Is investment attraction an economic distraction?

In Australia we invest a good deal of taxpayers money and public sector energy into what is known as “investment attraction.”  Designed to secure new economic opportunities for particular regions, investment attraction strategies frequently resort to a menu of features designed – it is hoped – to catch the attention of businesses looking for places to invest or expand or open new facilities.

All too often, these become cliches and are stretched to incredulity. Take this effort from the hapless South Australians (with my comments in parentheses):

“South Australia offers a range of cost advantages that no other state in Australia can match, improving your company’s bottom line. (So why are so many businesses there reportedly struggling?) … Private sector labour costs in South Australia are 10 per cent below the Australian average making our state a great place to expand your workforce. (With so many unemployed, you’d hope so) The Adelaide market continues to be one of the most cost-competitive CBD markets nationally when it comes to setting up business and leasing office space. (Because so much of it is vacant, and has been for a long time) South Australia has a range of office space and industrial land available in, or close to, the CBD at rates lower than other mainland Australian states. (They’re worth less for a reason) With a well-planned supply of affordable industrial land, linked to strategic infrastructure and transport corridors the cost of doing business here is highly competitive. (Until you try turn on a power point)”

“South Australia’s central location provides the ideal gateway into Australia and out to Asian markets and beyond through our modern air, sea and rail freight channels. (Central to what? The Southern Ocean?) Our international airport is only six kilometres from the CBD (so is Bogota’s, so what? New York’s JFK is around 25 klm from Manhattan, do they feel threatened by Adelaide because of this?) … Flights to Sydney and Melbourne also depart, on average, every 20 minutes during operating hours. (So you can escape at short notice?).”

Apologies to my South Australian friends for picking on them for this example, but the point is that any potential business looking at investment locations in Australia would likely find these heroic claims equally amusing. Being in denial is not a strategy. Propaganda is not a strategy.

South Australia has some very real, deep seated and widely publicised economic problems that stretch back for decades. Overcoming these cannot be easy. Denying they exist at all is far from achieving anything.

It’s worth noting that they – like many other regions trying to attract new investment - have resorted to the oldest investment attraction trick in the book: the bribe. They’ve set up an Economic Investment Fund and a Future Jobs Fund, which are aimed at “investment projects (that) deliver significant strategic and economic benefits for the state.”

The bribe attracts all sorts of interest, often for the wrong reasons. It can be counter productive – costing taxpayers more in upfront cash grants and foregone taxes than the benefits to the region. Elon Musk of Tesla fame is a big believer in the bribe. He played off several US states vying for the privilege of being home to his Tesla Gigafactory, finally settling on a remote site in the Nevada Desert in exchange for a reported USD$1.3 billion in up-front cash, free land and forgiven future taxes. It turns out that’s just a part of the nearly USD$5 billion in total grants and tax relief his business has managed to talk out of the hands of US taxpayers. (See my article on the Gigafactory story).  Is it any coincidence that Musk is now praising the wisdom of the SA Government, promising to work together on energy ‘solutions’?

The bribe isn’t confined to South Australia. It is immensely popular Australia wide. Competing and even neighbouring regions often get locked into bidding wars in the name of “investment attraction.” Also known as ‘the pork barrel’ the bribe is used with great political effect, and can easily run into billions of taxpayer dollars with little or no business case justification. It helps explain why, for example, Australian taxpayers are spending $50 billion on building new submarines in South Australia rather than buying them ready to go for much less. If you’re a fan of the TV series ‘Utopia’ you’ll be familiar with how ‘nation building’ and the bribe are rarely separated by much. It’s practically essential viewing to understand how this country works today.

The sad part of all the effort and money directed at “investment attraction” is that so little attention is paid to investment retention. Identifying the problems faced by existing industries and business, and ensuring we don’t make things worse for them, might be a step in the right direction. Lumbering innovative businesses in a rebounding manufacturing sector with excessive electricity costs while talking up “innovation agendas” or being in hot pursuit of technology “start-ups” is just one example of neglecting the needs of existing business while efforts are focused on attracting new ones. South Australians might find this a depressing but familiar story but they can take some comfort in knowing it’s a problem that is Australia wide.

Too often, tackling the problems faced by existing businesses are glossed over in favour of the much more glamourous role of chasing shiny new investment bling. For every new business opportunity secured, how many others receive little support or are allowed to fail?

Tourism down but by no means out

As the ravages of Cyclone Yasi leave scars across the northern landscape, and as much of the rest of Queensland continues with a clean up and repair bill from successive flood inundations, recreational visitor numbers to various part of the state will inevitably tumble in the short term. Tourism’s recovery from natural disasters will occupy headlines for a time, and the industry will recover. As it does so, industry leaders could begin to focus on some of the man-made disasters which deserve equal attention in any rebuilding and growth plans.

Tourism industry representatives have so often predicted their industry’s near death that there’s a Cassandra element about it. From pilot’s strikes to the Ansett collapse, to S11, SARs, bird flu, the high Australian dollar, Cyclone Larry and now Yasi – each has prompted dire warnings of imminent demise accompanied by the request for bigger advertising budgets. You’d be forgiven for thinking the industry was one of our most vulnerable, based on the repeated prophesies of doom.

