21 February 2014
Speech - #2014004, 2014

Address to the 9th CEO Symposium, Associations Forum, Melbourne

Check against delivery

Thanks very much. When you started talking about my past I didn’t know which bits you were going to bring up but that was a good bit to bring up, because I also spent some time in the non-profit sector working on various boards, the Aboriginal Employment Strategy, the Mary MacKillop Foundation and also with the reference to the AO, a number of Greek community boards in the age care sector and the child care sector, which was an interesting experience, because often the smaller the organisation, sometimes the sharper the conflicts.

But I think it’s great that you’re getting together in this way, that you have a forum where associations, non-for-profits, charities and others can get together and compare, I suppose, their experience, learn from each other, what is best practice. Because, as David Murray mentioned earlier, in one form or another, whether you’re in a profit or a non-profit, you are out there to sell a proposition to someone, a value proposition and we all have stakeholders, we all have our suppliers, we have our customers, so it is important to think about the ways in which we can learn from other models of doing things and organizing business and activity.

But today I am here in my capacity as Assistant Treasurer in a new Government. I’ve got a number of responsibilities that cover financial services, superannuation, taxation and business law. But I want to talk a bit about the broader picture of the opportunities I think the country faces and some of the ways in which we as the new Government need to grapple with those opportunities and capitalise on them and the larger context for Australia’s current economic position is of course the rapid re-emergence of Asia. And I am using here Asia as a generic phrase, people in Asia don’t regard themselves as Asians. They regard themselves as Thai, or Indonesians or Chinese. In a generic sense what we’re talking about here is the re-emergence of Asia or the Indo-Pacific, if you like, as a centre of gravity for the world economy. And this is going to be a key driver in shaping the environment for all of us going forward, particularly in the business environment.

Now it’s true to say, and this is something that should give us a sense of humility when we’re dealing with our region, that until the nineteenth century, Asia accounted for the larger share of world output, so the ascendance here of the West in the broader sense is a relatively recent development. For the past 30 years or more the centre of the global economy has been returning to the Indo-Pacific region. And I think it’s important that we have that mindset when we’re dealing with the region. Rather than this idea that they’re sort of less developed countries and now they’re doing better, they’re emerging and that’s all very well and we’re looking at it from a position of some superiority.

The fact is that in a sense the centre of gravity is returning to what it was and Asia in the broad sense is on track soon to be, not only the world’s largest producer of goods and services, but its largest consumer. Already home to two thirds of the world’s population and soon home to a majority of the world’s middle class. And this increasingly affluent and mobile group presents huge opportunities as they demand more diverse goods and services from consumer goods and food products, to education and healthcare, to tourism and financial services. And, as well as the demographic and sort of socio-economic transition underlining the emergence of this region, we’re increasingly seeing structural policy reforms that promise to multiply those benefits to Australia.

Now structural reforms or all of those micro economic reforms, which often sound very unglamorous and unsexy, but they’re really the wheels of enterprise. It’s how you reduce the cost of doing business, it’s how you get risk takers, entrepreneurs, investors, willing to put capital forward to create new businesses and it’s about how Government’s facilitate that process. This is where structural reform to remove barriers to entry, to promote competition, to sort of help to sustain innovation and creativity, very important. For example the market and financial reforms signalled in China’s Third Plenum last year could potentially present an unprecedented opening of one of the largest and most tightly restricted capital markets in the world.

Now what is happening in China now is very important, that Third Plenum was a meeting of the highest levels of the Chinese leadership and they have this every so often, as the name suggests. And the structural reforms they are talking about there are a further potentially big leap in opening up their economy. And for us that presents even bigger opportunities.
There is also the sweep of structural reforms under way in Japan, properly knows as “Abenomics,” after the Prime Minister Mr Abe. These are the largest reforms the country has seen in years and are designed to further open up this economic powerhouse and breath life back into it.

We’ve had two decades of very slow growth and deflation in Japan, and so for Japan this combination of expansive fiscal and monetary policies, but also these structural policies, which in the long run are going to create sustainable growth, lift the speed limits of growth, very important for Japan.

There is also a growing willingness of governments to strengthen and to deepen regional integration, through for example APEC, ASEAN, the East Asia Summit and the Trans-Pacific Partnership. And I noticed my old friend and colleague, Craig Emerson, in the audience, former Minister for Trade, who was instrumental in a number of these major initiatives in the previous Government.

Now this combination of demographic and economic development with growing openness presents a significant opportunity for Australia and we’re on the doorstep of the world’s fastest growing economic region and its doors are open.

