Working the Nation s Assets

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Stanley Morris
5 years ago
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1 Working the Nation s Assets IBISWorld Newsletter June 2013 Phil Ruthven, Chairman In the middle of 2012, $8.0 trillion in assets were at work in the Australian economy to produce almost $1.5 trillion of final goods and services (GDP). So each dollar of sunk investment generated less than $0.20 of product: a bit lazy, it would seem. However, this low ratio is partly explained by the fact that $4.5 trillion (57%) of the assets were in the form of dwellings (land and buildings), and none of their output is counted in the economy apart from an imputed rent. Interestingly, it is estimated that over $500 billion of goods and services are produced (and consumed) within households each year, but this value is only counted in official statistics when these activities are outsourced. Indeed, we are doing a lot more of that these days; in , we have outsourced over $290 billion of services that we once did on a DIY basis, and these are now included in the $1.5 trillion of GDP. So we are more than one-third of the way through the process of creating more leisure at home via outsourcing very important when a lot of the nine million households have two income earners. If the $500 billion worth of activities taking place in dwellings were counted, then our households would be generating $0.11 for each dollar invested in their dwellings. Still very little. But then again, a dwelling is probably seen as a place of rest these days rather than a working business asset. Of course this is changing with the trend towards working from home (including teleworking) on a partial or even full-time basis. So that low ratio is likely to improve over time. So what does our official economy produce? The first chart shows the output for 2012.

2 Australia s Industry Mix Shares of GDP in current price terms, % Quinary Hospitality 2.3% Health 6.0% Arts & 0.8% Recreation Other 1.7% 46.6% Quaternary Info Media & Communications Rental & Real Estate O Ship Dwells Prof. & Tech Serv Admin. & Support Govt Admin Ind. Taxes 2.8% 9.5% 2.1% 7.5% 6.4% 2.4% 4.8% 6.9% 4.2% GDP $1.5 trillion 12.0% Primary 2.2% 9.8% 16.9% Secondary Manufacturing 7.2% Utilities 2.3% Construction 7.4% 13.7% Tertiary Wholesaling 4.4% Retailing 4.4% Transport 4.9% SOURCE: ABS AND IBISWORLD 29/05/13 Most of the output is in the form of services, as it is in all advanced economies these days. The goods-based sectors the primary and secondary sectors accounted for just 29% of GDP in that year. If the tertiary (goods distributing) sector, itself a service sector, is added then the proportion rises to just under 43% for goods-related sectors. But the lion s share (57%) of the economy these days is in the quaternary and quinary service sectors, and this share is growing. These fast-growing sectors require less capital to produce wealth. This is patently clear in the second chart, which shows the spread of the $3.5 trillion of capital used (excluding dwellings).

3 Australia s Industry Mix Shares of total assets (excluding dwellings), June % Quinary Hospitality 1.9% Health 3.5% Arts & 1.9% Recreation Other 0.5% 29.8% Quaternary Media/Telecom Rental & Real Estate Prof. & Tech Serv Admin. & Support Govt Admin 4.3% 3.8% 7.9% 1.9% 0.7% 7.0% 4.2% Assets $3.5 trillion 27.2% Primary 12.4% 14.8% 18.4% Secondary Manufacturing 6.2% Utilities 10.6% Construction 1.6% 16.8% Tertiary Wholesaling 2.4% Retailing 2.2% Transport 12.2% SOURCE: ABS AND IBISWORLD 29/05//13 Producing over half our GDP, the quaternary and quinary sectors used less than 38% of business assets and, interestingly, were more profitable in the process. is the most capital-intensive or capital-lazy industry in the country, and has very low profitably. The massive ownership of land and low-use farm equipment explains the problem practices that have been eschewed by most other industries, which have turned to leasing such assets so that their capital can be more actively employed in IP and growth capital. Utilities (electricity, gas and water) and transport are close behind in capital-intensiveness and are equally unprofitable, as we will see shortly.