But the industry over the years has proven itself remarkably robust. International visitor numbers may not reflect long term predictions or industry ambitions, and Queensland’s share of that traffic may have slipped, but the numbers generally have held up. In fact, last year, there were 2% more international visitors to Queensland than the year before. This is a handy snapshot of international tourism trends, and it doesn’t provide evidence of past bloodbaths. The picture isn’t one of constant growth, but it is one of relative stability.

Domestic travel has fared worse, but with a strong dollar, who can blame Australians for seizing the opportunity to see the world.? That too will return to a balance once the dollar falls below current levels (which must surely happen at some stage). And business travel continues to perform strongly. The industry might itself be preoccupied by images of white beaches and bikini girls, but men in dark suits attending meetings and conferences actually generate more nights and more dollars spent. It’s why Brisbane is by far the largest tourism market in the state, surpassing the Gold Coast. Room rates for hotel rooms in Brisbane are hardly being sacrificed, and even discount room site Wotif.com suggests that $300 to $450 per night is the going rate for the Brisbane CBD. That’s not dissimilar to what you’d pay for a decent hotel room in New York City, which is hardly evidence of a bloodbath.

So the reality will be that, despite the horrors of Yasi and the floods that affected much of the state, the industry will recover. As it does though, it might be timely for industry leaders to focus on some of the man-made problems that have been wreaking damage just as effectively as natural events.

Let’s start with the ridiculous difficulty faced by tour operators or developers of new facilities, trying to create new product for the leisure or business travel market. What the industry desperately needs is a widening and dizzying array of new tourism experiences and offerings, from Cape York to Coolangatta. Each new experience creates a richer picture of the Queensland offering and it builds the incentive to travel here. It also means each new operation has its own marketing budget, which combined with others is a more effective way of luring visitors than government sponsored campaigns. (What happened to that ‘new brand’ campaign “Queensland, Where Australia Shines”. Don’t remember? The cringe factor can be found here. It’s now been replaced with ‘Queensland, ready to welcome you.’ Tourism’s elder statesman Jim Kennedy suggested in October last year that industry agencies were out of ideas and in need of a shakeup. He could well be right).

The challenges aren’t just faced by larger businesses talking major resorts - even the smallest operations seem stymied by planning and environmental regulations. For example in Cape York, traditional owners in several communities were hoping to build tourism experiences but the environmental bureaucrats combined with the politics of Green preferences meant those hopes were dashed in the form of Wild Rivers Legislation. On Fraser Island, chances of anything much happening at Orchid Beach were killed off by environmental forces claiming the area too sensitive, even to beach camping at Waddy Point. On the Gold Coast some years back, attempts to build a skyrail experience to the Springbrook Hinterland were similarly strangled in regulation and anti-anything politics. Earlier this month, developer Graeme Juniper abandoned plans for a $500 million eco resort in the Sunshine Coast hinterland, after a fruitless seven year battle with the local (and allegedly pro-tourism) council. I even know of one dairy farming family who wanted to run Dairy Farm tours in school holidays for city kids in south east Queensland, but the town planners in the local council heaped so many regulations and application fees on their idea that it too died a deliberate death by bureaucracy.

The point here is that whether it’s a micro tourism proposal or a major one, whether it involves simply accessing natural areas or building structures on private or public land, the regulatory environment is tilted heavily against the proponent. This has become a sort of Berlin Wall of regulatory opposition, too difficult for most to scale and too big to go around. Erected in the name of environmental protection or safety, these regulations have had the effect of achieving environmental paranoia and a nanny state obsession with the precautionary principle. And they are strangling the chances of new tourism products being established, which are essential to the future viability of the industry.

Without new tourism experiences or new physical assets, the Queensland tourism picture will start to fade like a postcard from Surfers Paradise in the 1960s. It possibly already is, unaided by tourism campaigns which largely turn their back on promoting business tourism in the capital city and instead trot out the same beaches, the same palm trees, and the same rainforest. For the industry, identifying this massive obstacle to the development of new and expanded tourism offerings ought to be a very high priority.

And when it comes to calls for increased marketing budgets, perhaps we could start to press for campaigns which make direct connections to districts and regions. Instead of announcing some new $10 million tourism campaign designed to bring visitors back to Cairns, for example, give the money to Qantas, Jetstar and Virgin in exchange for free or heavily discounted seats. If a Sydney-Cairns return flight is worth $250, $10 million would be worth 40,000 free return seats, even more if the subsidy was one way only, or for discounts rather than free seats. Over the course of six months, an extra 40,000 visitors spending money in Cairns (or any other distressed destination) would have a direct bearing on the profits of businesses that employ people and that constitute what is called the tourism industry. Initiatives which go direct to stimulating visitor traffic have to be superior to cliché ridden advertising campaigns.

Finally, it would be good to start undoing the assumption that our environment is too fragile and far too sensitive to allow any more intrusions by people. Operators and visitors may have impacts, and these are manageable. You can’t have industry, jobs or create taxes to pay for social services by locking up vast areas with ‘DO NOT ENTER’ signs.

The obsessions with ‘damage’ caused by walking or 4WD tracks in wilderness areas, with water quality because of people’s sunscreen, or the outright alarm at the prospect of clearing a few trees to make way for a structure of some sort, must surely look a bit ridiculous now.

Have another look at the images of vast devastation caused by Yasi, or of the floods of 2011. Thousands of hectares of trees and forest damaged, rivers and creeks unrecognisable. Yet we’re precious about the relatively minor impacts of man and in the process are choking off an industry’s future prospects to develop new product.