25/07/2006 - 22:00

Real winners to play on a level field

25/07/2006 - 22:00

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A small number of big companies, including Motorola, Westpac and defence contractor Raytheon, have received multi-million dollar incentives from the state government to establish or expand their Western Australian operations.

Real winners to play on a level field

In December 2000, at the height of the dot.com technology boom, Motorola signed an incentive package with the Court government that most companies could only dream about.

The state government agreed to provide up to $5.4 million over five years to help the US communications company establish a software engineering centre in Nedlands.

The state also agreed, but has never previously announced, that it would reimburse about $2.5 million in payroll tax payments.

And the University of Western Australia agreed to construct a new building, at a cost of just more than $16 million, to lease to Motorola.

Motorola was one of several big international technology companies to negotiate financial assistance packages with the Court and Gallop governments.

Computing giant IBM signed a $1.9 million deal in 2001, while defence technology supplier Raytheon signed a $3 million deal in 2003.

A handful of Australian companies has also managed to negotiate special financial assistance packages, including banking giant Westpac and towel manufacturer Canning Vale Weaving Mills.

The provision of state government assistance to large and profitable companies begs at least two questions.

Firstly, how do these companies qualify for assistance packages that are not generally available?

And secondly, what return has the state obtained for this assistance?

This kind of assistance is underpinned by a belief that the recipients will deliver special strategic value to the state, such as high-tech jobs or stimulating broader industry development.

Former deputy premier Hendy Cowan justified the Motorola deal as “another step down the path to a more knowledge-based economy in WA”.

And former state development minister Clive Brown said the presence of IBM and Motorola would be a definite selling point in seeking to attract more international investment to WA.

Science and Innovation Minister Francis Logan said last month that Raytheon’s contribution to local industry and exports was “central to the development of the state economy”.

Mr Logan emphasised that Raytheon’s presence would support further developments in the marine and defence industries in WA.

Despite his professed support for Raytheon, Mr Logan told an industry briefing earlier this month that picking winners was not the best approach.

“The floor is littered with those that haven’t worked,” he said “It’s far better that we approach industry support through a level playing field, through infrastructure.”

This stance is strongly supported by the Chamber of Commerce and Industry of WA, which believes attempts to pick winners is misguided.

Mr Logan’s caution is borne out by WA’s experience over the past few years.

In 2003, the Gallop government agreed to provide up to $1.8 million to local company Synergy Regional, which planned to establish three call centres in the South West. Just 18 months later, the company went bust.

The Court government had a similar experience with Ansett Airlines. In 2000, it agreed to provide $2.2 million to support the opening of a call centre in Joondalup, but one year later the company went into administration.

Another big recipient of state government assistance was Canning Vale Weaving Mills, which initially expanded its operations but decided this month to close its manufacturing activities after concluding that rising costs made it impossible to compete with imports.

In contrast to these failures, companies including Kailis & France Foods and Mediterranean Shipping have substantially expanded their WA operations after obtaining state assistance.

Stellar Call Centres and Westpac Bank have become big employers in Perth’s northern suburbs after establishing call centres at Joondalup with state government support, while Motorola, IBM and Raytheon have all become substantial employers of university graduates.

The question for policy makers is whether the extra jobs would have been created in WA, even if the government assistance was not provided.

The government assistance is not granted lightly; the proposals are subject to close scrutiny and the performance of the recipients is monitored against defined targets.

Westpac, for instance, has to maintain at least 150 jobs (on a full-time equivalent basis) to qualify for payroll tax refunds. In order to obtain the maximum assistance of $4.6 million it must physically expand its call centre by 50 per cent and add a further 75 staff after five years.

This would be of little comfort to other employers, and particularly call centre operators, who do not qualify for payroll tax refunds or any other form of assistance.

The Motorola deal was sold on the basis that the company would employ 200 software engineers within five years and that, in addition, its presence in WA would stimulate high-tech research and business opportunities.

In practice, Motorola’s WA operation was slow to gain traction, not helped by the rising value of the Australian dollar (which made it less competitive internationally) and upheaval in the global technology sector.

However, it now employs 125 people and is adding about 30 people every year, mostly from WA universities.

The company expects to have 150 staff by the end of next year, which falls short of the government’s stated goal but is within the range specified in its assistance package.

The IBM deal involved the state government providing nearly $2 million over five years, in return for the company increasing staffing at its software development centre in West Perth, which started in the 1980s. The deal achieved its stated goal, with employment increasing from 81 positions to “in excess of 165 people” by December last year.

Like Motorola, IBM also had to contend with the sharp rise in the value of the dollar from about US55 cents in 2001 to about US75 cents presently.

This made it much harder to compete with other in-house R&D centres around the world for the internal contracts that underpin the West Perth centre’s existence.

Partly offsetting this was a key competitive edge: IBM (and Motorola) agree that Perth’s lifestyle is a big plus when it comes to recruiting and retaining skilled staff at reasonable prices.

IBM’s West Perth centre is now well established as one of a handful of research labs around the world focused on mainframe systems.

The current challenge facing IBM is to maintain staffing levels. If staff numbers fall below 165, IBM could be forced to reimburse the entire $1.91 million in government assistance.

Its cause will have been helped by the acquisition earlier this year of US company Micromuse, which had a 40-person research lab in Perth courtesy of its earlier acquisition of Perth-born company Network Harmoni.

The Gallop government agreed in 2003 to offer a $3 million assistance package over five years to US defence contractor Raytheon. The assistance was an incentive to encourage Raytheon to transfer part of its naval systems division to new premises at Henderson, south of Perth.

The deal was sold on the basis Raytheon would employ 165 engineers and graduates within five years.

The government agreement also includes capital expenditure and research and development targets, which have not been disclosed.

Raytheon’s Collins site executive WA Richard Drain said the company had exceeded its first year targets and currently had about 85 staff.

While the company was pursuing a number of new opportunities, most of its staff were working on maintenance support of the weapons system on the Collins Class submarines.

This begs the critical question whether Raytheon would have transferred its operations to WA anyway, given that Garden Island is home base for the Collin Class submarines and most of the maintenance is performed in WA?

Only Raytheon knows whether it would have transferred its operations to WA without the government assistance but it deflects questions on this topic to the government.

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