KGB: Ian Macfarlane

The federal industry minister tells Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

• Why the government isn’t rushing into delivering more auto handouts
• Why it makes sense to include science in the industry portfolio
• How the coal seam gas industry has positively transformed rural Queensland
• Thousands of jobs will be lost in New South Wales if it doesn't follow Queensland's example
• Where the gas price will sit for the next decade
• The role of innovation and reform in managing future energy demand
• CSG will play a role in meeting the carbon emissions reduction target but we must get used to higher prices

Alan Kohler: Welcome Minister.

Ian Macfarlane: Pleasure.

AK: Minister, do we need a car industry?

IM: Well, we do. Australia relies on the car industry for far more than just making cars. It’s an industry that is full of innovation. It’s full of electronics. It’s got fashion components. It’s obviously a great training ground for schools. And Australia has benefitted immensely over the past decades from having an industry here in Australia. Yes, it does face some challenges, but we shouldn’t be daunted by those challenges. We need to make sure that the industry repositions itself to be internationally competitive.

AK: So, will the Abbott Government continue to subsidise the car industry?

IM: Well, that depends on the proposal that comes forward as a result of the Productivity Commission review. Now, I know there are some such as South Australian premier Jay Weatherill, who’s very anxious to get a decision tomorrow, but the reality is that any decision Australia makes or any consideration we make in terms of putting further taxpayers’ dollars into the car industry needs to be based on a tight economic case. Yes, it’s an important industry, but if it doesn’t stack up financially, then it’s just going to be money down a black hole.

AK: Minister, the reality of life is that it really is going to be based on a negotiation. What do they need to stay here? What can you afford? It’s basically a negotiation. And also, Holden have said that they can’t hang around waiting for the Productivity Commission. They want to make a decision before then.

IM: Well, that’s Holden’s issue. It’s not my issue. I will be putting forward a proposal to Cabinet sometime in late April or May and that will be based on what comes back from the Productivity Commission and also from the discussions that I have with the industry and with my colleagues etc. And it won’t just cover Holden. Obviously the plan I’m looking at needs to cover both Holden and Toyota along with the research, development and design capacity of Ford, which will remain open long after the plant is shut, and of course just as important – and some might even say more importantly – the component industry here in Australia.

So Holden is certainly important, but in terms of the process I’m not setting out to meet Holden’s timetable, I’m setting out to put forward a proposal which I have some chance of getting support for from Cabinet. If Holden needs an answer by Christmas, then I’m not going to be able to give that to them. My understanding is that Holden is prepared to wait and once we wipe away the rhetoric and politics that Jay Weatherill was injecting into this argument in South Australia, I think you’ll find that the industry is prepared to wait for a proper solution, not just a patch-up job which is what we’ve seen from the previous Labor government over the last six years.

Robert Gottliebsen: Minister, can I put a scenario to you that in the mining investment business we’re going to see something like a 150,000 jobs lost – no one’s fault, it’s just the end of that period – around about 2015-2016, in roughly that area. In the retail area a series of events are taking place which will mean a similar jobs loss. In the public service – give me a number, but it’ll be substantial, and that includes state public service, not just federal public service. And then in the motor industry you’re looking at, probably with indirect jobs, a similar amount – about 150,000 jobs. So basically you’re looking at, let’s say, 500,000 – but let’s be conservative and make it between 350,000 and 400,000.

But I put to you that if you do shut the motor industry down, then you’ll get the blame for 300,000 to 400,000 jobs lost – some of it unfairly of course, it’s not all motor – and you’ll be a one-term government.

IM: Well that’s a political speculation based on a whole heap of predictions. Now I don’t deal in predictions. What I’m saying is that I’m setting out to put in place a plan for the car industry which will sustain the industry into the next decade and that plan needs to include – as I’ve said repeatedly before – not only a sound economic model, it needs to see the car producers in Australia exporting at least 30 per cent of their production. It needs to ensure that some of the issues that the industry currently faces, that make it uncompetitive, are addressed.

So the first of those of course is the carbon tax. We need to get rid of that. It adds hundreds of dollars to the cost of producing a vehicle in Australia. We need to ensure, as I’ve already discussed with some of the union representatives in the Australian Manufacturing Workers Union, it needs a realistic approach on conditions. Wages I think need to be maintained. In reality what we’ve got to do is lift production and productivity, so those issues will have to be addressed. Companies will have to address issues. There is a whole range of issues about government buying Australian cars.

