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Is investment attraction an economic distraction?

By Ross Elliott - posted Wednesday, 23 August 2017


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?]."

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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.

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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?

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About the Author

Ross Elliott is an industry consultant and business advisor, currently working with property economists Macroplan and engineers Calibre, among others.

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