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ENHANCING VICTORIA’S ECONOMIC PERFORMANCE AND PRODUCTIVITY

DISCUSSION PAPERJUNE 2017

ENHANCING VICTORIA’S ECONOMIC PERFORMANCE AND PRODUCTIVITY / DISCUSSION PAPER / 2

ABOUT THE PREMIER’S JOBS AND INVESTMENT PANEL

The Premier’s Jobs and Investment Panel (the Panel) provides strategic advice to the Premier on driving economic growth and creating high-skill, high-wage jobs in Victoria. Established in 2015, it is supported by the Premier’s Jobs and Investment Fund.

The Panel, chaired by Harold Mitchell AC, has some of Australia’s brightest business minds, including CEOs and other senior business and industry organisation leaders. The members represent a broad range of perspectives that are critical to ensuring Victoria’s ongoing prosperity, including tertiary education, the community sector, regional Victoria, advanced manufacturing and small to medium enterprises.

Since being established, the Panel has focused its efforts on issues that promote prosperity and harness liveability in Victoria and has delivered strategic advice to the Premier on key issues including Victorian precincts, improvements to the planning system and the development of STEM skills in Victoria.

PANEL MEMBERS

Mr Harold Mitchell AC (Chair)Founder, Mitchell & Partners

Ms Amanda BanfieldManaging Director, Mondelez International (Australia and New Zealand)

Professor Glyn Davis ACVice Chancellor, The University of Melbourne

Dr Megan Clark ACDirector, Rio Tinto Limited

Ms Tracey FellowsCEO, REA Group

Ms Belinda DuarteCEO, Culture is Life

Ms Jill WalshPartner, Actco-Pickering Metal Industries

Ms Margot SpaldingCo-founder, Jimmy Possum

Mr Luke HilakariSecretary, Victorian Trades Hall Council

Mr Tim PiperDirector, Australian Industry Group (Victorian Branch)

Mr Mark StoneCEO, Victorian Chamber of Commerce and Industry

Mr Graeme FordCEO, Victorian Farmers Federation


TERMS OF REFERENCE

OBJECTIVE

1. The objective of the Enhancing Victoria’s Economic Performance and Productivity Project (the Project) is to identify specific reform ideas for government consideration that will support enhanced economic performance and productivity that contributes to improved living standards for all Victorians. Ideas identified by this Project will form the basis of a long-term agenda of economic reform for Victoria.

SCOPE

2. The Project will identify and assess a wide range of reform options that would enhance Victoria’s economic performance and productivity.

3. The reform options identified should be:

(a) consistent with Victorian Government policy commitments;

(b) specific and measurable against key assessment criteria (such as impacts on fairness and equity, jobs, productivity and overall economic performance);

(c) achievable via policy and advocacy levers available to the Victorian Government and readily implementable; and

(d) aimed towards economic growth which is inclusive of all Victorians.

4. Reform options should have an emphasis on, but not be limited to, systemic improvements (for example, changes to market settings) and have consideration of Budget parameters.

DELIVERABLE

5. The key deliverable is a concise report to the Premier presenting a menu of specific reform options together with context-setting analysis for each agreed area of focus.


TABLE OF CONTENTS

FOREWORD 5

OVERVIEW 6

1. WORKFORCE 13

Participation and underemployment for relatively poorly performing groups 13

Better aligning skills/education with industry needs now and in the future 17

2. REGULATION 20

Improving service delivery and lowering the cost of regulator interactions for business 20

Increasing flexibility in regulatory design and implementation 22

Reforming local government’s regulatory role 24

Improving accessibility and efficiency in government procurement 25

3. DIGITAL TRANSFORMATION AND DISRUPTION 26

Leveraging Government infrastructure and assets 26

Addressing the shortfall in skilled digital workers 28

Addressing regulatory and other barriers/disincentives to digital disruption 29

Assisting the transition of disrupted industries and communities 31

4. FINANCIAL SERVICES 32

Recognising the significant opportunity for the financial services sector to grow its share of Victoria’s economy 33

Ensuring better access to capital for businesses and the community 36

5. CONSTRUCTION 38

Ensuring supply of skilled workers 39

Changing public sector procurement practices to improve productivity 40

Harnessing transformative technologies 41

MAKING A SUBMISSION 43


FOREWORD

Governments, businesses and individuals around the world are grappling with rapid changes in the global economic landscape. We are seeing the early impacts of unexpected political developments, such as Brexit, mega trends – notably globalisation and population ageing – as well as disruptive new technologies, including advances in artificial intelligence, automation and robotics. Combined, these forces will fundamentally reshape the economies in which we work.

Victoria should be optimistic. Our economy continues to grow strongly. And we are well positioned to capture many of the benefits of these changes – particularly

as the mining boom winds down and our State’s competitive advantages come to the fore.

However, it is clear that many in society are concerned about being left behind by the next wave of global change – that they will not share in the promised benefits of growth.

It is in this context that productivity matters, perhaps more than ever. Low productivity growth limits overall economic growth, which makes it much harder for governments to tackle wealth and income inequality, or disparities in quality of education, health and jobs.