When I get that all together, I’ll be dealing with a plan based around making the industry sustainable, not dealing with some scenario, which you’ve painted fairly graphically but which is yet to be borne out. Yes, there are challenges in terms of unemployment. Yes, there will be job losses in the resource industry as construction phases finish. But as I was discussing with the deputy premier Peter Ryan from Victoria the other day, whilst people tend to highlight jobs being lost – let’s pick an example in Geelong – let’s talk about the number of jobs being created in Cotton On, for instance, a company down there that deals in cotton clothing, has created 300 jobs in Geelong. And that gets very little highlighting.

So the challenge for us is firstly, let’s deal with the car industry as a sustainable industry. If it’s not going to be sustainable, there’s no point in propping up your number 150,000 jobs, whether it’s 42 or a 150. We need to make sure the plan has the rigour to make that industry sustainable or just simply exacerbating the problem that we have now and that is that in Australian cars, our share of the market is falling and that’s making the industry even more uncompetitive because we don’t have the throughput to sustain a competitive industry.

RG: Will you use the fringe benefit concessions as part of your package?

IM: Well, we’ve already reversed the fringe benefit tax.

RG: Would it be easier to catch a local car component and, say, if you’re using that scheme to buy cars, it’s got to be Toyota or Holden?

IM: Well look, I’m not going to get into a game of speculating what might be in the package. I don’t rule anything out and I don’t rule anything in. I’m getting a lot of advice. I got some very good advice last night in an email from Will Hagon who is a car enthusiast and someone who I respect as an industry commentator. Everyone’s putting forward their ideas. All those ideas are going into the mix. What comes out the other end will be a plan which will make the industry long-term sustainable. But I’m not going to try and piece it together bit by bit. I’m going to make sure I’ve got a comprehensive plan that I can take to Cabinet and hopefully convince them that this is where we need to go with the car industry in the long term.

Stephen Bartholomeusz: Ian, as Industry Minister in a department that’s been seminally reconstructed since the election, you seem to have a very wide-ranging brief. But how much of the economy are you responsible for?

IM: Well, of the non-service economy you could probably argue about three quarters of it. So along with Malcolm Turnbull and with Barnaby Joyce in the productive sector we share that between us in agriculture, communications and industry. So yes, there’s no argument it’s a huge portfolio. In overall terms it’s probably less than a quarter, but you’ve got the banking, finance, health sectors and so on.

It’s a big sector but the synergies between the sectors are real and I know some people said, well, why put science with resources? The reality is that innovation and science are what are going to take the resource industry to the next phase. If you’ve got those two working together, obviously you’ve got a head start. You put manufacturing in there as a supplier to the industries and use the science to make them more competitive and more productive, then that all fits together and of course with all those jobs in that combined group, then obviously having apprenticeships and skills fits with that as well.

So I’m really excited about the portfolio. I don’t for a moment understate how big it is, but that’s part of the challenge. That’s why you take on the opportunity to be a Cabinet minister. I was Cabinet minister for a portfolio about two thirds of the size of this. I had been for six years, so I had the experience in most of the portfolio and I certainly have a keen interest in skills and science.

SB: As I understand it, the industries that you are responsible for today were covered by a number of ministers and parliamentary secretaries in the previous government. Can one person – or I suppose there are two of you – cover such a range of industries and challenges?

IM: Well, I’d have to say that with the exception of the resources sector the previous ministers didn’t do much of a job. I don’t think my single ability is the issue, it’s how well firstly my department performs and my personal advisory staff perform. We have a very large department – very experienced, highly respected – so there’s no argument about it having the resources to do it. In terms of our staff, we’ve put together a very experienced, wide-ranging group of people with a wide range of skills, and I’m confident that between them and the department they’ll be able to give me the advice which I can then take in to Cabinet to ensure this area is well serviced. I don’t think anyone in the sector is complaining that they can’t get in to see me or they can’t get their issues raised. The real challenge is how well you do what you’ve got to do. And, as I say, with six years of experience as a Cabinet minister already under my belt I had the opportunity to hit the ground running and get going. And so that’s exactly what we’re doing.

AK: Clearly in the industry side of your portfolio the car industry is the biggest thing you’ve got on your desk. Is it fair to say in resources the biggest thing is shale gas and the development of Australia’s shale resources?

