No longer the Wild West

  • Date:01 Feb 2014
  • Type:Company Director Magazine
Domini Stuart discovers that despite peaking commodity prices and other challenges, the potential for Western Australia’s economy should not be underestimated.

Western Australia (WA) had the fastest-performing economy over the past decade and Michael McNulty GAICD, Deloitte’s WA managing partner, expects the state to retain the title for at least another 10 years.

“We’re seeing a lot of negative press about mining, but it’s important not to underestimate its continuing role in the economy,” he says.

“Productive capacity is still increasing, particularly in iron ore, and many mining companies are still growing and highly profitable.”

McNulty sees an opportunity for WA to build a global centre of excellence around floating liquefied natural gas and there are many onshore and offshore areas yet to be explored.

“It’s said that wells are sunk in Texas for 100,000 barrels yet there are reserves of millions of barrels in WA,” says Clinton Bradbury GAICD, director of corporate advisory at WACAR – West Australian Corporate Acquisition Register.

Investments in oil and gas have years left to run and in the meantime, there is a burgeoning opportunity for related services. “These require a lot of technical expertise and projects like GE’s new technology and learning complex are being developed to provide the necessary skills and training,” continues Bradbury.

Dean Hely MAICD, managing partner of Lavan Legal (Twitter @lavanlegal), sees non-resource business opportunities as the next frontier for WA.

“Agriculture, for example, is a mature market in its current form, but it will see substantial growth as a result of our proximity to substantial Asian markets,” he says. “Large Asian companies are showing increasing interest in buying or developing projects in WA. We’re seeing developments like the Ord River project opening up. And, in the last budget, the state government committed $300 million to the sector.”

WA is increasingly regarded as a good place to do business.

“The state government has been working to promote this over a long period and it’s now paying off,” says Hely. “It also helps that we’re only a five-hour flight from Singapore and in the same time zone as numerous countries and cities in the Asian region.”

However, overall economic performance in 2014 and beyond will depend on international conditions. “These have two main dimensions,” says Rod Tyers, Winthrop Professor of Economics at the University of Western Australia (Twitter @UWABusSchool).

“First, China is undergoing a major policy transition from a regime dependent on exports and investment for its growth to one that depends more on growth in home consumption. This transition requires difficult reforms in those sectors that satisfy domestic demand, namely heavy manufacturing and services, along with reforms of population and internal migration policy. There is uncertainty about the advent and depth of these reforms because established interests opposing them are now within the Communist Party of China. It is, however, likely that they will proceed and that stable growth will continue, albeit at a slower pace.

“Second, the performance of the Chinese, and therefore the Australian, economies depends on reform of macroeconomic policy in the US, Europe and Japan. It is likely that the US ‘taper’ that winds back unconventional monetary policy will bring forth similar transitions in Europe and Japan and that this will see some financial exodus from Asia and Australia as investment returns rise, particularly in the US. If the transition in the US is managed successfully, the associated slump in investment in China and Australia will be followed by a return to growth as US income grows and its trade picks up. Because China’s performance will come to depend less on the US and Europe, and because Australia and WA are so closely linked to East Asia, the state is likely to be insulated to some extent from associated fluctuations.”

Challenges Ahead
The past few years have been marked by an unprecedented number of capital projects. Many of these are now moving into the operations phase, creating challenges and opportunities for directors.

“Companies exposed to the capital projects component should be thinking about how they’re going to diversify into other operations,” says McNulty. “This is the case in every area from mining, engineering and marine services through to catering and accommodation.”

A push for lower costs is also extending down the value chain.

“I think this is the thing most likely to be keeping directors awake at night,” says Matt Judkins, Deloitte Access Economics’ WA Leader. “It’s time for them to be proactive in making sure their own shop is in order. They need to be as efficient as possible so that when people come looking for rate reductions, they’re ready for them.”

The end of a minority government should bring greater certainty to WA and a consequent upturn in sentiment. However, Tyers believes the tax policy changes planned by the federal government will advantage WA’s mining and energy industries only marginally.

“The federal momentum towards tax reforms that absorb royalty incomes and WA’s declining share of its GST revenue are unlikely to abate, posing problems for infrastructure funding in the long term,” he says. “This said, WA state governments of both political persuasions have been comparatively efficient in delivering infrastructure services in urban areas and recently, also in rural centres.”

As WA matures, Bradbury sees a marked rise in the number of international companies looking for extended distribution agreements, joint ventures or acquisition opportunities.

“I consider this to be a challenge for directors because the business environment is becoming increasingly complex and more of us are finding ourselves in positions with cross-jurisdictional settings,” he says. “It’s also creating opportunities as the vertical integration favoured by many international companies can allow directors to unlock great strategic value in their companies. The challenge here is making sure you’re well-advised and appropriately equipped.”

But in terms of the carbon and mining taxes, he believes the horse has bolted.

“They have undermined confidence in some industries and in my opinion, none has suffered more than junior miners,” says Bradbury. “These rely on being able to attract equity investments, but for the majority, the uncertainty has meant the capital markets are closed.”

Calling WA Home
WA’s reputation as an expensive place to do business may change if the shift from construction to production eases the cost of labour.
 
However, Bradbury would still advise directors to be conservative in estimating sales and liberal in estimating costs.

“Another key consideration is opportunity cost,” he says. “WA resource industries are maturing quickly and coming in from scratch can put you at a significant disadvantage in the market. Some companies are using strategic acquisitions as a fast way of securing local knowledge and relationships.”

Western Australians tend to favour local businesses or businesses with a long-term commitment to the state, over east coast people who fly in and out.

“We’ve had companies set up shop in a boom, leave when it falls away and then try to pick up where they left off when another boom comes around, but Western Australians have long memories,” says McNulty.

Hely cautions against underestimating the potential of the state, its businesses or its business leaders.

“For a long time, WA has been viewed as the Wild West,” he says. “But business here is becoming more sophisticated with quality leadership and an eye on opportunities in Asia and Africa as well as on the east coast. I think the biggest mistake people make is coming into Perth with a ‘we know best’ attitude. In all negotiations, both parties should show and receive respect. After that, business is business.”