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Thursday, 20 November 1986
Page: 2638

Senator SHORT(5.47) —The five Bills we are debating-the Bounty and Subsidy Legislation Amendment Bill (No. 2) 1986, the Bounty (Ships Repair) Bill 1986, the Navigation Amendment Bill 1986, the Subsidy (Cultivation Machines and Equipment) Bill 1986 and the Fertilisers Subsidy Bill 1986-are an important series of Bills. Despite the fact that we are debating them cognately, they are essentially separate Bills. I am surprised that this is a cognate debate. I do not believe that it should have been a cognate debate. It is yet another example of the bad organisation of Government Business in this place that, particularly as we crowd towards the end of each session-it always happens with this Government-we get concertinaed and squeezed dealing with an enormous amount of legislation. This is for no reason other than bad government management. As a result the debates and considerations of Bills in this chamber are not given the justice they deserve.

Senator Gietzelt —Senator, I appreciate that you are relatively new to the Senate, but that was the process under your Government, as it is under this Government. It is the normal process towards the end of a session.

Senator SHORT —It is something that certainly should be looked at. Regrettably, the Minister's Party is in government now. I cannot help the Government improve Government Business but it is something the Government certainly should be looking at. I reiterate Senator Chaney's condemnation of the 20 per cent across the board bounty cut that occurred in the Budget. It was a cut that applied to all industries. It was a totally arbitrary decision that had nothing at all to do with industry policy. It has caused considerable concern throughout some of the industries that have been affected by it. Although it has applied to all industries, it has had particular effect on some of the major textile companies at a time when they are awaiting, in a very uncertain manner, the outcome of the Government's consideration of the Industries Assistance Commission report of the textile, clothing and footwear industries. It has had an enormous effect on the book printing and publishing industry, particularly given the double hit that industry has had with the decision, the very day after the Budget's 20 per cent bounty cut-this was another decision based on an IAC report-to have a further cut as from 1 January 1987, thereby giving a 36 per cent cut in bounty to the book industry in a period of 4 1/2 months. More than half of that reduction was totally unexpected and unconsidered in the context of industry policy. The Government obviously has no idea of the effect that such arbitrary decisions can have on the cash flow of companies and, therefore, on the whole of their investment, production and planning processes. The Hawke Government claims-or at least its Minister for Industry, Technology and Commerce, Senator Button, does-that it accepts the need for stability and predictability in government policies so far as they relate to industry. The decisions this Government has made recently make a total mockery of those statements. It is no wonder that there is a loss of confidence. Without any fear of contradiction, I say to the Government that in the private sector there is an enormous loss of confidence in the Government because it has shown that it is quite unfit and incapable of adopting either industry or economic policies that have predictability and stability.

I accept that the Budget bounty cut was not Senator Button's decision. He has made that perfectly clear. He has walked right away from it every time it has been raised, and rightly so. He has made it clear that it was a Budget decision and not an industry policy decision. Sadly, it seems to be the case nowadays that the Minister for Industry, Technology and Commerce, Senator Button, for whom I have a great deal of respect, always seems to lose when it comes to the important issues of his portfolio. He lost on the bounty legislation and therefore has lost a great deal of face in the industry. He lost on the fringe benefits tax. He knew what that legislation would do to the automotive and other industries. He lost in Cabinet in pressing his line on the need for greater flexibility in the wage fixing processes. He lost in Cabinet on the need he obviously foresaw for a much stricter approach to government spending, and he has lost on most of the other major issues he has been pursuing in the Cabinet. I regret that because most of the positions he has been putting in these areas are essentially correct. It accords very closely with the thinking on this side of the Senate. It is a matter for real regret that the Minister does not seem, despite the fact that he is the third most senior Minister in the Government, to be able to command sufficient support or attention in the Cabinet to have sensible economic policy decisions made.

I will confine the remainder of my remarks today to the Fertilisers Subsidy Bill. I would like to comment on the other Bills but time prevents this at the second reading stage. I will reserve those comments for the Committee stage. In the Minister's second reading speech on the Fertilisers Subsidy Bill he pointed out that it implements a 1986 Budget announcement by the Treasurer (Mr Keating). The Bill has several elements. It amalgamates the nitrogenous fertilisers subsidy and the phosphate fertilisers subsidy into one Act. It maintains the subsidy payable on nitrogenous fertilisers at $20 per tonne of nitrogen content. It introduces a three-tiered system of subsidy on phosphatic fertilisers, depending on the amount of available phosphorous content. It maintains the total payout under the subsidy arrangements at $55m per annum for each of the three years to 30 June 1989. It contains provisions to ensure that the subsidy is passed on in full to users; that is, to farmers. I shall comment on these provisions in the Committee stage. I think they need to be looked at very closely.

