Our politicians are repeating mistakes they made with the car industry and GMH

PM Morrison last month observed that "Australians will be fuming" after General Motors Holden (GMH) allowed its business to "wither away", despite pocketing $2.17 billion in taxpayer-funded subsidies over the past 12 years. The PM said that the carmaker's exit proved the company was "never going to respect" the subsidies it received. He also argued that the departure showed "the ineffectiveness of government propping up industry".

The PM is correct in saying that subsidies and other forms of protection don't result in an industry that is sustainable in the long term. I don't, however, accept his claim that the public is fuming over the downfall of Holden.

When former PM Abbott in 2013 (sensibly) declared that there would be no more increases in taxpayer assistance to Holden and the other car manufacturers, the writing was on the wall. By late 2017 the last major manufacturing plant had shut down, and the demise of the Holden brand was all but guaranteed. The public knew full well that all this was coming, and generally felt that enough was enough in terms of never-ending mega-subsidies to the industry.

The reality is that Australia had no comparative advantage in car-making. Our fragmented industry (with its small right-hand-drive market) always had insufficient volume to be efficient, and was totally reliant on subsidies/protection for its continued existence. The industry should never have been encouraged in the first place. It is even claimed that it would have been cheaper for taxpayers to have given every Australian auto worker $1 million in 1985, and have called it quits.

Given Morrison's expressed view that subsidies and other protection don't produce a competitive industry, it's a pity that the Government doesn't practice what it preaches. Instead it (with Opposition support) is throwing even bigger subsidies at other industries, that the public knows will never be economically viable.

What in hell is Australia now doing building submarines and frigates, and paying more than double the going price (and losing tens of billions in the process)? Are we spending too much of our defence budget on submarines and anti-submarine frigates? And why is the Australian Government now spending millions in subsidies (admittedly a pittance by comparison) trying to grow a space industry? The only explanation that might account for such decision-making is that it is all just pork-barrelling (yet again) to gain votes in South Australia (where else?).

There are other unviable industries and projects (not necessarily based in SA), that are also propped-up by unwarranted subsidies. Why is our electricity system so expensive and in such a mess despite huge subsidies for new renewable capacity? Why is the Government committed to Snowy 2, when there are so many questions about its cost effectiveness?

The Australian Submarine Corporation (ASC) did not have the confidence of Senator David Johnston, when he was defence minister around 2014. "You wonder why I'm worried about ASC and what they're delivering to the Australian taxpayer. You wonder why I wouldn't trust them to build a canoe?" he said. The ASC was at least $350 million over budget in building three air warfare destroyer ships. "I'm being conservative, it's probably more than $600 million, but because the data is bad, I can't tell you," he said. "ASC was delivering no submarines in 2009 for $1 billion." Mr Johnston was sacked as defence minister (for daring to spoil a good pork-barrel) weeks after making the comments. He lost his seat in Parliament at the 2016 federal election.

(Johnston was not quite accurate with his cost figures. The predicted cost over-run for the Hobart class destroyers actually is now predicted to be much more (at least A$1.2 billion). The total cost, A$9.1 billion for 3 ships, is said to represent the world's most expensive build for this type and size of ship.)

The existing Collins Class submarines have been plagued with problems, though some in the RAN now claim that their problems have been largely sorted. They are a Swedish design fiddled with by ASC in Australia. An audit reported that the entire programme was beset with poor planning, lack of client-shipyard coordination, lack of performance vision, and poor craftsmanship. This resulted in immense reliability and performance problems. The subs spent most of their time in dry dock being maintained, and had at one time been deemed "louder than a rock band", despite submarines requiring stealth.

It seems most unwise for Australia to trust ASC with another major sub build.

The cost of building the new 12 French-designed submarines has reportedly crept up from an expected $50 billion three years ago to at least $80 billion. The cost to "sustain, update and upgrade" the submarines until 2080 was estimated to total a further $145 billion, when adjusted for inflation. Originally the French proposed to convert their nuclear-powered Barracuda design to diesel-electric propulsion. Now it seems that it will be a new diesel-electric design.