IM: Well, the biggest thing in the resources side of the portfolio is gas supply into New South Wales. Now, shale gas will be part of that solution in time. CSG or coal seam gas will be the solution in the short term, though. Getting both those sectors going – particularly in New South Wales – is a very immediate and real priority. I mean, no one seems to argue now – although they did 3.5 years ago when I started warning them – no one argues now that New South Wales will face a gas crisis perhaps as soon as 18 months. And there’s no doubt that once the three sets of [LNG] trains are operating, there will be very little gas coming down to NSW in terms of the CSG industry in Queensland.

So the reality is that we’re working through the issue of CSG supply in NSW. We have a task group who are already out there talking to some of the interested parties and the stakeholders. We are seeing a little less rhetoric and a little more science coming into the argument in NSW and I think the challenge is to ensure that Santos and AGL Energy both get their prospects going.

Now, as I’ve said repeatedly, that needs to be in places like the Pilliga Forest and then the less densely populated areas, away from houses, away from townships, where we can prove to the residents in NSW that an industry in Queensland which employs 31,000 people, supplies 90 per cent of the gas into Brisbane and has 4000 farmers signed up in co-existence agreements where farmers are reaping in some cases millions of dollars in benefits from the industry, that scenario in Queensland could easily be transposed into NSW. That’s the challenge at the moment. We know the gas is there. We’ve just got to get it out of the ground.

AK: But the Hunter Valley farmers are in implacable, aren’t they?

IM: Well, I’m not suggesting we start in the Hunter Valley. I’m suggesting we start in the Pilliga Forest. Out there the goannas carry water bottles and it’s not exactly prime agricultural land by any stretch of the imagination. And where the geology is known, the science around the water is known, where a company like Santos has a long-standing reputation of doing the right thing in Queensland, we need to start drilling wells and getting a full appraisal of the gas that’s there.

So, in time perhaps as we’ve seen in Queensland – and CSG is a very matter-of-fact industry in Queensland – as I say, the vast bulk of farmers support it, the vast bulk of rural communities support it. It’s the biggest change I have ever seen in rural Queensland in my life. I went into agri-politics to improve the lot of regional Queenslanders, regional Australians. I’ve never seen anything make such a positive contribution to the standard of living in rural Queensland as the CSG industry. Now, getting that message into NSW is proving challenging, but in the end if we don’t do it and if we don’t get the industry started, jobs will be lost in Newcastle, Sydney and Wollongong and I don’t mean hundreds, I mean thousands of jobs lost.

SB: Ian, even if the NSW government were to look more kindly on CSG exploration and production in the state, it would take some years to actually get meaningful supplies of gas to flow. There’s been a lot of calls for reservation of gas to address the NSW issue. I take it you’ve got some strong views on this?

IM: Well, let me just say two things. Firstly, I understand the urgency in getting started in NSW and I’m not asking the NSW government to relax any conditions. They’ve put in place a set of conditions and even after all of that the issues around densely populated areas and two-kilometre buffers – all of which I support – there is still ample opportunity to extract gas. In terms of reservation, you can’t reserve something you haven’t got and what NSW hasn’t got is gas, so they haven’t got anything to reserve in the first place. Reservation is not the solution in New South Wales. Getting gas supply is the solution in New South Wales. You won’t get it by interfering in the market by threatening reservation or doing whatever you can because, as I say, there’s no gas to reserve. You need to get this gas proven, up and out of the ground.

RG: Ian, let’s assume you do that and the gas is proven and it can be supplied to NSW, is the price at which it’s economic, say, twice or three times the current price? And if that’s so, what effect will that have on gas-using industries?

IM: Well, no doubt the price of east coast gas is going to become the international price and you can argue what that price is. Some would say the cashback price out of Gladstone is about $12 a gigajoule. In reality I think, though, that for domestic supply if we can keep the price of gas around $7 to $8 for domestic supply, then I think you’ll see plenty of gas produced. Two things about gas supply in NSW: firstly, gas produced there will be used there; and secondly, by far the biggest single impact now on producing gas out of coal seam is the rules and regulations surrounding it. It can be clearly demonstrated that that’s adding about $3 a gigajoule to the price of gas. So, what I’m saying is yes the price of gas has gone up, but some of that is the cost of ensuring that it’s done in a safe and proper way. So, anyone thinking that there’s $3 or $4 gas around in Australia needs to understand that either through the impact of international prices or through the cost of regulation and ensuring that the industry develops in a safe way, the reality is that we’re looking at $7 to $8 dollar gas and we’re looking at that long term when you realise that the cost of getting it out of the ground is probably close to $5.50, before you pipe it anywhere.