Finally, the Bill removes the application of the subsidy from imported fertilisers and reallocates the resultant subsidy savings to increase the subsidy rates on the consumption of locally produced phosphatic fertilisers, particularly high analysis phosphate products. As Senator Chaney has said, the Opposition supports these elements of the Government's proposals, with one major exception, which is that the Liberal and National parties believe that the subsidy should continue to apply to the consumption of both locally produced and imported fertilisers, as has been the case since 1966 for nitrogenous fertilisers and since 1982 for phosphatic fertilisers. The two main reasons given by the Government for its decision to restrict the subsidy to the consumption of locally manufactured fertilisers are, firstly, that it will provide benefits to the balance of payments when our external account is in quite dire straits; and secondly, that it will bring some benefits to manufacturers, as the Minister said, `in the form of increased price competitiveness' whilst it will `at the same time avoid disadvantaging the rural sector'.

Those are the reasons advanced by the Government for this Bill. The Minister in his second reading speech said that the Government has faced a difficult task in trying to reconcile the interests of the producers and the users or consumers of this important commodity. I agree that the Government was faced with a difficult task. Arguments can be made in favour of the Government's decision and arguments against it. The Opposition's view is that the arguments against the Government decision to direct the subsidy solely towards the use of locally-manufactured fertiliser outweigh the arguments in favour of that decision. I will examine the arguments put forward on both sides. Before doing so, I should make it clear that the products at issue are essentially the higher analysis phosphatic fertilisers for which farmers have demonstrated a growing preference in recent years. Single superphosphate is not at issue. All our requirements for single superphosphate are met from local production because of natural competitive advantage. However, since the mid-1970s the trend in fertiliser usage in Australia, as in other countries, has been away from single superphosphate towards the increased use of nitrogen and high analysis combination fertilisers. The most common forms of high analysis fertilisers in use are double superphosphate, or DSP, triple superphosphate, or TSP, mono-ammonium phosphate, or MAP, and di-ammonium phosphate, or DAP. The trend towards higher analysis fertilisers appears unlikely to be reversed because of their considerable economic benefits to users through reduced application, transport storage and similar costs.

High analysis fertilisers now account for about 40 per cent of elemental phosphate used annually by Australian agriculture. About half this is imported and half is locally produced. Until 1983-84 almost all fertiliser imports were made by local manufacturers. They manufactured and also imported, and they were the sole importers. However, other firms have been importing a growing proportion of fertilisers since then. There is a surplus capacity within the Australian industry. Both the IAC and the Department of Primary Industry have concluded that domestic manufacturers have sufficient capacity to meet all local requirements, but this is disputed by other groups including, in particular, farmer organisations and especially the National Farmers Federation. In world terms, the high analysis fertiliser industry is in massive oversupply. There has been enormous growth in the production by certain Third World countries in recent years, notably such countries as Morocco, Jordan and Korea. Dumping is prevalent throughout the world, including into the Australian market, where fortunately we have very stringent anti-dumping provisions, although the local industry says that these are not stringent enough. The Government provides grants which offset the effects of dumping duties on fertilisers in order to prevent the costs to farmers from increasing.

The Industries Assistance Commission has reported on all or parts of the fertiliser industry on several occasions in recent years. The most recent occasion was in October 1985. In the report of that date the IAC reached several interesting conclusions. First, the Commission concluded that assistance for the consumption of fertilisers then, as distinct from in the early 1960s when the current subsidy arrangements for the consumption of fertilisers had their origin, had little effect on levels of output of the using rural industries. Secondly, the IAC concluded that agricultural competitiveness in the short term is not sensitive to changes in the price of fertilisers. The Commission believes there are a number of aspects of macroeconomic management which can have a considerably greater influence on agricultural competitiveness in the short term than the existing fertiliser subsidies. I for one would certainly agree with that conclusion. The IAC also concluded that the subsidies do not lead to significant community benefits compared with the cost to the community of providing that assistance. For those reasons the IAC recommended that the subsidies on the consumption of phosphate and nitrogenous fertilisers, both imported and locally manufactured, should cease on 30 June 1986. The Government has rejected that recommendation, as we can see from the Bill before us.

