Labor's new dilemma: pipeline or pipedream

THE finances and politics of the resources boom are getting far harder for the Gillard government with a loud message coming from the corporate sector - unless Australia changes its policies the higher living standards offered by the boom will not materialise.

The resources boom, once largely presented by Labor as a project in income redistribution, is now exposed in its true light: as a mammoth test of Australia's economic management.

The urgent declarations from Resources Minister Martin Ferguson can scarcely get any blunter. On August 23, after BHP Billiton's postponement of the huge Olympic Dam project, he said: "The commodity price boom is over. Anyone with half a brain knows that." Ever since, he has delivered the same unqualified message.

On September 4 Ferguson said: "The real message to us with lower commodity prices is that the fat within the commodity system has gone." Ferguson said iron ore prices had fallen from about $US180 a tonne 12 or 18 months ago to about $US90 a tonne now. Yes, prices might come back somewhat, but the "easy gains" of the boom "are gone".

Dividing the "official" $500 billion investment pipeline into two categories, Ferguson said $270bn was committed capital investment but the other $230bn depended on "getting the cost of delivery of projects in Australia down".

That's right. With the authority of his portfolio Ferguson says that delivering roughly half the future investment pipeline depends on a better economic performance from Australia. In short, it's a new ball game.

While Ferguson may say the "easy" days are over, the truth is Labor's acceptance of this reality lacks resolution and urgency.

The official government line, quoting Julia Gillard from last week, is that the boom has three phases: the prices boom "is now passing"; the investment boom has yet to peak; and the production boom (export volumes) stretches ahead for decades.

Yet the transition from the price boom into the middle of the investment boom is a massive political and policy shift. The historic challenge for this generation of Labor leaders still sits on the table: can Labor turn an investment pipeline into a sustained national success?

Corporate sector alarm on this front was laid on the table last week by former Business Council of Australia president Graham Bradley in his speech to Infrastructure Partnerships Australia drawing on the BCA's earlier Pipeline or Pipe Dream? research analysis.

According to Bradley the current situation "is not sustainable". The BCA report, he said, revealed what most politicians wouldn't admit; namely, "that successful delivery of the prospective project pipeline is far from assured, not only because uncommitted projects are at risk to a major downturn in commodity prices and demand but also because we have become too expensive."

The BCA report found Australian resources projects are 40 per cent more expensive to deliver than in the US Gulf coast; Australian labour is massively less productive, 35 per cent less productive than in the US Gulf coast for projects near cities and 60 per cent less productive for remote projects. The report found, on infrastructure delivery, our airports are 90 per cent more expensive, hospitals 62 per cent, shopping centres 43 per cent and schools 26 per cent more expensive than the US.

There is a double bind at work in resources. Demand from China is easing while costs and productivity in Australia become more problematic. Labor is caught with a political message inconsistent with the turn in the resources sector. Its political message is still anchored in the high price phase yet the new policy demands originate from the investment phase.

Labor's political message is about redistribution of the boom's benefits via the mining tax, the Fair Work Act, a softer cop on the building and construction beat, more spending on disabilities, dental and schools, and demonising mining bosses Clive Palmer, Gina Rinehart and Andrew Forrest in the cause of such redistribution - yet the story from the investment phase is that its policies have entrenched higher costs, poor productivity, excessive regulation, counter-productive green tape along with a reluctance to allow the Productivity Commission to review factors driving higher project costs.

The boom demands a flexible, skilled, mobile labour force with the capacity to draw on foreign workers. Labor's record on these fronts is mixed at best. It has committed to funding skills. It has unveiled a new scheme to get foreign workers on to projects starting with 1700 workers on Rinehart's Roy Hill project yet Gillard was highly equivocal at its inception and caucus remains suspicious.

The labour market overall is less flexible and less mobile. There seems no political will to confront this. The BCA report in June warned of industry alarm that productivity on projects "will worsen significantly".

Earlier this year Gillard announced moves to rationalise federal-state environmental approvals. For many projects, green tape is crippling. The BCA report quotes one approval that took more than two years, 4000 meetings and, when approved, was subject to 1500 conditions.

Meanwhile, the demise of the commodity price peak puts the budget under serious pressure. To secure the surplus Wayne Swan faces the prospect of taxation increases and more savings - a series of tough decisions that reveal the need for Labor to scale back community expectations. Yet the public already feels short-changed from the much-hyped resources boom and such sentiment will only intensify. Gillard and many ministers routinely invoke the $500bn investment pipeline in resources to advertise their success. The Prime Minister, incredibly, recruits this not-yet-delivered figure to deny concerns that Australia is losing competitiveness. Her language is a real problem.

Gillard calls the boom a "down payment" on the growth Australia can expect from the Asian Century. This comment is riddled with complacency.

Meanwhile Gillard resolutely defends the consequences of her re-regulation of the labour market, attacks the Coalition over Work Choices and resists resource sector laments about Australia's rising cost structure.

The boom is not ending. It is pivotal to Australia's economic future because it creates an investment phase larger than in any other industrialised nation.

The next election will involve, inevitably, a judgment not just on the distribution of its benefits but whether Labor has the brains and courage to maximise the boom as a long-run success for the Australian people.