4 The next two charts explore the profitability of Australian industries. The first chart shows the return on net assets (after tax) over a five-year period for almost 1,200 of the nation s largest enterprises, which account for over half its GDP. The second chart looks at all the enterprises in the economy both government and private for just one year and with profitability measured as gross profit (pre-tax) on total assets. Both tell much the same story in terms of profitability of the private sector versus the government sector. Australian Profitability By Major Industries Return on shareholder funds (after tax) Top 1,170 businesses, 5 years to Arts & Recreation Communications Retail Trade Hospitality Wholesale Trade Private Sector Prop & Bus Serv Average Utilities Construction Manufacturing Personal & Other Transport & Storage All Government Health & Community Agric, Forestry, Fishing Government Admin Percent SOURCE: IBISWORLD 29/05/13

5 Australian Profitability By Major Industries Net profit (before tax) on total assets All businesses, Construction Prof/Tech Serv Other Retail Trade W'Sale/Marketers Media/Telecom Hospitality Private Sector Admin. Manufacturing All Industries Health Transport Utilities All Government Arts & Recreartion Rental/Real Est O'Ship Dwells Public Adm /Def Most profitable Top 5 industries 42.3 have significant mixed incomes 31.0 (wages + profits) so distort 21.9 true profitability (excludes ownership of dewllings) Net profit is GOS (including 0.3 mixed incomes), less depreciation Percent SOURCE: IBISWORLD 29/05/13 While the private sector s profitability is three times that of the government sector in the third chart, it is over four times more profitable in the fourth chart. We have almost $1.4 trillion of assets invested in utilities, transport, public administration and safety, education, health and arts and recreation; the overwhelming majority is government owned across the three levels of government. This is 39% of all business assets, with an average profitability of a low 2.3% return (before tax) on total assets employed. If these assets were able to perform at the private sector level, the additional profit (or surplus ) would be some $119 billion. This total will never be realised, but some of it is gettable. Maybe half these assets are off limits for traditional if not also logical reasons, including the nature of public administration, defence and safety (not in the market economy); much of the health and passenger transport industries (subsidisation); most education (ditto); and arts and recreation (community good). However, there is no excuse for utilities to underperform, nor freight transport, tertiary education and parts of other government-owned industries. New utilities, such as fast broadband, can be excused for not achieving private sector profitability for a decade or more, just as they were excused in the cases of electricity, gas, water and sewerage in the early 20th century when their absence would have stymied progress in the Industrial Age, and damned the nation to a backwater economy.

6 But there is no excuse for poor, negligible and even negative productivity across the government-dominated industries, as has been the case for years if not decades. The final chart reveals the low productivity of government-dominated sectors such as utilities, health and education all with negative productivity growth over the five years to 2012 and the low productivity growth of public administration and safety, and arts and recreation. Productivity Growth By Industry Value added per hour worked, average change 5 years to December 2012 Recovery from drought 6.6 Construction 2.9 Retail Trade 2.8 Wholesale Trade 2.6 Prof & Tech Serv 2.4 Telecom & Media Very long term 2.2 Transport average Arts & Recreation GDP 1.3 Rental & Real Est 1.2 Manufacturing 0.9 Public Adm/Safety 0.8 Pers & Other Serv Health -0.8 Hospitality -0.8 Admin Serv -1.3 Utilities % per annum SOURCE: IBISWORLD 29/05/13 The only government-dominated industry to perform well over that five-year period was transport, which still had very low profitability. The nation has too many lazy assets, too much low productivity, and most, but not all, of these problems are government ones. We should no longer accept this situation, not when we have a chronic deficit pattern in government budgets taking us slowly towards the same boiling-frog syndrome problem that is so manifest now across the European Union, Japan and the United States. We do not need to create our own local version of the global financial crisis. Copyright IBISWorld Pty Ltd 2013 IBISWorld makes no representation to any other person with regard to the completeness or accuracy of the data or information contained herein, and it accepts no responsibility and disclaims all liability (save for liability that cannot be lawfully disclaimed) for loss or damage whatsoever suffered or incurred by any other person resulting from the use of, or reliance upon, the data or information contained herein. Copyright in this publication is owned by IBISWorld Pty Ltd. In the event that the purchaser uses or quotes from the material in this publication in papers, reports, or opinions prepared for any other person it is agreed that it will be sourced to: IBISWorld Pty Ltd.

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