Introduction
I'm assured that South Australia is a heartening place for a Resources Minister to be.
I'm not so sure about the climate for a Treasury Minister, particularly one with specific responsibility for tax!
I believe Ian Macfarlane is a regular visitor here and certainly he sends his apologies for having to miss this visit.
Ian did want me to pass on a message that his gravelly tones - he is called "Chainsaw" for good reason - won't be affected by his current situation.
And he will be back as your loud and vocal advocate within a couple of weeks.
In deference to the diversity of interests represented by those attending this function, I hope to touch firstly on some issues affecting mining and exploration, especially incentives for exploration, then a few words about petroleum resources, energy reform, the pharmaceutical assistance program, and last but not least, challenges facing tourism.
South Australia has a vast mineral sector - from valuable metallics such as copper and gold, to construction material and vital energy sources of oil, gas and coal.
But to mine it - you have to firstly find it.
"Exploration expenditure" is a loud and definite cry in this state and throughout the resources sector.
Exploration
I appreciate there has been a general decline in world-wide exploration rates since the mid-1990s.
However South Australia appears to be bucking that trend.
In 2001-02 mineral exploration expenditure here totalled about $32 million. Up from $29 million the year before.
A recent Energy Investment Conference also forecast a 25% jump in South Australia's exploration expenditure for this year.
Indeed expenditure for the first two quarters of this year has reached just over $20 million.
The Howard Government does not take your investment, risk and success in exploration for granted.
Last year we announced the development of a Mineral Exploration Action Agenda.
This is an industry-driven response which will map the mining sector's exploration future.
And the Prosser Inquiry is furthering investigation of possible exploration incentives. It is currently conducting public hearings around the country in the lead-up to delivering a final report later this year.
I appreciate the Prosser report could represent a turning point of sorts for the country's explorers.
In fact, Ian's office suggested I bring a large jar to collect a dollar every time the topic of "flow-through shares" was raised this evening.
So let me throw in the first coin - as well as discussing other aspects of tax reform.
Flow-through Shares
Being the Minister for Revenue and Assistant Treasurer, I am most concerned about the efficiency and effectiveness of any tax measure.
I am aware that there is a growing interest in examining whether a flow through shares scheme can help to raise capital for exploration activity.
Flow through shares allow shareholders to claim a deduction for expenditures undertaken at the company level.
This is not a standard feature of the company tax system.
Having said that, the Government is open to all proposals that seek to boost resources exploration. A flow through shares scheme is one of those that deserves serious consideration.
The starting point for consideration of an incentive flow through shares scheme is that it must be founded on the economic merit of the underlying resource activity and not rest predominantly on tax considerations.
The underlying objective of flow through shares is to assist exploration companies, particularly small companies, raise capital.
There is some evidence in a recent ABARE report commissioned by the Department of Industry, Tourism and Resources that such a scheme will help junior exploration companies to raise capital.
Although Australia has tried flow-through schemes on two previous occasions, both were abandoned as having failed to meet their objectives.
As you would know, Canada has operated a flow through share scheme for mineral and petroleum exploration and development since 1954.
The Canadian model provides a useful, if not conclusive, set of comparisons.
It is interesting that Canada's exploration performance over the 1990's did not match Australia's.
A 1994 evaluation of the scheme by the Canadian Department of Finance gave a mixed report.
It identified some significant negatives including that activity generated by the scheme was not particularly high.
Perhaps more concerning, it found that the industry experienced inflated exploration
drilling costs and declines in project quality.
I want to make it clear that the Canadian experience may not be definitive.
Certainly the extent to which we can learn by these experiences is relevant.
We remain interested in the idea and the Prosser Inquiry has been set up to examine the barriers to investment in mineral and petroleum exploration in Australia.
After all, flow through shares are simply a mechanism that may be capable of delivering a shot in the arm for capital raising for exploration, albeit one with large revenue numbers attached.
Previous costings by the ATO suggest it would cost around $1 billion over four years if applied to small and medium sized corporations (with a market capitalisation of less than $30m).
The Prosser Inquiry will provide industry with an opportunity to make the case for a flow through incentive scheme. In particular, the case will need to address:
- Why the two previous incentive schemes in Australia failed;
- Why historically, exploration peaked in Australia outside the periods of the incentive schemes;
- How such an incentive scheme can be effectively managed or ring-fenced so that it is not a vehicle for tax abuse; and
- What evidence is there incentives will produce commitment to long term investment relying on the market price of the resources and not merely generate tax motivated investments.