Now one theme that is particularly starting to come through to us, as we contemplate the opportunities in the region is, while the potential is there, the extent to which Asia ceases this potential depends on whether economies can successfully move towards more sustained growth and development and address some of the barriers restraining them.

One area of concern that is being highlighted in the context of the G20 meeting that’s coming up this week is the gap that’s emerging between the region’s infrastructure needs and the financing available to meet those needs. This has been a key focus for us here at the domestic level, but also internationally, investment in infrastructure is going to be an important topic, as I alluded to, to our presidency of the G20. And the G20, we are hoping and Joe Hockey is leading the charge on this at the moment, to deliver a package of measures that boost private sector led investment, particularly in infrastructure, as one of the important tools to lift economic growth, improve productivity and create employment opportunities.

One of the reasons we are focusing on infrastructure in particular is because we’re aware, when you look across the G20 as a whole, there is an argument that we’ve reached the limits of what fiscal and monetary policy can do in terms of promoting growth. A number of economies are loathe to keep putting more stimulus into the system, so that the question then becomes, how do you best promote more private sector growth? Part of that is structural reform, but part of it also is the way in which we get this infrastructure growth expanding. In the case of Australia we have particular commitments in that regard, you will see a down payment on that in the Budget, but the reason the infrastructure piece is important is because it also has, not only an immediate effect in terms of how it can support economic activity, but it can also underpin the higher productivity and competitiveness.

Now the package for the G20 will focus on both collective and country specific actions to improve the climate, the domestic climate for investment, and through improved intermediation of global savings to productive investments, in part through finding ways to develop domestic and international capital markets. In other words, in those countries which have relatively underdeveloped capital markets, helping them to find better ways in which they can mobilise domestic savings to go into domestic investment is something that we’re going to be pursuing through the G20 process. That’s also a way of helping to deal with some of the broader imbalances we see in the world, in terms of the focus that there has been in some emerging economies, which have had export led growth, big rises in foreign exchange reserves, tended to be recycled back into the West, where its underpinned the expansion of debt and whatever in the West. What we’re talking about here is developing those capital markets in the emerging economies so they make more productive use of their savings domestically.

Part of this is how we catalyse private sector investment by better use of the multilateral developing banks like the World Bank and public resources. So in other words it’s a public-private partnership creating pipelines with bankable projects for private sector investment by improving the planning, the privatisation, the funding of projects, including, as I said, public-private partnerships.

This has also been a theme in the context of APEC. And in fact last year APEC committed to establish a pilot public-private partnership centre in Indonesia with the technical capability of assessing infrastructure projects and guide their successful implications. One of the things that the Treasurer, Joe Hockey, has said this week is that he wants a common way that investors can, if you like, measure the risk and return from projects across countries as a way of maybe promoting more sort of cross-border investment. Certainly measures like this, with the APEC measure, will help in that regard. The centre will be an important way to build capacity and share expertise from around the region and this experience will also be highly instructive to the work being done by the G20 on these issues.

Now I want to turn a bit more to China, because I’m a bit “China-ed out” this week, because we’ve had a number of delegations here from China, from major Chinese banks and it’s been fantastic to actually be immersed in some of the work that they are doing. Now there is no doubt that the China story in particular has been extraordinary and that it continues to hold unique opportunities for Australia. Our national advantage in the resources allowed us to benefit handsomely from the earlier wave of China’s economic reintegration, but the next wave of opportunity will come from their demand for services, including financial services, as they move towards a more liberalised capital market, liberalising their capital account, allowing more capital flows in and out, more freely, as part of a process where, as their income dries, their tastes change, they start to demand more sophisticated goods and services, more processed foods, you can go through the list.

At its core the economic reform agenda that was unveiled at last year’s Third Plenum recognises that China’s continues economic development will require a larger role from market signals, a more efficient allocation of resources, especially capital. The financial opening of China presents vast opportunities for Australia, particularly in our export of financial services. It will create incentives to invest in China and for Chinese outbound investment. The associated rise of the Chinese currency, the renminbi,

over the coming decade will also present opportunities for overseas investors and financial service providers, through issuing RMB denominated investment products offshore and investing the proceeds into mainland China. And in fact, as I mentioned before, it’s been my pleasure this week to attend a number of functions with key Chinese banks to finalise arrangements for the settlement of renminbi in Australia.

