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Industry Comment

Construction contracts

Chamber of Commerce and Industry of WA

The Housing and Works Minister’s new policy capping the number of contracts or percentage share of the government housing budget that any one builder or subcontractor can be awarded does not make sense.

Given the unconvincing arguments offered by the Minister, taxpayers can only assume that the reasons for it are political or ideological, or both.

The new policy is wrong in principle and undermines the credibility of the Government’s claim that it is strapped for cash under the current federal-state funding arrangements.

The State Government cannot argue that it does not have enough funds for community works and then pay extra to engage uncompetitive tenderers.

By limiting contract eligibility to those with fewer previous successes, the Government will find itself having to turn its back on the best tenders and to award contracts to higher-priced bids.

The WA building sector is large, diverse, experienced and competitive, and it is hard to see a case for taxpayers having to pay a premium for extra risk management for fear of a monopoly.

The public housing program is a small part of the total housing sector.

Provided the Government administers its tendering process fairly and prudently, it does not have to be a concern that one contractor earns a strong share of the work.

Industry holds growing concerns about other shifts in contracting policy, which again suggest a disturbing willingness on the part of the Government to pay more for services than is necessary.

Most typical are the instances where services which have sensibly been contracted out to the private sector, are being brought back in-house.

When properly accounted, such changes lead almost invariably to a higher cost outcome and take the State backwards in terms of public expenditure and efficiency.

Construction Contractors Association of WA

The WA Government policy of ensuring a spread of Department of Housing & Works construction contracts is a case of spreading responsibility for implementing best practice across a broad spectrum of contractors.

The Government’s objectives in promoting best practice, particularly in health and safety and training, are commendable.

The Government remains obligated to ensure the financial and logistical capacity of contractors is adequate to undertake works in the appropriate contract levels.

International Financial Reporting Standards

KPMG

The proposed adoption of international financial reporting standards will significantly impact mining company balance sheets and income statements.

Conversion to these standards is much more than an accounting compliance issue and poses a number of significant and complex questions that mining business leaders need to consider now.

Companies will need to start work now to meet tight timeframes for the changes, which include requirements relating to financial instruments, rehabilitation provisions, impairment of assets, accounting for employee options, and defined benefit plans.

Impairment tests are expected to increase earnings volatility and there will be far greater transparency on the basis of impairment testing.

Companies will have the burden of disclosing sensitivity assumptions used to assess recoverable amount.

It will also be critical to assess the impact of the standards on potential derivative transactions and on derivatives that will still exist as at opening balance sheet date.

Companies will be required to maintain sufficient documentation to prove a hedge is effective at inception and at each reporting date.

Many companies will need to reflect the standards in opening balance sheets as early as July 1 next year.

Mandatory Renewable Energy Target Scheme

Australian Gas Association

While the Commonwealth’s Mandatory Renewable Energy Target Scheme is achieving some modest greenhouse gas emission abatement, various studies show this is coming at an unnecessarily high cost to the economy.

The Scheme is poorly targeted to achieve greenhouse emission abatement because it specifically targets renewable technologies rather than achievements in greenhouse abatement.

It also diverts investment away from other ‘low emission’ but unsubsidised energy sources, such as natural gas, thereby undermining the broader national objective of greenhouse emission abatement.

The MRET should be abolished once a commitment is made to a national emissions trading regime, such as that proposed by last year’s Energy Market Review.

In the interim, the MRET of two per cent should be capped and transitional arrangements should be implemented to recognise those investments already made to comply with this target.

Electrically boosted solar water heaters should be removed from receiving incentives under the scheme.

AGA research has found that equivalent abatement could be achieved at approximately one third the cost of MRET’s incentives for electric-boosted solar water heaters, by encouraging the uptake of direct five-star natural gas water heaters instead, through an alternate policy option.

These heaters have much lower purchase and operating costs.

The aggregate cost of achieving a 525,000 tonne reduction in greenhouse emissions through MRET’s solar water heater assistance over 20 years is estimated to be around $10.1 million. This compares with an aggregate cost of $3.4 million for an equivalent natural gas five-star water heater scenario.