Unfortunately, like other advanced economies, Victoria is faced with a stubborn and continued decline in our productivity growth. Labour productivity growth in Victoria has fallen from annual average rate of 2.7% in the 1990s to only 0.7% over the last decade.

To spur sustainable economic growth that benefits all Victorians, we must reinvigorate Victoria’s productivity. But any call for an economic and productivity enhancing agenda must not simply be a demand for people to work longer, harder and later in life. We must keep front of mind the importance of inclusiveness, fairness and wellbeing.

The Premier has asked the Jobs and Investment Panel, a group of business and community leaders which I chair, to work out how we can tackle the challenge of boosting the economy and revitalising Victoria’s productivity head-on, with practical solutions.

The Panel is committed to delivering a suite of specific reform ideas to government that will improve Victoria’s economic performance and productivity. To achieve this, the Panel has identified five focus areas as a starting point, though these are just the first wave of areas the Panel hopes to look at. It has also identified 21 potential reform directions to help focus industry and community efforts to identify the specific reform ideas the Panel will put to government.

Harold Mitchell ACChair


OVERVIEW

About this project The Premier has asked the Panel to identify practical and systemic solutions for government consideration that will enhance Victoria’s economic performance and productivity. Increasing productivity across the economy is critical for delivering improved living standards for all Victorians. As Nobel Prize winning economist Paul Krugman said “productivity isn’t everything, but in the long run it’s nearly everything”. And as Glenn Stevens, previous Governor of the Reserve Bank of Australia has noted, productivity growth is perhaps “the only real basis for optimism”.

This undertaking builds on the Panel’s previous work, including the Economic Building Blocks for Victoria report,1 which set out a range of economic priorities and recognised the importance of opportunity, inclusiveness and liveability as the preconditions for strong, sustainable and fair economic growth. While Victoria is performing strongly on many economic indicators, including employment growth, the Panel believes there are opportunities to improve Victoria’s productivity, as foreshadowed in the Economic Building Blocks for Victoria report. This project provides an avenue for developing an agenda that focuses on areas with the greatest potential to improve economic performance and productivity while ensuring equity and participation are also comprehensively considered. Such an agenda is increasingly important given Victoria’s recent poor productivity performance and the opportunities and challenges arising from disruptive technologies, global trends and structural change.

This public discussion paper represents an invaluable opportunity to harness the broad and diverse knowledge and expertise of the Victorian business and broader community and those with a direct understanding of the challenges Victorians face and of the potential impact of government actions, in partnership with industry. The Panel hopes this process, by developing specific reform ideas in partnership with businesses and the community, will build momentum for a meaningful and long-term reform agenda that benefits all Victorians.

Productivity and economic performance: how Victoria is tracking and why it mattersThe Victorian economy has been performing strongly, with an average annual growth in Gross State Product (GSP) of 2.6% over the last 15 years. Victoria is a great place to live and its population has grown strongly since 2008-09, but the other two components of GSP growth – productivity and participation – are not keeping up with that level of population growth. As a result, GSP per person and income per person – which are the measures of material living standards that actually matter to Victorians – have stagnated.

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1 The report is available online at: http://www.dpc.vic.gov.au/index.php/news-publications/economic-building-blocks-for-victoria


WHAT IS PRODUCTIVITY? Productivity, defined as the ratio with which inputs (such as labour or capital) are converted into valued output, is a measure of the efficiency of production and the main driver of economic performance. The main types of productivity measures are:

• Labour productivity, which measures how efficiently labour inputs are utilised in the economy, i.e. output produced per hour of work.

• Multifactor productivity, which measures the overall efficiency with which labour and capital inputs are used together in production, i.e. improvements in the way of doing things through innovation, technological change, organisational change, knowledge creation and diffusion etc.

In the long run, it is the combination of multifactor productivity and the amount of capital available per worker that determines the growth in labour productivity, real wages and material living standards. When considering productivity improvements, economic analysis often narrowly focuses on efficiency improvements (i.e. people working harder). Our paper considers a broader concept of productivity that includes equity considerations, i.e. productivity that is aimed towards economic growth which is inclusive of all Victorians.

Growth in Victoria’s real income per person2 has been relatively flat in recent years. In contrast, both GSP and income per person in NSW have been steadily increasing. Victoria’s productivity growth has slowed over the last decade. While this broadly reflects a decade of low productivity growth for Australia as a whole, Victoria’s below-average labour productivity and multifactor productivity growth suggest that there are opportunities for improvement. Furthermore, while the workforce participation rate3 has been relatively stable, total participation as measured by hours worked per person has fallen by nearly 3% over the last decade. This decline has been driven by a number of factors, including increasing underemployment, population ageing and the increasing prevalence of part-time work.

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In order to lift Victorian living standards, we need to work to boost both productivity and participation. With an ageing population, tackling the long-term decline in participation is a difficult task, but there are still opportunities to improve participation. Increasing productivity across the economy is critical for improving living standards.

2 As measured by real gross disposable income per capita in the household sector. 3 The labour force participation rate is the proportion of the civilian population aged 15+ who are either employed

or actively looking for work.