Senator Harradine —Half.

Senator SHORT —Yes, I will come back to that. It is also important to note that the IAC-this is the point-in its 1985 report did not address itself to the question of whether any subsidy payments should be limited to the consumption of locally produced fertiliser. It was not asked to do so and given the conclusions that it reached that there be no subsidy at all it is not surprising that it did not address it in detail. But I will come back to that a little later. The Commission did make some passing reference to it.

I turn now to the arguments advanced by the local manufacturers in support of the Government's proposal to restrict payment of the subsidy to the consumption of locally produced fertiliser and the arguments to the contrary which have been advanced by the user or rural industries. I refer first to local manufacturers. As I understand it, in summary the local manufacturers argue as follows: Firstly, consumption subsidies in Australia are rare at any time but the payment of a consumption subsidy on an imported product is unique. Secondly, there would be a progressive benefit to to the balance of payments from the Government's proposals, starting off with a $15m benefit in 1986-87. Thirdly, the Australian fertiliser industry does have the capacity to supply all the high analysis fertilisers and all the mixes required by Australian farmers.

Fourthly, the Australian industry is efficient, a view, I would emphasise, that has been supported by the IAC. I have no quarrel with that. Without the benefit of tariff protection or industry plans the Australian fertiliser industry has carried the significant cost burden of such Government decisions as the Australian National Line contract, the coastal shipping provisions of the Navigation Act, the 2 per cent general revenue duty and so on. The local industry also argues that the fertiliser industry is an important, integrated Australian manufacturing industry with a work force of over 4,000 and an annual turnover in excess of $700m. It argues that the continuation of a subsidy on the consumption of imported fertilisers would act as a disincentive-I use the word `disincentive' rather than anything stronger; I quote the industry's own word-to future capital investment projects in the industry, including the possible development of Australia's indigenous resources of phosphatic rock at Mount Weld and Duchess. The local industry also argues that the Government's proposal to remove the subsidy from the consumption of imported product would reduce the overall price of fertiliser to farmers because increased local throughput would reduce unit costs of production and that would therefore lower prices to farmers despite the reduced competition facing the Australian industry.

The user industries-that is, the rural sector-argue on the other hand, firstly, that the Government's proposals will reduce competition because they will make the imports of fertiliser that much less competitive and will eventually lead to a monopolistic situation for Australian industry vis-a-vis imports. The Minister's statements have admitted this. Secondly, the rural sector argues that the Government's decisions are based solely on a desire to assist local fertiliser manufacturers, with little regard for the effect on farmers. Manufacturers continue to show a good financial performance and none are in danger of financial failure. Thirdly, the rural sector argues that the Government's proposal will discriminate strongly against farmers who have no option but to use imported fertiliser. Fourthly, past arrangements did not subsidise imports. I direct this comment to Senator Siddons. I am sorry he has left the chamber. Imports and locally manufactured fertilisers have been treated on an exactly equal basis. When an imported and a domestic product are treated on an exactly equal basis it is simply not true to say that the imported or the local product is subsidised in the sense of getting favoured treatment relative to the other.

Fifthly, the rural sector argues that the Australian industry does not have the capacity to manufacture to meet farmers' demands for all high analysis fertiliser product. Obviously this is a point of disagreement between the user and the consumer industries. Sixthly, the rural sector argues that the Australian industry may be able to produce an additional 85,000 tonnes of fertiliser to replace imports. It is not enough to meet the market, but is on the way to meeting it. The rural industries calculate that after allowing for the cost of imported raw materials-a very significant point-the net balance of payments effect would be less than $10m. Finally, the user industries argue that when current stocks of fertilisers are exhausted the price of imported products will rise by up to $42 per tonne.

So there are conflicting arguments on both sides, in logic and in fact. The Opposition acknowledges many of the points made by the local fertiliser industry. We acknowledge fully and welcome the fact that the industry plays an important role in our manufacturing and rural sectors in Australia. It is an efficient industry. It has demonstrated that by virtue of the fact that it has had little or no assistance almost throughout its history. Indeed, some calculations would indicate that the local industry has experienced negative assistance over recent years. Whether it is negative or slightly positive, it is virtually nil. The industry has also demonstrated, I think, the potential for further development. The Opposition acknowledges those points. However, we do not accept that either of these points or the reasons advanced by the Government provide sufficient grounds to change the arrangements that applied prior to the Government's announcement in the Budget.