An ACIL Tasman study has shown that the MRET cost of greenhouse abatement for electricity in 2010 is expected to be in the range between $44 and $73 per tonne of carbon dioxide, compared with an ACIL Tasman emissions trading scenario cost of $31.60 per tonne.

WA State Budget

Chamber of Commerce and Industry of WA

The further bout of unwelcome stamp duty slugs will have a distinctly adverse effect on business, which will shoulder much of the additional $180 million to be collected.

The hikes could have been avoided, a consequence of Government still not being tough enough on public sector spending, and its inability to bring the health sector, in particular, under control.

Had the Government delivered on its previous two budgets, the stamp duty increases might not have been necessary.

The Government has made commendable progress in establishing a framework for reviewing expenditure and has been successful in reining in the annual growth in outlays, but the program is running behind with the scale of savings promised in the last election yet to be achieved.

Analysis indicates the Government has oversold its difficulties this year, and the tax effect is probably $100 million more than is needed.

WA is now challenging Victoria to be ranked as the second highest taxing state after New South Wales.

Chamber of Minerals and Energy of WA

The WA State Budget is a budget for the community, reflecting the Government’s social priorities for health, education, and law and order.

It has recognised the cornerstone role of the resources sector to the growth and development of the WA economy, and the Government has made progress in achieving a healthy surplus of $178 million while retaining its AAA credit rating.

However expenditure last year exceeded the ambitious 1.8 per cent forecast, reaching 4.7 per cent.

Expenditure growth also outpaced revenue growth, and is estimated to do the same in 2003-4.

Increases in State levies and user charges to the industry through the increase in State stamp duties are of concern.

The resources sector already provides significant input to the Western Australian economy.

Increasing Government charges will erode the attractiveness of WA for investment.

Pastoralists and Graziers’ Association of WA

Stamp duty increases on property sales and insurance premiums, almost $7 million cut from the Department of Agriculture, and uncertainty over regional road funding are of concern.

Cutting the Department of Agriculture’s budget by millions of dollars will place a massive extra strain on essential services such as farm research and agriculture protection, which are already below viable levels.

The 25 per cent stamp duty increase on insurance premiums and a 15 per cent increase on property conveyancing is a cruel impost on farm businesses, because of the already substantial increases in farm insurance costs and the high cost of transferring property ownership.

The Treasurer has acknowledged the crumbling state of WA’s rural electricity grids and has committed $30 million to address the problem. Time will tell if this amount is sufficient.

Rural communities will be concerned to see they get a fair share of this year’s $565 million road funding allocation.

Mr Ripper has placed a lot of emphasis on drought and dairy deregulation costs as the reasons for lower levels of rural funding, but it remains to be seen if this government’s preference for ‘city over the bush’ carries through.

Standard & Poor’s

WA’s budget projections are consistent with the state’s AAA rating, but the government is cutting things pretty fine.

The budget shows the state’s financial performance weakening in fiscal 2004, with a smaller operating surplus and a larger cash deficit than in fiscal 2003, before improving in later years.

Windfall revenue gains in fiscal 2003 have resulted in the estimate of net debt at the end of fiscal 2003 to be significantly below previous estimates.

Rather than allowing the improved net debt position to flow through to lower net debt than previously estimated for fiscal 2004, the government is spending the windfall and ramping debt back up nearly to its previous estimate.

This has allowed the government to announce some significant spending initiatives, both in recurrent spending and capital spending.

However, the government has also made some tough decisions, and partly funded the spending by new revenue and saving initiatives.

The government’s deliverance of its revenue and saving initiatives are the key to it meeting its fiscal targets, particularly in delivering the fiscal improvement forecast in fiscal 2006 and 2007.

The government’s commitment to the target of keeping total non-financial public sector net debt to below 47 per cent of revenue is an important indicator of its commitment to fiscal discipline.

Based on the current projections, the government will meet this target.

However, the government is facing some pressure, as it is cutting the target pretty fine.

It will take a blow-out in finances of only about A$400 million in fiscal 2005 to breach the self-imposed debt limit.

Such a blow-out would not be difficult to achieve in the current uncertain environment.

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