14/06/2013 - 07:08

History of cheap money for industry

14/06/2013 - 07:08

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Car subsidies not the only one-way deals out there.

Federal governments past and present have been criticised for the generous deals that have handed over billions to car manufacturers without seemingly holding them to account.

But are state governments any smarter?

In the past, iron ore producers have promised to produce steel as part of the mining deals struck with the state government.

After decades of iron ore mining we have yet to see a steel industry. Instead, we have seen two botched attempts at value adding by the major producers – BHP Billiton dropped $4 billion on its short-lived Boodarie Iron hot briquetted iron plant at Port Hedland, while Rio Tinto wasted $400 million on its ill-fated HIsmelt pig iron plant at Kwinana.

From what I understand, both companies seem to think these failed attempts lived up to the agreement they committed to.

Perhaps they have covered themselves and the fine print is correct, but it seems odd that a state agreement would demand a company in receipt of taxpayer largesse would have a go at some new, risky technology, and that it would be alright if it failed.

That isn’t value adding or a steel industry – it is a farce.

The irony is that BHP’s effort came just at the end of a period of cheap gas, when we had abundant fuel at low prices due to state subsidies that underwrote the LNG business when it started up in the 1980s. In the current era of high energy prices, the lack of a steel industry built on cheap long-term gas supplies (BHP had a 15-year gas contract) represents a big missed opportunity.

Today, LNG producers can get huge prices for their gas and are not interested in the underdeveloped domestic gas market in this state.

The idea of reserving gas for domestic use is relatively new, but it too seems to receive lip service from the companies that have agreed to include it as part of their projects.

While they have begrudgingly signed up to offer as much as 15 per cent of their gas to the local market, they have done everything they can to make this difficult.

That is a self-fulfilling direction to take. If cheap and plentiful gas is hard to get, energy-dependent industry can’t grow, so when domestic supplies are offered later, the market has not developed to take it.

There seems little to discourage these businesses from overlooking what they said they would do.

Last week, ATCO Australia chief Steven Landry, a former car industry executive, told an audience at the most recent Business News Success & Leadership event that what has happened with Ford in Geelong would not have occurred in the US because such commitments come with terms and conditions, such as volume of employment and facility life.

“If those terms of the agreement are not met the car company takes penalties, financial penalties,” Mr Landry said.

Why don’t our governments ensure they have the same leverage?

Clearly our state governments, past and present, are not good at striking a deal or holding their partners to account when an agreement has been made.

It is easy to slam the feds for giving Ford millions of dollars only to discover that their Geelong factory will close, but are our state leaders any smarter?

 

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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