on this side of the House.

One of the key issues that applies to manufacturing in bond is: how do you deal with those aspects of production which do not go into the export markets? The whole idea of course of manufacturing in bond is to facilitate a duty free arrangement which enables us to build an export orientated sector. But there is a subsidiary question because, once you have manufacturing in bond in Australia, some of that will come into the Australian domestic market. So how, for example, do you deal with a computer? Let us assume you bring all the componentry required to make a computer into this country and then most of those sales proceed overseas but some goods are sold into the Australian market. How do you properly deal with those transfers into the domestic market? This bill and the regulations that will be associated with it deal with the matter on the basis that, when an item enters the Australian domestic market after being produced in a manufacturing in bond facility, duty is taxed on all the imported components as if they themselves had been imported into Australia, not on the finished computer.

The economic impact of this will differ with particular goods. But take the computer example for a good discussion point. This means that a manufacturing in bond producer is disadvantaged because each of the components individually attracts duty which in aggregate would be substantially more than any duty applicable on the manufacture in Australia of a completed computer or on the entry into Australia of a fully imported computer. So essentially there is a significant economic disadvantage for somebody seeking to establish a manufacturing in bond facility to make computers here.

That is a very sad thing because we do not have a particularly strong computer manufacturing facility in Australia. We have encouraged it—for example, the former government entered into partnership arrangements with IBM to build some hardware manufacturing capacity in this country. But members on both sides of the House would have to acknowledge that we have not thus far really attracted a significant computer manufacturing capacity to this country. If you look at our trade figures for physical imports you will see that one of the real reasons we have such a high deficit in the terms of trade is that we import so much of this computer material—peripherals, computers and the whole physical set-up that goes with the information age. Most of it is imported from overseas. The way the manufacturing in bond proposal is structured will do nothing about that at all. It does not give a way of encouraging local industry to build computer manufacturing facilities or to get a regime in terms of its economic circumstances which would facilitate it filling that gap.

That is not to say that we do not recognise that there are some competing considerations. There certainly are concerns that we would have to balance the economic interests of new entrants in manufacturing in bond facilities against Australian domestic suppliers that are already in place. In different industry sectors that circumstance may be something of some significance. But the government does not seem to have addressed these significant economic issues at all. Again it is going to mean that we have a half measure that purports to give us an opportunity to attract big investment and to grow Australian export related industries but which handicaps them in the way in which they will operate.

Labor's response is to recognise that to be competitive and innovative in the international global economy, ideas such as manufacturing in bond need to be developed, but they have to be developed correctly. The government has managed to completely stuff up a potentially good idea and has wasted nearly 1½ years of its potential at the same time. We will support this bill's passage through the House, but we will be looking at it very closely in the Senate. We will be discussing these matters with the minor parties to look at whether we can make amendments to it which can make it more effective in doing the task that it is intended to achieve.

The Labor Party is way out in front of the government when it comes to understanding the issues involved in the manufacturing in bond facilities. We have been talking to business and seeking to gain an understanding of their concerns regarding this issue. We want to listen, consult and learn from all affected groups. That is a process that involves listening to those who are affected. That is why, when this bill comes before the Senate, we will be seeking to have a committee closely examine it. We want the Senate to look at various aspects of this issue. Firstly, there is the duty paid on consumables before the production process. Consumables are those products that are used up in the manufacturing process, such as petroleum, machine tools or solder. Currently it is required to pay duty on them before they are used in manufacturing in bond. Does it make sense to treat in this way components and items which are fully consumed before a fully manufactured product is made?

Secondly, there is the duty paid on capital equipment. Imported capital also carries a duty with it into manufacture in bond. However, capital as a fixed investment may well require an approach different from that taken with consumable imports. We want the Senate to examine those costs imposed in this process by Customs and the best methods required to reduce them to the smallest possible level. We want to look at the present high cost of obtaining a manufacturing in bond licence. We want to look at the current requirement that manufacturing in bond licences go to those who can demonstrate an almost exclusive export benefit. There may be some significant potential benefits for on-selling to the Australian market products made through manufacture in bond particularly where there is not already a strong manufacturing sector in this country. It may well be the case that in some sectors where we already have well-established, efficient local manufacturing we need not explore this. But where we do not make a product in Australia or where we do not have strengths in a product, does it not defy our national interest not to examine whether manufacturing in bond may be a measure to entice investors to build facilities here which enable those products to be made in this country—products which would otherwise be wholly imported from manufacturers offshore? We want the Senate to look at that issue.

We want the Senate to look at the effects that manufacturing in bond licences have on the competitive ability of those domestic producers who do not have manufacturing in bond licences—the balancing consideration. We want it to look at making manufacturing in bond non-location specific in the licence agreement so that you can have multiple sites under one licence through a licence multiple user model. We want it to look at per item accounting of manufacturing in bond through virtual bond stores rather than through warehouse specific manufacturing in bond to allow production through any facility at any location in Australia. We want to play a constructive part in this debate but we believe the government has not grasped an issue which has great potential for this country.

We know that there are still significant unresolved issues. For example, the govern ment has said, in relation to the arrangements that it wishes to put in place, that there will be a single administrative charge for the charging of duty on components that are brought in for domestic manufacture. But that is not in this legislation, and there needs to be some clarification and reassurance that that in fact will be the case. Otherwise, industry will again be unwilling to commit to a scheme which places high overheads and red tape on their operations.

We want to play a positive role in this debate and not look for simple or quick fix solutions. We understand that the minister has set a date on which these proposals are intended to come into effect and we understand the anxiety of the government to facilitate changes to make some sense of a scheme which has thus far failed. We want to facilitate that also. So we do not intend, insofar as it is within our control, to hold these processes up in the Senate. But we do want to open up the process so that these significant issues that industry has been battering on the door of the government to have addressed and to have listened to do have an airing and so that we can have the opportunity of setting on track a process to make sure that the opportunities that should exist to grow jobs and to grow economic impetus in Australia are not missed. That is where we stand in relation to these measures. We want to be constructive, we want to see that these reductions in charges are brought into effect, but we want to make certain that all the other issues that stand in the way of making manufacturing in bond a growth sector for Australia are dealt with also.

I have mentioned my colleague who will be speaking later in this debate, and of course our industry spokesperson will be speaking further in this debate at a later stage. We say to the government: we would welcome your input into how that Senate process can be facilitated. We do not want to delay the matter but, on the other hand, we do not wish to give a tick to a process that only half deals with a deficiency that the government itself has identified and which has been the subject of continual representations by industry. (Time expired)