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A practical approach: five initial focus areasProductivity reform by its nature is a broad, all-encompassing topic and there are a large number of avenues that could be explored. However, the Panel has taken a focused and practical approach by identifying five initial focus areas with significant potential to boost economic performance and productivity, with further focus areas to follow. These five focus areas are:

• three cross-cutting enablers that are strongly linked to productivity across the economy – workforce (which will also consider improving participation), regulation and digital transformation and disruption; and

• two priority sectors to improve productivity and reduce the cost of business more broadly across the economy – financial services (a sector with high growth potential and labour productivity over three times higher than the Victorian average in 2015-164) and construction (a large sector that, on some measures, is also significantly less productive compared to the national average).

The Panel is well aware the Government is already working hard to address a broad range of issues within and across these areas, and will seek to ensure its contribution complements rather than duplicates or conflicts with that work. A brief overview of each area, with broad reform directions, is set out below.

Identifying tangible solutions under a set of identified reform directionsThe Premier has asked the Panel to identify and develop practical solutions that are targeted, tangible and readily implementable, in collaboration with industry and the community. As such, the Panel is inviting stakeholders to engage closely with this process. This includes seeking submissions with practical and systemic reform ideas that will improve the economic wellbeing of Victorians. It is important to note that improving economic performance and productivity is only important in as much as it translates to better and fairer outcomes for Victorians.

The Panel has identified a number of reform directions to guide this discussion, which will draw out specific reform ideas that will form the basis for its final report to government. These reform directions are summarised on the next three pages and detailed in each chapter of this paper. These reform directions reflect potential avenues to enhance economic performance and productivity through incentives, capabilities and flexibility. Given the critical role that business plays in driving productivity and growth, the Panel is interested in hearing reform ideas for how businesses can improve how they work with each other or with government in the context of the five initial focus areas. The proposed reform directions and the initial focus areas they aim to address are not intended to be an exhaustive catalogue of areas where reforms are needed, but reflect a deliberately targeted and selective approach to this first wave of reform.

4 Department of Treasury and Finance calculations based on ABS (2016) Cat. No. 5220.0; ABS (2016) Cat. No. 6202.0; ABS (2016) Cat. No. 6291.0.55.003.


Making a submissionThe Panel hopes that this paper sparks ideas within the Victorian community and industry. The Panel is interested in hearing a diverse range of views on how we can shape Victoria’s economic performance and productivity agenda to secure our future economic prosperity in the interests of all Victorians.

If you would like to submit a reform proposal, please lodge it online at engage.vic.gov.au/enhancing-economic-performance-and-productivity by 2 August 2017. You can either provide a formal submission, or join the conversation on the website by quickly sharing your ideas with others. Further guidance and advice on making a submission is at page 43.


Summary of challenges/opportunities and proposed reform directions (cross-cutting enablers)56

1. WORKFORCEThe types of jobs and the nature of work is changing as a result of technological and structural change. It is essential to bridge the growing gap between the skills across Victoria’s workforce and the needs of industry. Increasing participation and labour utilisation rates in key relatively poorly performing groups is also vital. Some groups have participation rates more than 20 percentage points lower than the general population, and youth underemployment is twice as high as the general population.

Nature of identified challenges/opportunities:

• Improving participation and reducing underemployment for relatively poorly performing groups (recently-arrived migrants, single parents and disengaged youth)

- These groups have lower participation rates relative to the national average and higher rates of underemployment (e.g. 34% of underemployed persons are youth despite representing only 17% of the labour force).5 Government also has available levers to make a meaningful impact for these cohorts

• Better aligning skills/education with current and future industry needs (literacy, numeracy, digital skills, critical reasoning skills and interpersonal skills)

- Around half of Victorians have low literacy/numeracy skills and 93% of surveyed businesses say this negatively impacts their business

- Significant structural change will increasingly impact skills required for the future economy, with industry already concerned many recent graduates lack the relevant skills or skills mix

Proposed reform directions:

1.1 Targeted support schemes for relatively poorly performing groups (recently-arrived migrants, single parents and disengaged youth) including promoting flexible work arrangements, utilising government social procurement approaches to create employment opportunities, and leadership/mentoring programs

1.2 Improved coordination between various government services at all levels of government to promote employment outcomes for relatively poorly performing groups, including employment and related services, training, youth services, justice, family and carer support and migrant services

1.3 Improvement to the training and education system to deliver foundational skills and qualifications for current and future jobs, including increasing the focus on building critical reasoning skills, interpersonal skills, and workplace literacy/numeracy/digital skills

2. REGULATION

Strengthening Victoria’s regulatory governance structures and adopting smarter and simpler regulation is needed to respond to changing business and community needs. The annual cost of administration, compliance and delay to businesses in Victoria is estimated to be between $2.4 billion and $6.4 billion.6 Service delivery of regulators needs to be improved, the cumulative cost to business must be reduced and continuous improvement in regulation design and implementation is necessary.