On Monday I spoke at the launch of the China construction banks RMB settlement services in Australia. This is to encourage people, right, in the trade finance base, those that are doing trade with China in particular, to use the Chinese currency more. China Construction Bank has established that service here in Australia. On Tuesday there was a signing of an agreement between our stock exchange, the ASX, and the Bank of China for the settlement services for the renminbi in Australia by the stock exchange to further facilitate people being able to make these transaction in almost real time, based on Australian financial market infrastructure, which means that it’s very reliable, it’s very precise, it’s very accurate and it’s very quick. And this should further reduce the transaction costs of doing these sorts of transactions. And then yesterday I was present when a memorandum of understanding was signed between Hancock Prospecting and the Bank of China about how they will promote the use of renminbi in China-Australia trade. Hancock, already do a fair bit of trade with China and they’re taking a bit of a leadership role in helping to promote the use of the renminbi. So while Australia-China trade is still largely denominated in other currencies, there’s little doubt that this will change as global RMB markets become deeper, and as regional financial centre such as Sydney become more comfortable working with the RMB and better connected with other RMB markets across the region.

Why is this is important is, it’s not only the economic dimension of this for Australia, in terms of the way it broadens and deepens potentially trade and investment between the two countries, but what we’re doing through these initiatives, whether it’s the stock exchange or the other banks, is helping to play a leadership role in encouraging the Chinese to continue to further liberalise their capital markets. And that’s very important, not just from an economic point of view, but from a strategic point of view, a geopolitical point of view, because the key to getting the relationship with China right is that engagement which continues to help them build a bigger, bigger stake in the world economy and the rules by which the world economy is governed, and that’s very important for the stability of the system in the region and more globally. So for us this is about global engagement, both from the geopolitical sense, as well an economic and trade sense.

We will also need to make the most of the other advantages we have in our strong trade and people-to-people ties with China, a strong banking sector and funds management industry, which is the third largest globally, with more than 2 trillion dollars of assets under management. Australia also has the lowest financial risk factor in the world; these metrics have been put together by Austrade, the second most stable financial regulatory system and the third strongest management practice of corporate boards, interestingly enough. And as it considers its own approach to reform, China is studying economies like Australia that have undertaken programs of financial deregulation in the past and the Government looks to continue the dialogue with China in this area as part of our process of engaging them more and more.

For us, part of the reason we’re also doing this is quite selfish. We want to position ourselves as a financial services centre in the region, that’s one of the things, as a Minister for financial services, I want to do. And we’re committed for example, to working on key recommendations of a report by Mark Johnson to the previous Government, which to the credit of the previous Government, they started to implement, around how we promote Australia as a financial services hub. Part of this is to continue the work on completing what’s called the investment manager regime, to remove the tax impediments of foreign investment by foreign managed funds.

I released some draft legislation, which is the following step in implementing the regime on the 31st of January. And on the 30th of January, I announced that reforms to modernise the offshore banking unit regime announced in the last Budget would begin in July 2015. This will provide business with certainty by allowing targeted integrity rules, so we don’t abuse the use of offshore banking units, these are used so we can compete more directly with Singapore and Hong Kong and other offshore financial centres, by having a regime through which Australian banks can run those transitions on a more competitive tax basis.

We will also continue to work on implementing the other recommendations of the Johnson report, and the Treasurer, in one of his first acts when he was sworn in, was to sign the Asia Regions Fund Passport, a statement of intent, along with his counterparts in Korea, New Zealand and Singapore. Now the Passport will provide streamlined access by Australian fund managers to markets and regional economies and give Australian consumers greater product choice. Industry is being consulted on proposed passport arrangements shortly as part of an international consultation process. I’m also pleased to report that interest in the passport continues to grow among regional economies. As I mentioned earlier, we’ve got a very strong funds management industry and Australia is a great market, it’s relatively small market. These days we have to see the world as our market, we have to have a global mindset, so for us anything which removes the impediments for us to be able to export those services overseas is going to be very important.

Now the Johnson report also identified that the retail corporate bond market in Australia is underdeveloped and that a deeper liquid retail and corporate bond market would provide access to capital for Australian corporations and diversity in providing low risk, stable returns for investors. Now the importance of this is, and it harks back a bit to, I only caught the tail bit of what David Murray was talking about, but one thing we’re thinking about is how do we help facilitate the development of more retail investment products and diversify what superfunds, including self-managed superfunds, can invest in. And one of the areas is the retail corporate bond area. As I said before, particularly for super funds, we will be providing low risk, stable returns for investors. And allied with that, we’ve been talking to the self-managed super fund sector and they’re quite interested in how we can help develop retail products around investing in infrastructure. Now that has some challenges, but again, this is about finding ways they can diversify the products available that they can invest in. Now there has been already significant consultation with stakeholders on the reforms to develop the retail and corporate bond market and we’re considering the best way forward at the moment, but of course we’ll consult further before we implement those changes.

