Saturday, April 15, 2006

Automotive Competitiveness & Investment Scheme

I have just read the Productivity Commission’s, Trade and Assistance Review 2004-05. One of its important conclusions is that, of the significant tax concessions awarded in 2004-05, the most significant is ACIS which accounted for more than a quarter of the $2 billion provided. Apart from this, the report says almost nothing about ACIS. It is strange! It recognises its importance but says little about it. In fact the Commission has not said much about ACIS since 2002! Darcy McCormack, Joe Sunderland and I first raised this issue at the 1998 Industry Economics Conference (here, p. 222) sponsored by the Productivity Commission. Why no rebuttal or reaction?

ACIS offers handouts to motor vehicle and components producers that are, subject to meeting very low production levels, fixed. For firms not considering an exit from these industries and which satisfy the mild minimum output levels there are no effects of output subsidies that are effectively fixed on incentives to export or produce. As all automobile manufacturers in Australia are foreign-owned such subsidies seem to comprise a direct transfer from the Australian taxpayer to foreign shareholders. They do not seem sensible if you are trying to scale back protection.

Background. ACIS is a multi-billion dollar assistance scheme aimed at encouraging new investment and innovation in the Australian automotive industry given reduced tariffs on passenger motor vehicles and automotive components from 15% to 10% in 2005 and a planned reduction to 5% in 2010. ACIS rewards investment, R&D, and the production of eligible motor vehicles through the issue of import duty credits to scheme participants. These credits can be used to discharge customs duty on eligible automotive imports, or alternatively, can be sold for income. To assist the industry in adjusting to this lower tariff in 2010, ACIS will be extended until 2015.

A guide to ACIS is provided by AusIndustry which has the responsibility for administering it. To be eligible firms must produce minimum numbers of cars, components or automotive services.

Motor vehicle producers can claim import duty credits of 25% of the value of production of motor vehicles, engines and engine components and 10% of the value of new investment in plant and equipment. Parts and service providers can claim import duty credit equal to 25% of the value of new investment in plant and equipment and 45% of the value of investment in R&D.

Comment. It is important to note here that credits are not based on exports or some ,measure of performance but on total production and investment for total production. It is important also to understand that benefits are 'capped' in two ways.
  • The total benefits payable under ACIS will be capped at $2 billion over five years from January 2006. To ensure consistency with this cap modulation of credits is required.
  • No firm will be permitted to receive benefits exceeding 5% of its annual sales in the preceding year.
While the investment incentives may spur innovation it is difficult to see how this type of output-based assistance will. Provided a firm knows it will meet the minimum output target it will know in advance that its handout is capped. Why should it export more or improve its market position. For firms at the margin who might well be considering exiting the industry (e.g. Mitsubishi Australia) the cash handout may mean that they will not shut down. But the benefits are paid to all firms including highly profitable businesses such as Toyota Australia (Toyota’s profits being computed in my accounting, cum-transfer-pricing adjustments).

The Productivity Commission spends much of its time these days on daft projects such as privatizing biodiversity to resolve our stark conservation problems. One wonders if they feel they are running out of markets to liberalise! A much more useful task would be to comprehensively assess ACIS and the extent to which claimed tariff reductions in the passenger motor vehicle sector have passed on net benefits to the Australian consumer.

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