• Improving service delivery and lowering the cost of regulator interactions for business

- There is too much complexity and lack of coordination and collaboration across government and between regulators

- There is poor accessibility, quality and provision of information on regulatory requirements

- Compliance and enforcement policies are often poorly targeted, disproportionate and inflexible/ risk averse

• Increasing flexibility in regulatory design and implementation to support growth and new business models

• Reforming local government’s regulatory role, and improving accessibility and efficiency in government procurement


2.1 Improvements to the structure of regulators and continuous improvement of regulator practices and business interactions

2.2 Facilitation of business innovation, including through promotion of adaptability and new thinking by regulators and policymakers

2.3 Facilitation of new business models, including through regulatory pathways and concierge systems that support/enable innovation

2.4 Streamlined local government regulatory services through increased decision-making consistency, strengthened regulatory capability and improved provision of information and guidance

2.5 Better business experience with government procurement and improved efficiency of procurement practices and processes

5 ABS (2017) Labour Force, Australia, Cat. No. 6202.0.6 VAGO (2016) Reducing the Burden of Red Tape, p.18.


3. DIGITAL TRANSFORMATION & DISRUPTION

Digital technologies are driving the next wave of industrial transformation, with huge potential to lift growth and productivity. The economic contribution of the Internet – and digital-enabled economy in Australia is forecast to grow to $139 billion by 2020 or 7% of GDP.7 There are significant opportunities for the development, trialling and adoption of new technologies in Victoria.


• Leveraging government infrastructure and assets and addressing the shortfall in skilled workers to support introduction, uptake and diffusion of promising new technologies (including AI, automation, robotics, etc.)

- Economic contribution of the digital economy is forecast to grow from $79 billion in 2014 to $139 billion by 2020 (a difference of roughly 2% of Australia’s GDP)

• Addressing regulatory and other barriers to digital disruption to enable businesses to develop and/or adopt digital technologies

- Many new technologies and related changes to business models require regulatory and legislative changes

• Assisting the transition of disrupted industries, businesses and communities through proactive management of the structural impacts of digital transformation on affected sectors, particularly to support growth in future industries

- Jobs will be displaced in manufacturing/construction and other labour, clerical and some analytical roles


3.1 Better utilisation of existing telecommunications and other public infrastructure and assets, particularly in provision of high speed (4G & 5G) mobile broadband and reinvigorating Victoria’s open government data efforts

3.2 Facilitation of collaboration between business and higher education providers to create more ‘work ready’ digital graduates

3.3 Increased flexibility of the regulatory environment to facilitate investment and ease introduction, trialling and early adoption of new technologies

3.4 Partnership with industry to proactively target, manage and assist disrupted industries and businesses, including encouraging digital literacy and supporting affected workers

Summary of challenges/opportunities and proposed reform directions (priority sectors)78910111213

4. FINANCIAL SERVICES

Sophisticated financial services are essential for a productive and prosperous economy by helping businesses invest, innovate and grow. Although Victoria’s financial services sector has clear strengths – accounting for 13% of economic activity8 and 115,000 skilled employees9 – there are opportunities for a larger, more diverse and innovative sector.


• Recognising the significant opportunity for the financial services sector to grow its share of Victoria’s economy

- As a share of the economy, Victoria’s financial services sector is smaller than NSW (12.8% versus 15.2% )10 and there is a growing productivity gap (over the past 25 years Victoria’s annual productivity growth was just 1.9% compared to 2.9% in NSW)11

- There are opportunities to develop Victoria’s financial services sector by leveraging our existing strengths and new opportunities, as well as reducing barriers to innovation

• Ensuring better access to capital for businesses and the community, particularly early-stage risk capital for businesses and basic financial products for financially excluded people

- Information asymmetries and transaction costs can be a significant problem for start-ups/Small and Medium Enterprises (SMEs), and up to 30% of SMEs struggle to access capital12

- Approximately 17% of Australian adults were financially excluded in 201313


4.1 Deepened links to international capital markets, and attraction of talented individuals and new firms, including by capitalising on Melbourne’s reputation and advantages

4.2 Facilitation of industry-led research and collaboration with universities and other groups aimed at the creation of new products, market intelligence and skills

4.3 Development of new financial products by removing regulatory/policy barriers and facilitating a growing FinTech sector

4.4 Improvement of financial skills and access to advice for borrowers including SMEs and financially excluded people

7 Deloitte Access Economics (2016) Australia’s Digital Pulse, report prepared for the Australian Computer Society.8 ABS (2016) Australian National Accounts: State Accounts, 2015-16, Cat. No. 5220.0, Department of Treasury and Finance9 ABS (2016) Labour Force, Australia, Detailed, Quarterly, Nov 2016, Cat. No. 6291.0.55.00310 ABS (2016) Australian National Accounts: State Accounts, 2015-16, Cat. No. 5220.011 Department of Treasury and Finance calculations based on ABS Cat. No 5206.0.55.002, Cat. No 5220.0, Cat. No

5220.0.55.005, Cat. No 6202.0, and Cat. No 6291.0.55.00312 ABS (2015) innovation in Australian Business, 2014-15, Cat. No. 8158.013 Connolly, C. (2014). Measuring Financial Exclusion in Australia. Centre for Social Impact – University of New South Wales for NAB


5. CONSTRUCTIONThe construction industry is responsible for delivering capital and infrastructure that is vital to enable productivity growth. Construction represents a significant share of the Victorian economy, with $23.9 billion in economic activity each year,14 and is Victoria’s fifth largest employer.15 However, by some measures, productivity in this sector is significantly lower than the national average.