Now I suppose that’s by way of a relatively lengthy backdrop to the fact that the new Government, coming to office while it obviously identified a number of challenges to the Australian economy, this is about being optimistic, about the opportunities that we face out there. And that is the overwhelming emotion I think we can feel when we look, notwithstanding the headlines we sometimes see from day-to-day about the future of the Australian economy. We do have relatively good fundamentals to build on, but there are challenges out there. And as I mentioned before, there are opportunities, but we have to be fit for purpose, if we’re going to be able to exploit them, and at the moment, we all know that Australia needs to lift its productivity as we transition away from resources-led growth. We’ve had the great good fortune of a long run of historic terms of trade rises, the biggest in 150 years or whatever, and that had tremendous impact on our income, on gross national income per capita. It helped to underwrite the growth of the economy over the last few years to a considerable extent. Fantastic and that all in price, in terms of trade, export prices versus import prices. Those terms of trade are now going the other way, we’re coming off that huge and very steep rise in the terms of trade. It’s been decelerating for a while, but it’s coming off and that means of course that the challenge ahead, if we want to maintain the sort of rates of growth in income we’ve been used to is, the mathematics of this is that we’ve have to double our productivity growth, if we look at the this in purely mechanical terms. And that’s a challenge, going from something like one and a half percent to three percent of productivity growth.

Now nothing in economics or in life is precise, but the fact of the matter is that in in a broad sense that is our challenge, our productivity, and how we become better at everything we do. Better at how we combine capital and labour, better at innovation and creativity to create new products and services. This is a major transition which is going on, it’s not seamless and it’s not smooth and it’s not easy. But one of the things the Government is determined to do is facilitate the transition. At the macro level, that’s through maintaining, I suppose, monetary fiscal policies which promote low interest rates and with it hopefully a relatively competitive dollar, which takes some of the pressure off some sectors of the economy that we’ve seen over recent years and gives them a bit more of a benefit going forward. But coupled with that, at the micro-economic level if you like, there’s also a determination that we actually facilitate the process of structural change, rather than stand in the way of it. That’s why decisions like whether there are further subsidises, whether it’s SPC Ardmona or what do we do about the future of the motor vehicle industry, in a sense we’ve reached the tipping point where as a society we have to make up our minds that the era of trying to be defensive and trying to slow down the rate of change, in the end just puts off the inevitable, and increases the cost of adjusting to change.

So we’re better off as a society trying to manage change, but what’s the challenge then? The challenge then for industry policy is two things. The first is to facilitate that process of adjustment by making sure that the resources, principally labour, that are released from that process actually can be productively employed elsewhere. Positive adjustment policies to help that process and as part of that as well, we need to keep promoting new sectors and industries. Not just by direct subsidies, it’s not as easy as identifying and just saying well we’re now going to force-feed the biotechnology sector by putting X-billion into that. But what we do intelligently is identify ways in which we promote that creativity and innovation to create sustainable competitive advantage.

Because if you look across the Australian economy, we want the sort of companies that can, not only operate domestically, but have a capacity to compete globally and if possible be global leaders. You look at the Cochlears of the world, the Resmeds, the CSLs, you go through the list, you go through the big miners. The big miners aren’t there just because they’ve got a lot of resources; they’re also there because they’re highly efficient, by world standards of what they do. Agriculture, particular challenges in agriculture in how, that is a very efficient sector on one level, on another level we need a lot more investment in the sector, and probably consolidation as well to take advantage of the opportunities that are coming.

So industry policy in the future is not about protecting what is there already, it’s how we move, if you like, to the next stage, and the next stage of jobs. And this is raising big issues as well about the whole future of work. I can’t go into those here, except to say that the Government is conscious that it’s not easy to specify where every last new job is going to come from, but we have to provide and continue to provide a framework that allows people to be entrepreneurs, to take risks and to invest. Which is why it’s important that we keep the budget under control, to get the budget under control as a way also of making sure taxes, can be as competitive as possible.

It’s important that we keep doing the work that we’ve announced we’re going to do on regulation. Now the work on regulation is two-fold, part of it is red-tape, reducing compliance costs, in other words reducing the cost of doing business, but part of it is, reducing the barriers to competition, barriers to entry, so there is a de-regulation agenda. And we’re very keen, particularly after the middle of the year to hear from you on areas where you think more can be deregulated, red-tape can be reduced but we’re also conscious that it links to a broader agenda around competition.