By comparison, the US Navy in December 2019 signed a US$22.2 billion contract for nine new 'Block V' Virginia Class fast attack nuclear submarines. The much cheaper US nuclear submarines will be built from 2025 to 2029. Our 12 will not arrive until between the mid-2030s and the early 2050s, by which time they risk being 'obsolete'. The exorbitant cost (2.35 times more to build each), delayed delivery, concerns about ASC, whether we actually need to order twelve, whether the subs have adequate range, and their performance relative to much faster nuclear submarines, have all raised serious doubts.

It has been leaked that breaking the submarine contract would involve a $404 million fee. This may be a justifiable price to pay to get out of an increasingly unattractive and expensive acquisition.

Australia will also acquire nine anti-submarine warfare frigates from the end of the next decade under a deal with (UK designer) BAE Systems worth A$35 billion (A$ 3.9 billion each or US$26 billion in total). The ships will be built by ASC Shipbuilding in South Australia, using local workers and Australian steel, under the Turnbull government's continuous naval shipbuilding programme.

The United Kingdom budgeted £8 billion (A$14.4 billion or A$1.8 billion each - less than half the cost of ours) around the same time for eight of BAE System's Type 26 frigates, the basis of its Australian design. In America, where Navantia and Fincantieri are bidding to build up to 20 guided missile frigates, the US Navy has put a price tag of $US950 million (A$1.265 billion each) for second and subsequent vessels (about one third of what the RAN is paying).

The chief executive who oversaw the construction in the 1990s of the navy's current fleet of frigates has raised concerns that Australian taxpayers are spending billions of dollars more than necessary. Dr John White's comments (which only state the obvious) follow a highly critical auditor-general's report which warned the Turnbull government that its shipbuilding program faced "high to extreme risks" of cost blow-outs and delays.

Our domestic submarine and naval shipbuilding industries (like our car industry) were always too small to be viable and cost-competitive. Given this and the industries' appalling past record, they should be closed down, except for a maintenance component. Buying these items overseas, at far less cost and with better timeliness and quality assurance, makes much more economic and military sense.

Both industries are completely reliant on Australian government purchases of their entirely uncompetitive products. At one time (around 2015) it was widely believed that many within the federal coalition wanted to facilitate the demise of the ASC. Pity they did not prevail over those (on both sides of politics) wanting to continue pork-barrelling South Australia. There might have been be a better chance of this happening (now that Christopher Pyne and Malcolm Turnbull have left the political scene), except that the government has signed contracts.

Electricity generation is another area of massive subsidy and waste, though the government-mandated switch to renewable electricity rather than protection from overseas competition is the real issue.

Australia is throwing up to $2.8 billion a year in subsidies at renewable energy. Despite this, our electricity consumers are still paying some of the highest electricity prices in the world. Australia has ruled out using nuclear energy, even though it is a far more cost-effective non-greenhouse alternative, and can provide continuous base-load power. The taxpayer is now subsidising some (previously viable) industries that are now uncompetitive because of expensive electricity.

The Alcoa smelter in Portland in Victoria receives substantial government subsidies following the end of cheap power (from the now closed Hazelwood electricity plant). It reportedly will continue operating, for now. The smelter received $200 million in Australian Government subsidies as part of a four-year package ending in 2021. Green groups also claim that the smelter also receives undisclosed cross-subsidies worth "up to $1 billion a year" from the State Government.

Tomago Aluminium, which consumes 10 per cent of NSW's power, told the NSW government that the viability of its plant is under threat unless power prices can be controlled. (The Tomago smelter produces 25 per cent of Australia's primary aluminium.) Mining giant Rio Tinto says its three Australian Aluminium smelters, which employ more than 2,600 workers, are not sustainable at current power prices.

Snowy 2.0 is a pumped storage project, which is supposed to provide a solution to the problem of storing excess renewable electricity for when it is needed. The federal government announced the project without a market assessment, cost-benefit analysis or indeed even a feasibility study.

When the former prime minister Malcolm Turnbull announced the project in March 2017, he said it would cost $2bn and be commissioned by 2021. This was revised upwards several times and, in April last year, a $5.1bn contract for partial construction was awarded. (This excludes the costs of transmission and other considerable expenses.) The main contractor recently claimed the project will take eight years to build, bringing us to 2027 before the full scheme is completed. Further delays and cost increases are anticipated.

