Entrepreneurs suffer the slings and arrows of government policy mistakes.
JULIA Gillard might have consolidated her position as prime minister after negotiating a peace deal with major miners, but one significant Perth entrepreneur claims that the policy she created puts far more at risk than the resource super profits tax ever threatened.
Tertiary education provider Navitas founder and CEO Rod Jones believes the federal government’s “inept” handling of issues around international students could cost the country billions in export revenue and tens of thousands of jobs.
Mr Jones said the federal government, led by Ms Gillard in her previous role as education minister, had overreacted to rogue educational institutions that were financially unviable and, in numerous cases, simply visa shops.
“The impact of what the government is doing in education at the moment is going to cost, conservatively, $3 billion in export income and at least 20,000 jobs,” Mr Jones said.
“It doesn’t even get a rating.
“I am being hit by sovereign risk at the moment by the government (in Australia) failing to take account of what is happening.”
This is from a businessman who has operations across the world, from wealthy Western nations such as the UK, Canada, and soon the US, to less developed places like Kenya, Sri Lanka and Indonesia.
He admits he’s learned the hard way that what works in Australia doesn’t necessarily cross borders and fit snugly into the systems of other nations, even those of Commonwealth countries.
But he is astounded that the biggest thing hitting his business in his home country is poor policy at a time when he already has to worry about the strong Australian dollar.
Mr Jones is one of several Perth entrepreneurs who revealed the impact of government decision making on their businesses at a special luncheon forum held by WA Business News.
Four entrepreneurs who had been through the Ernst & Young Entrepreneur of the Year Awards process – Mr Jones, Austal executive chairman John Rothwell, Australian Finance Group managing director Brett McKeon and NGIS managing director Paul Farrell – shared their thoughts on how their businesses were performing.
All of them have created successful businesses, three of which have extended their operations overseas.
But even established successful businesses like these are encountering significant problems in their sector as a result of government policy in Australia, mainly in the federal sphere.
Navitas’ core business is helping predominantly foreign students qualify to enter university. It was founded in Perth in the 1990s and now operates across the world. In the past year, this sector was embroiled in controversy when a string of attacks against Indian students in Melbourne cascaded into a clampdown on schools that in many cases turned out to be little more than just visa shops.
Among the federal government moves was a requirement for schools teaching foreign students to be reregistered, a laborious task that will take at least until the end of this year to complete.
Mr Jones believes this strategy is an overreaction that affects the whole industry, not just the shonky providers. His reaction bears a strong resemblance to those in the mining industry after the introduction of the RSPT, except he is on his own in the market and there is no public attention on the issue despite the significance of what is occurring to the nation’s fourth biggest export industry.
In another mirror of the mining executives’ actions, Mr Jones said he confronted the then-minister at a John Curtin Institute of Public Policy event last month but Ms Gillard simply didn’t answer the questions put to her.
“There were clearly inappropriate students allowed into Australia,” Mr Jones said.
“The issues were created by government.
“It was the policies of migration and skilled migration. They could have gone in and fixed things up very easily through those regulations which already existed.”
Ironically, Navitas will be less affected by a fall of student numbers in Australia because it is well represented in other countries that compete with Australia in the field of international education.
“We’ll pick them up somewhere else, but I am Australian and want this to be the cornerstone (of Navitas’s operation). We are watching kids moving away and my real worry is they will never come back.”
The issue of the government impact was raised in terms of sovereign risk and how much that was seen as an issue for businesses that were stepping beyond their home market for the first time.
Yet most of the entrepreneurs’ complaints about policy related to Australia. The difficulties they tended to encounter in their main offshore markets – typically Western democracies – were more about understanding the cultural and legal differences, which could be quite marked despite the apparent closeness of Australia to places such as the UK, US and Canada.
Much like Mr Jones, AFG chief Brett McKeon takes issue with the government on how he believes it has mishandled a crisis in a way that affects an industry much more than his own business. In some ways he has benefitted from the poor policy.
Mr McKeon, who admits to a brash expansion across the Nullarbor when he was too young and naive to realise how much he had bitten off, now runs Australia’s biggest mortgage broking company.
AFG works with and competes against the powerful banks that dominate the market. From that vantage point he has had a very good view of the way government reacted to the threat posed by the global financial crisis.
“Through the GFC we wrote record volumes of business,” Mr McKeon said.
“Probably part of that was poor federal government policy and reacting to the situation in the wrong way.
“Some of the banks took the opportunity to get rid of their competition.”
Mr McKeon said government had allowed a reduction in competition with the mergers of Commonwealth Bank with Bankwest and Westpac with St George Bank. He hinted that those banks were still too busy digesting their acquisitions that they were not as open for business as they might have been if there was more competition.
At the same time, the federal government hamstrung the banks’ capacity to lend by not allowing them to increase margins.
Instead of banks naturally lifting their rates to reflect the higher cost and added risk of the period, the Reserve Bank ultimately raised its rates, resulting in higher costs for customers without any improvement in profitability for the banks.
“That (margin increase) would have meant they could sell their debt more readily offshore, bring the liquidity back home and allow businesses that needed funding to get funding,” Mr McKeon said.
“Instead we have only two banks really lending in any reasonable fashion. They (the government) misjudged the situation.
“We have an interesting symbiotic relationship with the banks but I am very much Australian and Western Australian, and in our most critical sector I hate to see the lack of competition in the market and government policy has generated this lack of competition.
“We were in a far healthier position going into the GFC than anyone else because we had more regulation and more guidelines but coming out of it we have less banks per capita and less banking options than any other country, including the ones that led us into the disaster. That is disgraceful.”
Unlike the other entrepreneurs at the WA Business News forum, Mr McKeon has no plans to expand offshore. Instead, he is looking at restarting a securitisation program that was put on hold for the GFC and getting into land development.