Obviously these are matters to be agitated with the Prosser committee. The analysis also needs to take account of the taxation reforms and lower tax rates this Government has already delivered.
The time for rhetoric is over. It is now time for industry to test these claims and put up its case.
Review of International Taxation Arrangements
I might just mention one other important area of tax reform that might be of considerable interest to people here. That is the Review of International Taxation Arrangements, generally known as RITA.
In this year's Budget, the Government announced a package of reforms to improve the competitiveness of Australian companies with offshore operations.
Active business income earned by a foreign subsidiary and repatriated to an Australian parent will be tax-free.
So a subsidiary making profits from mining in a foreign country won't pay Australian tax. When the profits are paid to its Australian parent, no Australian tax will be paid.
Likewise, where an Australian group sells a foreign subsidiary that operates an active business, the profit on sale will not be subject to capital gains tax.
The Government will also reduce the costs of complying with the controlled foreign company rules.
The Government has also announced a move towards a more residence based treaty policy, a key feature of which would involve reducing withholding tax rate limits consistent with the direction set in the US Protocol.
All of these initiatives reflect the commitment this Government has to business and industry - which, itself, is a recognition of the enormous contribution business and industry makes to Australia as a community and as an economy.
Petroleum Resources
Moving back to Ian's portfolio, there is clearly a growing interest in exploring Australia's southern potential for petroleum.
Recent discoveries in the Otway Basin as well as new developments in deep-water technology have added to this interest.
Currently there are seven petroleum exploration permits for offshore South Australia - the focus of which is in frontier acreage in the Great Australian Bight.
Of course any discoveries which may result in the Bight will have direct benefits for the Eyre Peninsula economy through both investment and employment.
This development of new basins is fundamental to addressing Australia's declining liquid fuel self sufficiency.
And I understand Ian recently announced the release of 2 more exploration areas in this region as part of the 2003 offshore release process.
The role of frontier exploration areas in meeting Australia's future energy needs is well recognised by the Howard Government.
In the recent budget we announced an injection of an additional $61 million to Geoscience Australia.
90% of all oil exploration success in Australia since World War II has been directly underpinned by geoscience advice given by Geoscience Australia.
That information will continue to flow free-of-charge to promote investment in offshore exploration of untested, frontier areas.
Energy Reform
Possibly the greatest challenge in the industry portfolio at the moment is reform of the national energy market.
The Howard Government is determined to maintain a supply of competitively priced energy.
It is quite simply one of our biggest business advantages - one of the reasons we rode out the Asian Crash of the late '90s.
But Australia's energy demand is forecast to grow by between 35 and 50% over the next 20 years.
Meeting this massive growth in demand poses significant challenges to industry, investors and governments.
Australia will tackle our energy concerns in a way that makes sure our policies satisfy the objectives of sustaining the environment and also maintaining economic growth.
The Howard Government is mindful that Australia needs a "game plan" to bring together the array of issues that affect the supply and use of energy today.
The Prime Minister has announced the establishment of a Ministerial Oversight Committee on Energy, which he will chair.
And the setting-up of a high level Energy Task Force confirms energy market reform as one of the highest priorities for the Government's third term.
We need a National Energy Policy to meet industry's calls for more practical governance, greater harmony of government regulatory arrangements, and improved inter-connectability and security of supply.
To that end Ian has proposed a new model of governance which includes a single, national regulator.
A single body under the umbrella of the ACCC to replace about 13 bodies which currently confuse the energy investment scene.
The end goal for this reform is to ensure future investment and thereby guarantee supply.
Australia will require an injection of about $20 Billion into energy infrastructure over the next decade to meet our growing demand for electricity and gas.
At the rate we're going, supply of these basics to living can NOT be taken for granted.
We have to think and plan ahead.
P3 - Pharmaceuticals Partnerships Program
And that's certainly what the new pharmaceuticals assistance program is all about - planning and researching for the future.
The current program - PIIP - will be replaced in 2004 by the new Pharmaceuticals Partnerships Program or P3.
P3 will offer $150 million over five years to encourage pharmaceuticals industry research and development in Australia.