• Ensuring supply of skilled workers, including by increasing the size and enhancing the skills of the construction workforce

- There is a persistent shortage of skilled tradespeople, particularly in the residential construction industry

• Changing public sector procurement practices to improve productivity, with a focus on increasing value and flexibility

- Potentially large benefits for project costs/timing (e.g. cost of tendering, negotiating and managing contracts can be considerable, with tendering costs alone estimated at up to 3% of total project cost)

• Harnessing transformative technologies, including through support for greater innovation and greater uptake of new construction technologies (and existing/underused technologies)

- Innovation and new construction technologies can significantly reduce costs and increase productivity (e.g. digital modelling for construction projects has potential to deliver 20% savings on the costs of capital projects)


5.1 Encourage upskilling of the current workforce and development of a larger pipeline of new apprentices for the sector, with an emphasis on skilled tradespeople for future projects

5.2 Redesign of government procurement processes and methods with an emphasis on reducing the cost to business and encouraging the use of innovative products and processes

5.3 Adoption of Building Information Management and other digital technologies and support to the workforce to adjust to digital disruption

1415

14 ABS (2016) Australian National Accounts: State Accounts, 2015-16, Cat. No. 5220.015 ABS (2016) Labour Force, Australia, Detailed, Quarterly, Nov 2016, Cat. No. 6291.0.55.003


1. WORKFORCE

Our workforce is at the heart of our economy, and it is vital that all Victorians have the capacity and capabilities to participate now and into the future. Not only is participation in the labour market one the most important mechanisms for driving Victoria’s economic performance – as increased participation lifts the productive capacity of the economy – but also for ensuring that Victorians can share in future growth and prosperity. Having a job and earning a living is important for individual well being, with people more likely to feel valued, enjoy better health and be less likely to experience social exclusion.

While Victoria has experienced strong employment growth recently, participation rates and labour utilisation amongst a number of groups is comparatively low. Gender imbalances also exist, but may be partially redressed given cultural shifts and future workforce trends. Technological change and global trends are also changing the nature of work, the structure of our economy, and the types of skills our labour force needs. Digital disruption is likely to pose employment challenges to low-skilled workers and underemployment may worsen as more part-time jobs are created. Education and training, with a focus on building adaptable and transferable skillsets, plays a critical role in lifting labour quality and increasing workforce productivity, as well as meeting the needs of industry into the future.

Increased participation is contingent on the availability of sufficient employment opportunities. However, the Victorian Government has a critical role in building the capacity for individuals to participate, including through the education and skills system, the provision of social and employment services, and the coordination of these services for disadvantaged jobseekers. The Victorian Government also has a role in advocating to the Commonwealth Government on issues that impact workforce participation, such as taxation and retirement policy. Further, employers play an important role in providing employment opportunities and on-the-job training.

Potential reform directions for the Victorian Government to strengthen our workforce include:

• improving participation and reducing underemployment for relatively poorly performing groups; and

• improving productivity by working to better align skills and education with changing industry needs.

PARTICIPATION AND UNDEREMPLOYMENT FOR RELATIVELY POORLY PERFORMING GROUPS

Participation ratesThe Victorian employment participation rate averaged 64.8% in 2015-16, slightly below the national average. However, this figure masks weaknesses in the participation rate, particularly for seven population cohorts which are either performing poorly against their national counterparts or the overall Victorian working age population.

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While recognising the importance of improving employment outcomes for all the groups shown in the diagram above, the Panel considered it important to focus in tightly on a few groups to ensure these highly complex issues can be given full and proper consideration. To ground reform efforts, the Panel is therefore honing in as a focus for this first wave of reform on those groups where Victoria’s relative performance is the poorest and where many state policy levers are readily available.16

This approach reveals three groups: recently-arrived migrants and single parents, who have the worst relative performance against their national counterparts; and disengaged youth.17 Women are disproportionately represented across the three groups identified. In addressing the barriers faced by these groups, it is likely that some of the barriers facing women more generally will be addressed. The reform directions listed at the end of this section, while focused on the three relatively poorly performing groups, could also be implemented to the benefit of other groups. There is scope for government to better embed evidence on the relative propensities for unemployment between different groups in policy settings.

Participation rates also vary significantly across Victoria, and can be exacerbated by entrenched locational disadvantage. Some of the most disadvantaged regions in Victoria include Brimbank, Hume, Greater Dandenong, Central Goldfields, Shepparton and the Latrobe Valley.