Snowy Hydro 2.0 will be an expensive white elephant (says energy expert Bruce Mountain). He says the project will end up costing five times what it was supposed to, and take twice as long to build. It is commonly believed that the scheme was promoted only for reasons of political opportunism. Given disunity within the federal Coalition over energy policy, Snowy Hydro 2.0 seemed politically expedient because it involves neither coal, nuclear power, or further wind or solar capacity.

According to the Productivity Commission, government investment in electricity market assets raises several concerns: reduced pressure to resolve problems in market rules; possible pressure to keep prices down by reducing the return on the publicly-owned assets; and the potential for 'special deals' to be offered to some customers (e.g. Alcoa), which can lead to a cycle of on-going assistance. The fundamental problem is said to be that investors do not have sufficient confidence in the market rules to make long-term energy investments.

The latest idea for future industry involves the space industry.

The Australian Government is looking to grow Australia's space industry by 20,000 jobs into a $12 billion sector by 2030 (three times its current size according to the Government), starting with its new national space headquarters in (guess where?) Adelaide. PM Morrison announced the $41 million Adelaide space facility in 2018, and the Coalition is investing a total of $700 million into the sector, including $150 million into Australian businesses so they can pick up more work by partnering with NASA's Moon to Mars initiative.

The estimated US$400 billion space economy worldwide is still largely dominated by large aerospace and defence companies. Wall Street's consensus is that it will grow into a multi-trillion-dollar economy in the next 10 to 20 years.

The question for Australia is what elements of this can reasonably be expected to be served by Australian companies. Historically, our involvement has been mainly limited to satellite communications and support to NASA from our southern hemisphere location. It is also now 56 years since a rocket launch took place from Woomera SA, the start of Europe's ill-fated cooperative venture [European Launcher Development Organisation (ELDO)].

Two conclusions seem obvious. Firstly, the government seems to be in conflict with own advice not to engage in subsidising industries. Secondly it may be optimistic to assume that Australia will be able to attract a more substantial share of the world space industry, which is now a more mature industry in many northern hemisphere countries.

A further issue in industry assistance relates to our steel industry.

On the one hand our biggest steel producer, BlueScope Steel, has continually flagged concerns about high electricity prices in Australia and the reduced reliability of power supplies. Its CEO confirmed that, owing to high electricity and gas prices in Australia, BlueScope is spending US$700m (AU$1b) to expand its North Star steel mill in Ohio, USA.

At the same time the new owner of Arrium steelworks in Whyalla, SA (UK billionaire industrialist Sanjeev Gupta) launched a $1 billion, one-gigawatt renewable energy plan based in South Australia's mid-north, that he says will lead Australian industry's transition to more competitive power. The project will produce 280 megawatts of power and feature 780,000 solar panels, generating enough electricity for 96,000 homes. Mr Gupta has said that renewables offered the best future for energy-intensive industries, though the world has yet to see solar provide the capacity necessary to run arc furnaces 24/7.

Mr Gupta has a record of requiring public subsidies for his business ventures.

A $50 million grant was given to Arrium by the former state Labor government, when Gupta's GFG Alliance purchased the Whyalla steelworks (after it had collapsed owing $2.8 billion and leaving 7000 jobs at risk). Previous support for the steelworks had included wavering of mining royalties, protection through anti-dumping duties, assisted local procurement practices, and a 10 per cent pay cut agreed to by its workforce.

Gupta has since approached the federal government about the possibility of a public debt guarantee to facilitate expansion of the business. Gupta (who announced a $600 million expansion plan) has said ongoing support would likely be required from the South Australian and federal governments. He apparently also intends to float parts of his business on the Australian Securities Exchange.

The Scottish government, Reuters recently reported, guaranteed up to $1 billion in debts owed by Mr Gupta's loss-making aluminium plant. Overall, there are concerns about the size and murkiness of Gupta's companies and their financing arrangements, that raise questions about the long term sustainability of the steel industry at Whyalla.

Overall, economic theory broadly labels industry subsides as a distortion. So why do Australian governments persist with these policies?

Part of the reason for subsidising the submarine and naval ship-building industry seems to have been to make up for the demise of the car industry. The only problem is that the former industry seems to be even less efficient. In this country, subsidised non-viable industries always seem to disproportionately end up in South Australia, reflecting the pork-barrelling policies of left wing politicians and the "moderates" of the Liberal Party.