It will be administered by an independent body and will be a competitive grants program.
P3 changes the emphasis of assistance in this industry somewhat. It's designed to capitalise on the world class biotechnology, health and medical research undertaken in Australia.
The objective is to also attract high value, international R&D to Australia to develop medicines for global markets.
Most importantly, P3 will encourage multinational firms to develop partnerships with local players.
This new program doubles the amount of R&D funding which is available under the PIIP scheme and for every additional dollar of R&D spending by firms, the Government will provide 30 cents.
Innovation
R&D or innovation - along with investment and international competitiveness - is one of the planks of our industry policy.
The Industry portfolio manages about 30 business assistance programs - that's help for everyone from car producers to carpet manufacturers.
Through our innovation statement, Backing Australia's Ability, we've committed $3 billion over five years to science, research and innovation.
Programs like the R&D Tax Concession, R&D Start, Commercialising Emerging Technologies (COMET) - and the Biotechnology Innovation Fund (BIF).
Under BIF, South Australian companies like Medvet Science and Micronix are getting a helping hand with their innovative ideas.
Projects that include development of a diagnosis for a pneumonia-like illness in foals and a revolutionary device for placement of catheters.
Through the R&D Start Program we assist about 200 companies a year with grants and loans to help commercialisation of research outcomes.
On a larger scale, the Government is handing the automotive industry more than a decade of certainty.
The new automotive program will provide stronger incentives for industry research and development with $150 million to be set aside in a dedicated R&D Fund.
All in all the Government will provide $4.2 billion - making sure the industry continues on its path to an internationally competitive future between now and 2015.
The post 2005 policy is already making a difference to the industry in South Australia.
Holden will employ 1000 extra people at its Elizabeth facility to begin a third shift from mid-2003.
This massive expansion program will enable Holden to pursue new export opportunities - increasing the number of models it produces at Elizabeth, from 28 to 35.
Mitsubishi also has substantial plans for its South Australian operations.
Last year, it announced a major new investment including a global R&D centre, towards which the Commonwealth will provide $35 million.
This means the creation of around 900 manufacturing jobs and 300 jobs in the new R&D centre - as well as the obvious flow-on effects for the local automotive supply chain.
Tourism
Can I finish where all roads appear to lead at the moment - tourism.
The tourism sector is a fully-fledged industry directly contributing 4.7 per cent - or $31.8 billion - to Australia's gross domestic product.
In 2000-01 tourists consumed $71.2 billion in goods and services - 76% of that was by domestic holiday-makers.
A heartening fact when you consider the challenges now facing the industry.
A series of shocks has seen a new paradigm emerge for international travel.
In the past the focus has been on volume, we are now facing a future where we have to earn more dollars from fewer international tourists.
Future growth will need to be focused on yield rather than "profitless volume".
And this is the focus of the Tourism Green Paper which was released by Joe Hockey on Thursday.
The Paper lays down options for a medium to long term strategy to steer the Australian tourism industry through new circumstances as they arise.
It seeks to better position the industry against future shocks by making it more flexible and attuned to sustainable profitability.
The Government is encouraging submissions from stakeholders before 18 July 2003.
Conclusion
I must say I have enjoyed speaking to you this evening.
Industry policy makes a very interesting diversion from my own portfolio - although, to borrow from the energy debate, there is more inter-connectivity that you might imagine.
I can see there are many challenging issues and I wish you all the best in pursuing your goals - although, in saying that, I am aware that, as a Treasury Minister, I may, from your point of view, appear to be one of the hurdles you need to leap over to achieve some of your goals.
Particularly given my role as Minister for Revenue - that is, Minister for getting it in, not Minister for dishing it out!
However, I am well aware of the challenge of making good industry policy and giving business and investors the incentives and assistance they require whilst keeping an eye on the budget bottom line.
Let me just say that far from being the handbrake on industry which is often the way Treasury Ministers are portrayed, I like to think that we are in the business of enabling industry to achieve its goals.
It is worth repeating the well chosen words of Victor Kiam, the famous American businessman, who said:
"Entrepreneurs are simply those who understand that there is little difference between obstacle and opportunity and are able to turn both to their advantage".
I hope by now we are in furious agreement about how we will continue to build a better nation for future generations of Australians to enjoy.
Thank you.