We’ve got a competition review about to get underway and that is about how we remove the barriers to entry, how we create a more competitive outcome for the country. Certainly in the tariff space, at some stage, we will have to make a decision about whether we take further tariffs off. That has a budget cost as well, but we have to think about this in the context of the work that we are doing to promote, if you like, the greater outward orientation of the economy.

So there’s a lot to be done and sometimes when you’re at a tipping point and there’s a lot of churn, people can say well ‘gee, what’s going on here’ but in a sense, if we as a Government, demonstrate the way we’re thinking about where things can go, I think we can assure people that the process will lead to a stronger, more prosperous Australia. But you can play a role in that regard, particularly around areas that impact on you, with deregulation, red-tape and the rest. Because no matter what sector of the economy you’re in, if we can reduce the cost of doing things, that’s a benefit to the economy as a whole, as part of our productivity agenda.

David would have alluded to the fact that we have Financial System Inquiry underway. In part that will look at issues of competition in the financial sector. There are issues there, big versus small banks for example, but an important issue that’s happening in that context is the way that technology is now undermining business models in banking in particular, creating new payments systems, particularly mobile payment systems and the impact that that will have on how services are delivered and also on how regulators deal with that. See regulators like things to be fairly stable. They like to be able to deal with a few players, easier to deal with, lower transaction costs. But this is about a world where regulators almost have to be able to anticipate where things are going, very hard to design regulation in that sort of world.

On the deregulation agenda just to finish off on that, it’s a broad ranging agenda across also sections of Government, Ministerial Advisory Councils are being set up in each portfolio, drawn from stakeholders in that portfolio, to help guide Ministers and public servants in identifying priorities for deregulation. This is to contribute to an overall goal on annual basis, reducing red and green tape by about a billion dollars a year. We’re also overhauling the process of scrutinising new potential regulations to make sure as many new regulations as possible do get scrutinised. Asking, in effect, like a checklist of questions, about, first of all, what is the problem that we’re trying to solve here? And secondly, what are the potential ways to deal with that problem. And if we’re going to have a form of regulation, what is the best form of regulation? If self-regulation won’t work because of conflicts of interest or whatever and there’s more formal regulation needed, what form should that take and measuring the costs and benefits of doing that more rigorously.

We’re also streamlining the meeting agenda for the Council of Australian Government meetings, the COAG meetings, so there can be a more concrete focus on outcomes. The COAG meetings are a bit like G20 meetings, over the years they’ve had longer and longer agendas, longer and longer communiques and often on the way through you can lose the focus of what you’re trying to do. It’s important to use those sorts of leaders’ meetings to get the leaders to focus on particular issues where, bringing their authority to the table they can get breakthroughs. And we’re making deregulation, red tape reduction a standing agenda on each COAG meeting and this will mean only proceeding with nationally harmonised regulatory solution where the benefits of doing so outweigh the cost. In other words, on the national level, not wanting uniformity or harmonisation for its own sake, but on a case by case basis, depending on the topic, looking at the cost and benefits of having a national approach.

One of the challenges we face in this whole area is how we more adequately make sure that stakeholders are engaged in the process. COAG is a bit different to dealing with one level of government alone. As I’ve said before the level of Federal Government will have ministerial advisory councils to help with stakeholder consultation. But that stakeholder consultation is important because one of the requirements of the new deregulation agenda is that there be genuine consultation of a certain length and of a certain type when new laws and regulations are being put out. So people who are affected have adequate time to respond, so they’re not suddenly just being caught on the hop, hearing on the radio that the Government’s decided to do X or Y.

And as part of this process we’re also, with the help of the Productivity Commission, developing a framework for evaluating the regulators and how they do their job to make sure that they’re doing their job as effectively, efficiently and hopefully as customer friendly a way as possible. And I mention here the ATO, the Tax Office, the ACCC (Competition Consumer Commission), ASIC (Securities Investment Commission) and the Prudential Regulator.

The final message I want to leave with you, in terms of the role you play in managing associations and the like, is that from a government perspective, you’re used to dealing with all types of organisations and some of them are more effective than others at getting through the door and getting their message through. So my advice on dealing with Canberra always, is look for where you’ve got common interests with other groups. Develop a bit of a coalition of the willing when you’re coming to Canberra to deal with an issue. Also, if you’ve got a problem, sure bring it to Canberra, but if possible bring a solution as well and one which tries to relate what you are doing to the agenda, or the goals and objectives of the Government of the day.

On that note, thanks very much for having me here today.