RG: What effect will that have on the industry development in New South Wales?

IM: Well, obviously industries based around low-cost gas are going to find that very difficult, but some industries and take [Dyno] Nobel for instance, they are looking at the opportunity of going out and partnering and developing their own gas supplies and finding lower-cost gas supplies and then using that to keep their business going. But if your business model is about making urea with $3 gas, there’s no doubt that that industry is going to be challenged. But that’s the reality of the world and we talked about industries needing to adjust. There are other options for those industries and some of them will turn back to alternative sources of fuel, but the reality is that for the foreseeable future, certainly for the next decade, you would have to expect gas prices north of $6.50.

SB: Ian, we’ve also seen a surge in electricity prices in recent years, which has partly been attributed to the decisions that have been made by the national energy regulators and incentives regulated business to gold plate. Is there anything that can be done to unwind some of that?

IM: Well, in terms of unwinding, probably not because the investments have been made in the network. And you’re right, they’ve added extraordinary cost to the industry. I think we need to look at this in a prospective way and say, right, what do we need to do to make the electricity industry a competitive industry and also ensure that some of this so-called gold plating – and I’m not going to argue whether it exists or not, I’m just going to say to ensure that work is done in the electricity industry when it is needed to be done – so capital investment, I’m saying.

So, the first step in that is making an effective body, the Australian Energy Regulator. The states are arguing that that needs to be separated away from the Australian Competition and Consumer Commission, and the ACCC retains the consumer protection component of the AER, but the AER – who’s turned into a standalone body – has the resources, has the wherewithal, has the expertise to ensure that its decisions are upheld, are not challenged in court as they have been, to ensure that it is able to regulate the industry in a proper way. So, that’s the first step.

The second step is to ensure that, where possible, the industry is privatised and becomes a competitive industry and we’re seeing that happening in NSW with generation and ultimately I think with transmission. I believe that’ll happen in Queensland and so that brings some competition to that part of the market. We need to also ensure that there are network management systems, so to use the jargon, a smart grid is established so that we’re not building extra poles and wires for a demand that only occurs for a couple of hours a day, five days a year. So we need to ensure that we have good technology in that area and innovation is going to play a role in that.

Now, I’m getting the state ministers for energy to get up on December 13 and it’s going to be on the table and we’re going to get on with the job that I didn’t have a chance to finish six years ago, and which the Labor Party basically dropped the ball on. We need energy market reform. We need a system where the industry can talk to the ministers and I’ll be establishing that as part of that meeting structure on the 13th there’ll be representatives from the industry there and we’ll talk about the issues and we’ll set out to do them, without the politics and without all the distractions of trying to introduce a carbon tax, as the Labor Party did, forgetting about the real game and as a result electricity prices have doubled in parts of Australia in that six-year period.

AK: The Coalition government has a big interest in cheap gas as well because without cheaper gas there’s no way that we’re going to meet the carbon emissions reduction target the Coalition has in its policy.

IM: Well, we do have an interest in cheap gas, but more importantly we have an interest in gas and as I say the reality is that without LNG in Gladstone, this CSG would still be sitting in the ground in Chinchilla and Roma and all areas around that. It’s only by exporting this gas at a Pacific Rim price that it is economical to exploit CSG. Coal seam gas is an extraordinarily expensive way to get gas out of the ground compared to natural gas. I was talking to someone the other day, they had five natural gas wells running a train in the Middle East. To run a train in gas, then you’ll need about 1500 wells. Each of those wells has to be drilled, cased, connected, plumbed, monitored – so coal seam gas is not cheap to start with. So, saying 'Well we need cheap gas at $3.50', coal seam gas will stay in the ground at $3.50. We have to adjust the industry to using gas at a higher price. But I take your point on emissions. Gas will play an important part, but as I say the industry will be using it at a higher price than perhaps they’re historically used to.

AK: Thanks for joining us, Minister.

IM: It’s been an absolute pleasure.

SB: Thank you, Ian.