The table below outlines characteristics of the three identified groups and potential barriers to participation.18

GROUP CHARACTERISTICS18 POTENTIAL BARRIERS TO PARTICIPATION

Recently-arrived migrants

• 53% female

• 68% of recently-arrived migrants who are not in the labour force are female, compared to 60% in the broader economy

• Participation rates vary by country of emigration, and low rates for some groups can persist

• Employer perceptions and discrimination

• Lack of specific and relevant experience

• Communication limitations

• Access to childcare

• Cultural attitudes and norms

Single parents

• 85% of single parents with at least one child aged under 15 years are female

• 230,000 single parent families in Victoria in June 2016, representing 13.5% of all families

• More likely to be in part-time jobs (for both female and male single parents)

• Employer perceptions and discrimination

• Access to, and cost of, childcare

• Access to flexible working arrangements

• Proximity of available jobs to childcare

• A lack of personal stability

• Poor skills, including foundation skills

Disengaged youth

• Lower participation rate in Victoria compared to Australia is largely due to a higher proportion of young Victorians in full-time education

• Around 10% of young Victorians are not working or not in full-time education, of which 53% are female

• The youth unemployment rate is double the average across all age cohorts

• Poor skills, including foundation skills

• A lack of personal stability

• Disenfranchisement with finding work

• Previous criminal record

• Exposed to entrenched disadvantage and living in jobless households

16 While recognising that an ageing population will reduce workforce participation rates, the most significant policy levers to mitigate this challenge are held by the Commonwealth Government.

17 Disengaged youth refers to people aged 15-24 who are not in full-time education and either unemployed or not in the labour force.

18 ABS, Cat. no. 6202.0 and Cat. no. 6291.0.55.001.


CELIA’S STORY: A SINGLE MOTHER STRUGGLING TO FIND WORK19

Celia, a highly-skilled single parent, found there were a lack of jobs with flexible work arrangements that allowed her to drop off and pick up her child from childcare. Celia noted that childcare was prohibitively expensive, and there were no childcare centres that offered half-day care near her house. She also felt over-qualified for the few part-time or job-sharing positions available, which were also lower-paying than jobs she had before she was a parent. Celia was also unaware of many relevant government support programs.

RASHAD’S STORY: A YOUNG MALE OF SOUTH SUDANESE DESCENT FACING BARRIERS TO EMPLOYMENT20

Rashad was born in South Sudan and came to Victoria recently. He is focused on building a career. Rashad completed a qualification in South Sudan, and thought that finding a job in a prosperous country like Australia would be relatively easy. Rashad has had trouble finding work, despite his knowledge and experience. He believes that cultural bias and racism is a barrier to finding work, as are stereotypes of the South Sudanese community in light of media coverage of particular incidents of youth crime. Cultural norms play a role too, where avoiding eye contact is a sign of respect in South Sudan. Rashad has had positive experiences with employment services, but was not aware of a number of other services that were available to him to build his work readiness skills.

Underemployment1920

Relatively poorly performing groups may also face higher underemployment, as well as lower participation and higher unemployment. The total underemployment rate21 in Victoria was 8.9% in 2016, slightly above the national average of 8.4%. Consistent with a rising share of employment in household services industries and an increase in part-time work, the underemployment rate has trended higher over the past decade – largely driven by structural factors. Available data shows that underemployment significantly affects youth and single parents, of which the majority are female.22

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Total Population – National

Female – National

Young people currently comprise a third of all underemployed Australians, despite making up only 16.6% of the national labour force. This gap has steadily grown over time, indicating that youth underemployment is worsening and is a significant problem. Underemployment can have impacts across a young person’s working life, reducing opportunities for building experience and skills and impacting their ability to accumulate wealth and commit to long-term investments in things like housing. The retail, accommodation and food services industries are the largest employers of young Australians, and are industries where underemployment is high. Youth underemployment is likely to have worsened due to the ongoing decline in manufacturing in recent decades, which has limited opportunities for young people to transition from the education and training system into full-time employment in those industries. These structural drivers are likely to continue to place upward pressure on the underemployment rate.

19 Market research commissioned by the Panel. Name of the individual has been changed.20 Market research commissioned by the Panel. Name of the individual has been changed.21 Underemployment is a measure of people who have a job but want to work additional hours, and is a key

indicator of underutilisation. 22 Underemployment is reported by gender at the state level, but by both age and gender at the national level.


Female Victorians are also disproportionately affected by underemployment, with a rate of 11.4% in 2016, nearly five percentage points higher than the male underemployment rate. Females also make up a significant proportion of single parents and currently comprise almost 60% of all underemployed Victorians. This is likely due to the greater share of caring responsibilities being undertaken by women, as well as possible discrimination around parental responsibilities. Efforts to increase access to flexible working arrangements for both men and women are likely to improve female participation and utilisation rates.

PROPOSED REFORM DIRECTIONSThe Victorian Government can work with other levels of government and business to support individuals’ workforce participation, by working to address the barriers to participation and the reasons for underemployment.2324

The Panel’s view is that government, across all levels and in collaboration with industry, should build on existing efforts23 and consider how best to improve participation and reduce underemployment for these relatively poorly performing groups through policy levers such as:

1.1 Targeted support schemes for relatively poorly performing groups (recently-arrived migrants, single parents and disengaged youth), with specific measures including:

• promoting flexible work arrangements through better regulations to improve the alignment of employee and employer work preferences with services for people with caring responsibilities and through encouraging business practices that raise awareness, change culture and improve information, while also ensuring that workers have adequate on-the-job training and career development;

• setting employment targets and increasing employment and training opportunities for relatively poorly performing groups within the public service, by further leveraging government procurement, and more broadly raising awareness and capability in the private sector to reap the productivity and innovation benefits of having more diverse workforces; and

• leadership and mentoring programs and partnerships with business and community groups to provide relatively poorly performing groups with informal relationship-based learning, advice and support.