“We hope to have 1,000 lots coming on the market over the next three to four years,” Mr McKeon told the forum.
“A lot of that is coming off our balance sheet but we might morph that model in the future because we have about 300,000 existing customers.”
However, Mr McKeon revealed that there was one government policy from which his business had carved a comfortable niche – subsidised solar panels.
With most small business unable to fund the purchase of such expensive equipment, AFG has been funding installers with the up-front capital they need and then getting repaid by the government, which is less risky for the financier and offers a comfortable margin.
Among the entrepreneurs at the forum, Paul Farrell probably runs the smallest company, NGIS, a location-based IT services company.
Mr Farrell admits the GFC prompted his company to withdraw back to its Perth base to focus on a market that showed more resilience than the east. It has also scaled down an Asian operation based in Hong Kong.
Nevertheless, NGIS has also gone against the flow to some extent. It has moved to establish an office in Los Angeles from where it hopes to sell a product to US utilities, a market 100 times bigger than in Australia where NGIS already supplies the majority of energy providers.
Mr Farrell said the company had sought to raise $1 million in equity capital to fund its next phase of development but had ended up getting the money it needed from existing shareholders and debt.
“Most people look at us and say what are you doing that for?” he said.
“It is establishing ourselves in a market with a product we knew.”
But even this small and flexible company has issues with the impact of government policy. For starters, the RSPT has been damaging recently because many of NGIS’s customers are resource companies.
But an issue that Mr Farrell is worried about is the drastic reduction of commercialisation funding.
“What really hurt us was when the federal government came out and cut funding for innovation,” Mr Farrell said.
“We are a company that needs funding for innovation; a Perth-based company a long, long way from anywhere. If we are going to be competitive overseas then taking a me-too offering doesn’t cut it, that requires R&D and innovation.”
Shipbuilder John Rothwell has had his own interactions with government which have made him, at times, something of a headline act – in the main due to Austal’s employment of big numbers of apprentices and its leadership in manufacturing.
While Mr Rothwell has his own views on how immigration ought to be changed to get the right mix of skills we need, his comments at the forum were unique in that, rather than finding direct fault with Australia’s government, he highlighted the benefits he’d received from the US.
Austal’s main success came out of the fast ferry sector where it came to be a world leader by the end of the 1990s, supplying Asia, Europe and the Middle East. But protectionist US laws and the opportunities in the American defence sector have prompted his company to establish a shipyard in the Gulf of Mexico.
Mr Rothwell highlights the fact that, unlike the other entrepreneurs who had sought out new markets to enter, Austal was actually invited by the US Navy to a high-level discussion it was hosting on the future of naval transport.
While nothing came initially of that foray, it prompted him to realise that there was a big market for Austal, which had rare expertise in a field that defence experts lacked.
That opportunity to supply the military has developed significantly, with Austal now bidding not just for fast freighter contracts but also for a special kind of combat ship, reminiscent of the stealth fighter, which revolutionised air warfare.
With Europe in the doldrums, Austal expects there to be some reduction in its Australian workforce, whereas the Alabama operation is set to rise from around 1,500 employees today to as much as 2,500 in the next 12-18 months.
But is not just the forward planning of the US military that has helped guide Mr Rothwell’s strategic thinking; there has also been significant funding from all levels of government in the US.
“I am a free-market person, fundamentally,” he said.
“But the US Navy gave us $33.6 million in grants for our facility, the state of Alabama tipped in about $20 million and the city or county came in with $5 million.”
Mr Rothwell said much of that came from federal government stimulus money linked to the recovery from Hurricane Katrina, with the military given the funds to use as it saw fit. In turn, the navy recognised that by assisting with the development of shipbuilding facilities it would reduce its own costs in the future.
“If they want you there they will pay for you,” he said.
In contrast, Mr Rothwell is scathing of the federal government’s mining tax grab (in the guise of the RSPT at the time of the forum discussion), which he believes sends out all the wrong signals to industry, even if he is not directly affected.
“When you are business planning that justifies X amount of capital to get a return on,” he said.
“To then to say ‘ha ha, got you, you guys are making too much money’ that is appalling.”
Austal – John Rothwell
Executive chairman Austal
Austal was founded by John Rothwell and three colleagues in 1988 as a manufacturer of aluminium boats for the international commercial market. Within five years the company was a world leader in fast-ferry manufacturing, mainly via the Chinese market. Today it builds giant fast ferries of up to 130m servicing markets around the world. As part of a diversification strategy, Austal now has a big facility in the US where it is manufacturing transport and combat vessels for the military.
Navitas – Rod Jones
CEO Navitas
Navitas was founded by Rod Jones and Peter Larsen in the early 1990s offering international students a way to meet the requirements of Australian university entry. The first joint venture was with Edith Cowan University in 1994 under the banner of Perth Institute for Technology. The company listed as IBT in 2004 and changed its name to Navitas in 2007. Last year, it had 30,000 students in markets spanning Asia, the UK, Africa and North America. Its product range has diversified to include workforce entry and student recruitment.
AFG – Brett McKeon
Managing director Australian Finance Group
AFG was established in 1994 to provide products and services to the growing mortgage origination sector. Today it is the biggest player in that market, serving 2,500 members processing about $2 billion in mortgage finance each month via 650 products. Its total portfolio is $50 billion in mortgage finance. AFG has diversified to offer commercial finance, insurance, property development and own-brand lending products.
NGIS – Paul Farrell
Managing director NGIS Australia
NGIS started life in Perth in 1993 and now has three Australian offices, a Hong Kong subsidiary and fledgling outlet in Los Angeles. Its specialty is geographic information systems applications. NGIS supplies sectors such as mining, agriculture and utilities with products that link spatial or location information with business systems.