Our reasons are as follows: Firstly, there is undoubtedly a real prospect that the Government's decisions will lead to a significant reduction in competition in the Australian market. Imported fertilisers would not be able to follow the Australian market down when they would be at such a subsidy disadvantage following the Government's proposals. I believe they would have great difficulty in remaining in the Australian market. This would run the real risk of creating a near monopoly for the domestic producer.

The problem is compounded when one takes account of the fact that, although there is more than one producer in Australia, there are natural internal barriers which mean that a manufacturer in, say, Western Australia has difficulty in competing with someone on the eastern seaboard. The costs of transport of the fertiliser and the like are very significant. So the risk of a monopoly, or a near monopoly, arising is very significant. If that is the case, it follows that, if prices move as a result of this decision, the price movement is more likely to be upward than downward. That is contrary to what the Government says it wishes to see, and it is certainly quite contrary to the interests of the Australian economy at the moment, particularly to the rural sector which, cost wise, has been taxed and squeezed almost blind in recent years by a major cost-price squeeze. So the prospect of fertiliser prices going up is not insignificant. As I say, it has suffered already from the great pressure of rural cost increases.

The other important question, one that the Government was advancing, is the balance of payments argument. The balance of payments argument is very difficult to argue. Even if one accepts the Government's and local industry's figures, they are not large, although admittedly they would be worth while. But they ignore the possible price effect of the Government's decision on farm costs and inputs and, therefore, the effect on the farming sector and on its export credit worthiness, particularly when it is facing difficult enough decisions as it is. To me, the balance of payments argument is very difficult to argue either way.

It is also indisputable that the decision would add significantly to the protection of the Australian industry. The industry would go from having no protection, as is the case now, to having not insignificant protection. There has been no Industries Assistance Commission investigation on this specific issue. To the extent that it considered it at all in its 1985 report, it tended to argue against what the Government is now doing. I quote from page 10 of the IAC's report:

Payment of a production bounty-

that is what we are now talking about in the Government's proposal-

as a long term form of assistance would distort the incentive structure for fertiliser manufacturers and pose a significant barrier to change. The Commission considers that this industry is capable of operating over a long period of time with minimum levels of assistance, albeit with a structure different from that which currently applies.

The IAC has not really addressed this issue. It is quite clear that there is confusion in the Government's mind with regard to the purpose of these subsidies. It is typical of the Hawke Government's approach to economic policy making. It is an important reason, as I said at the beginning of my remarks, for the growing lack of confidence throughout the private sector about this Government's economic policies. No one, least of all the Government, seems to know where it is going at the moment in terms of economic policy making. The confusion in this case is that this subsidy arrangement is, and it always has been, a subsidy on consumption. It is not a subsidy on production. It has never been seen to be a subsidy on production. I again quote from last year's report of the IAC, which outlines the history of the rationale for these subsidies. Page 8 reads:

The current subsidy arrangements for the consumption of fertilisers had their origin in 1963 . . . with the stated objectives of improving the productivity of farm lands and pastures, encouraging growth in rural output and improving the competitive position of exports.

That was the phosphatic bounty. It continues:

In 1966 a subsidy was introduced on domestically produced and imported nitrogenous fertilisers with the stated objectives of reducing costs of industries which were major users of nitrogen, encouraging the experimentation with and use of those fertilisers, and improving the competitive position of exports.

In other words, the whole rationale of these subsidies has always been consumer based. If it is a subsidy on consumption, it should apply to all fertiliser products, or to none. It makes no sense to differentiate between imports and local production on this basis.

The proposal of the Opposition to oppose the Government's proposal will not wipe out local industry. Local industry does not claim that it will. Local industry has said that it is not seeking increased protection. Yet that is the effect of the Government's proposals. The Opposition has considerable confidence in the local industry. We are sure that it will develop, despite chronic world oversupply. If the industry does decide not to develop further at this time, it will take that decision because of the world oversupply, not because of the fate of this Bill, whichever way the Parliament votes in the end on the Government's proposal. It is about time that the Government, in putting forward industry proposals, along with other economic proposals, got its line of thinking straight before starting to make proposals which, in the long term, will not be in the interests of industry structure in this country and therefore will not be in the interests of the industries with which it is dealing.