1.2 Improved coordination between various government services at all levels of government to promote employment outcomes for job seekers from relatively poorly performing groups, with specific measures including employment and related services, training, youth services, justice, family and carer support services and migrant services.24

DIVERSITY TARGETS IN GOVERNMENT Social procurement targets for level crossing removal project – The Caulfield to Dandenong Level Crossing Removal Project has a 2.5% Aboriginal employment target, and is covered by the Major Project Skills Guarantee, which mandates 10% of work be undertaken by apprentices, trainees and engineering cadets. A dedicated training hub established through this project in partnership with the Chisholm Institute is also providing Aboriginal students with classroom training, on-the-job mentoring and ongoing career support.

Women on Victorian Government boards – to ensure that our public institutions better represent the Victorian public and make better decisions, no less than 50% of all future appointments to paid Victorian Government boards and Victorian courts will be women.

23 Examples of existing initiatives include the Jobs Victoria Employment Network to assist disadvantaged Victorian jobseekers gain employment, diversity targets in government (detailed on the this page), and migrant and multicultural services.

24 Improvements to the coordination and delivery of government services could also benefit other groups as well, including Aboriginal Victorians, youth justice clients, mature age job seekers, job seekers with a mental illness, retrenched workers and ex-offenders.


BETTER ALIGNING SKILLS/EDUCATION WITH INDUSTRY NEEDS NOW AND IN THE FUTURE

The nature of work is always changing and Victoria’s labour force needs to be well-equipped and trained to maximise our productive potential. The skills and education system will need to be increasingly responsive to ensure that our labour force is suitably educated to take up future opportunities. Analysis undertaken by the Foundation of Young Australians found that, to be prepared for the increasingly complex future of work, people need a portfolio of skills and capabilities. This enables them to more easily shift between roles within so-called ‘clusters of work’, i.e. jobs with similar characteristics.25 The types of jobs that are likely to have the strongest future prospects relate to technology (technologists), caring for others (carers), and providing information and services (informers). These jobs require strong foundation skills (literacy, numeracy and digital), critical reasoning and interpersonal skills, as well as specific sectoral-based skills. These skills are not only important for the younger cohorts about to enter the workforce, but also workers in the existing labour force who are changing jobs and need to adapt to a changing economy.

Coordinators Generators Informers Technologists

Artisans Designers Carers

Which job clusters have the strongest future prospects?

Source: Foundation of Young Australians, (2016). The New Work Mindset

WEAK STRONG

Foundation skills: literacy, numeracy and digital skills26

Many Victorians have low levels of workplace literacy and numeracy – 93% of employers surveyed by the Australian Industry Group identified this as an issue impacting their business. Low levels of literacy and numeracy, as well as digital literacy, can be a barrier to the acquisition of technical skills, which are also increasingly important. Strong digital and numeracy skills are not only important in areas such as STEM fields, but more broadly across the economy as technology becomes prevalent.27

46% of Victorians have low literacy proficiency26

54% of Victorians have low numeracy proficiency26

93% of surveyed businesses say low levels of literacy and numeracy have an impact on their business 27

25 Foundation of Young Australians, (2016). The New Work Mindset. There are more than 1,000 different occupations in Australia, which can be grouped into seven ‘clusters of work’ based on the skills, tasks and work environment they involve: ‘Coordinators’ undertake repetitive administrative or service tasks; ‘Artisans’ engage in construction, production and maintenance; ‘Generators’ have strong interpersonal skills and are involved in retail, sales, hospitality and entertainment; ‘Designers’ engage in science, mathematics, product and building design, and engineering; ‘Informers’ provide information, education and business services; ‘Carers’ provide medical, care and personal support services; and ‘Technologists’ require skilled understanding and manipulation of digital technology.

26 Source: ABS (2013) Programme for the International Assessment of Adult Competencies, Australia, 2011-12, Cat. No. 4228.0. Low proficiency is defined as scoring below Level 3 in the OECD Programme for the International Assessment of Adult Competencies, considered to be the minimum requirement to operate effectively in workplaces.

27 Australian Industry Group (2016) Tackling foundation skills in the workforce, p. 3-4. Note that 300 employers were surveyed.


IMPACT OF LOW LITERACY AND NUMERACY ON BUSINESSESAustralian Industry Group’s research of Victorian members found that low literacy and numeracy affects the productivity of many businesses in a number of ways, including: poor completion of workplace documents (affecting 42% of surveyed businesses), material errors and wastage (32%), teamwork/communication issues (28%) and wasting time (27%).28 Research commissioned by the Australian Industry Group shows that the returns from investing in workplace literacy and numeracy programs can be significant.29

Critical reasoning and interpersonal skillsAs jobs change, there is an increasing reliance on non-routine cognitive skills, such as critical reasoning (e.g. complex problem solving) and interpersonal skills (e.g. collaboration and communication). These are skillsets that are transferable and adaptable between different jobs, and are at less risk of being affected by automation. The majority of new jobs are expected to be created in professional, service and managerial occupations, where these skills are vital.30 There are some industry concerns that graduates in particular fields may not only lack occupation-specific technical skills, but also more generic soft skills.

