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New South Wales the growth driver; tropical Australia the great hope.

Northern australiaAs the new financial year begins in July, Australia is on an upsurge and is unexpectedly buoyant. Sensible and careful investors have had a good year, and the Abbott government has recovered a degree of self-confidence. It knows that if it keeps its head and ignores the wailing of much of the commentariat, it will have a chance of beating Bill Shorten’s Labor Party next year.
There are several reasons; few were predicted by the pundits.

Mike Baird, the popular premier of New South Wales, has engineered the transformation his state much more quickly than even his most ardent supporters predicted. In her first budget NSW treasurer Gladys Berejiklian was able to bring forward nearly $600 billion of infrastructure spending because the state is forecasting a $713m budget surplus for 2015-16.

Second, the drop in commodity prices, while having a serious impact on the mining and resources sector, has not been as severe as predicted, and the big miners, BHP Billiton and Rio, have managed the contraction well.

Perhaps most significantly, the Abbott government – having secured beneficial free trade agreements with China, Japan and South Korea – has produced a visionary White Paper on developing Northern Australia. After years of procrastination and unfulfilled promises by both major parties (mainly because there are few votes to be had in the scantily-populated tropical North) the Government has outlined a plan designed to knit Australia more closely with the populous countries South East Asia and further afield.
While the concepts of the White Paper, largely ignored by the mainstream Australian media, are potentially the most significant, the document is mainly aspirational (as was the Australia in the Asian Century White Paper published by the former Gillard government) and dependent on business and community support that might not be forthcoming.

New South Wales, and Sydney, will be the most immediate growth driver. After over a decade of indifferent governments, Mike Baird became premier upon the resignation of Barry O’Farrell in April 2014, and was elected in his own right in March this year. His Liberal government set about introducing efficiencies and designing an infrastructure plan, funded in part by privatisation of the electricity supply and distribution industry.

Plans announced in this month’s Budget include a second Sydney Harbour tunnel, providing a new rail line that will terminate in the huge new Barangaru development on the west side of Sydney’s CBD. There are two other suburban rail projects, major new roads, schools and hospitals included in the plan, which commits $68.6 billion to infrastructure over the next four years.  The NSW population is forecast to increase by 2.2 million by 2035, with more than 80 per cent of that in Sydney. As earlier reported in Strategies, this means a decline in Sydney’s house prices is unlikely.

The White Paper on developing Northern Australia is equally visionary and, if implemented, will be a game-changer in the country’s economy, based as it is on creating a huge and expanding food bowl mainly for export through a much-expanded port of Darwin.

The language of the White Paper is not short on hype, and is almost breathtakingly optimistic.  It says, “Covering 40 per cent of Australia’s land mass, our north has the resources, the connections across the Tropics, and the land, skills and institutions that the Indo-Pacific region needs.” It promises, “We will fix the roads and telecommunications, build the dams and deliver the certainty that landholders and water users need. We will drive down the costs of operating in the north for business; making it a more attractive place to invest and work.”

The White Paper notes that many previous efforts to develop the North have foundered because of “lack of foresight and the absence of regional markets for high value goods and services”.  It asserts things are different now. Exports through Darwin are 13 times what they were ten years ago. The booming economies of South East Asia and southern China are within three to five hours flying time from Darwin. The tropics account for 40% of the world’s population today, rising to 50% by 2050. By 2030 Asia will represent approximately two thirds of the global middle class population and of middle class consumption.

But there are problems. Australians have been very slow to embrace their north. Previous ambitious enterprises such as the Ord River scheme have been white elephants. Australians prefer the comfort of Melbourne and Sydney suburbs, where more than two thirds of the population live.  As the White Paper says, “development will require many more people living in the north. Transformation won’t happen if the population inches up by just a few hundred thousand in the next 20 years. It would remain a high-cost, small scale economy, more of a pilot project than a power house”.

Another tricky issue is land reform. There are big issues over Aboriginal land title that need to be ironed out, and this will not be easy. Pastoralists are often limited to cattle grazing, unable to develop horticulture or tourism.

It is hoped that most of the new investment in the north will come from business and global investors, especially from China, but the government is also kicking in some money. There will be $600 million for badly needed new roads, a $75 million new research centre, and a $5 billion facility providing cheap loans for infrastructure projects.  On the workforce side, labour unions will be expected to be more flexible, to take account of the weather and peaks and troughs in demand.

Chinese officials in Beijing have reacted favourably to the White Paper, and look as if they will encourage investment from China. But interest from Australian business has been muted, while the media has hardly commented on the proposals.