10

20

30

40

%

1986 1991 1996 2001 2006 2011 2016

Employment by skill type (percent of total)

Source: ABS, RBA

Routine manual

Non-routine cognitive

Routine cognitive

Non-routine manual

Technical and sector-specific skillsAs the economy and the nature of work changes, many jobs (defined by the skills they require) will also change or cease to exist. But there will also be new jobs (requiring new skill sets), many in sectors that require STEM skills. Not only do employers seek workers with technical STEM skills, but also with transferable skills that come with a STEM qualification (e.g. critical reasoning).31 As Victoria’s population ages, the health care and social assistance sector will also grow strongly, requiring an increased supply of sector-specific skills.32

28 Australian Industry Group (2016) Tackling foundation skills in the workforce, p. 3-4. Note that 300 employers were surveyed.

29 Australian Industry Group, (2015). Investing in workforce literacy pays.30 Australian Department of Employment, (2016). Employment Outlook to November 2020, pp.6.31 Deloitte Access Economics, (2014). Australia’s STEM workforce: a survey of employers.32 The healthcare and social assistance sector is expected to be Victoria’s largest employing sector over the

next decade. The transition to the National Disability Insurance Scheme and recent Victorian Government investments to prevent family violence will also help to grow the sector.


Current skill shortages in Victoria (though historically low overall) consists mostly of technicians and trade workers,33 while the number of apprenticeships and traineeships commenced and completed halved between 2011 and 2016.34 Nationally, employers report that most applicants for trade apprenticeships don’t meet their expectations,35 and they are not planning to significantly increase the number of apprentices and trainees.36 The Victorian Skills Commissioner is working with employers, unions and government to better align training with the needs of the Victorian industry and economy.

Skill shortages for professional occupations are also currently low (mostly in the health care sector).37 While the total number of Victorian university graduates has greatly increased in recent years, employment outcomes for recent graduates have worsened (in 2015, only 66% of those looking for full-time work found it within four months, down from 80% in 2009).38

Specific technical skills and knowledge requirements will always change, but increasing the focus on building a set of transferable and adaptable skills (such as strong literacy/numeracy/digital skills, critical reasoning and interpersonal skills) and encouraging lifelong learning will help to make the Victorian workforce more responsive and flexible.

PROPOSED REFORM DIRECTIONSThe Government can play a role in promoting life-long learning, promoting the development of skills in growing sectors, and ensuring that all Victorians possess key competencies and skills.

The Panel’s view is that government, in collaboration with industry, should build on existing efforts and consider how best to improve participation and reduce underemployment for these relatively poorly performing groups through policy levers such as:

1.3 Improvements to the training and education system, with specific measures including:

• strengthening work readiness by improving workplace literacy/numeracy/digital skills and promoting work-based learning and lifelong learning through the training system and working with employers;

• refining qualifications in the vocational education and training system to focus on core competencies (e.g. literacy, numeracy, digital skills), critical reasoning and interpersonal skills (e.g. complex problem solving, communication) to ensure the workforce has relevant and transferable skills; and

• reducing information asymmetries to ensure that individuals and industry are well-informed about workforce, occupation and education trends to improve the alignment between skills and industry needs into the future.

33 Australian Department of Employment, (2016). The skilled labour market: A pictorial overview of trends and shortages; Australian Department of Employment, (2016). Skill shortage list: Victoria.

34 National Centre for Vocational Education Research, (2016). Apprentices and trainees 2016 June quarter: state and territory tables, tables 15-17.

35 Australian Department of Employment, (2016). The skilled labour market: A pictorial overview of trends and shortages

36 Australian Industry Group, (2016). Making apprenticeships work, pp.21-22.37 Australian Department of Employment, (2016). The skilled labour market: A pictorial overview of trends

and shortages; Australian Department of Employment, (2016). Skill shortage list: Victoria.38 Graduate Careers Australia, (2016). Graduate Destinations 2015: Supplementary tables and figures, Table 7a.


2. REGULATION

Regulation is a core government tool for influencing how businesses operate to achieve community objectives. Good regulation provides confidence to stakeholders that businesses are operating within known parameters and safeguard the community and environment from harm. Victoria has a substantial body of regulation to achieve important objectives – a few examples are occupational health and safety, road safety and environmental protection. Victoria has a well-regarded regulatory system overall, but we can always do better. We need smarter and simpler regulation and ways of interacting with government that reduce costs to business, improve productivity and respond to future challenges. Like government, individual organisations can also reduce the cost and complexity of doing business by examining the self-imposed rules that they operate within.39 The Victorian Government, in collaboration with businesses, can lighten the regulatory burden by:

• improving regulator service delivery and lowering the cost of regulator interactions;

• increasing flexibility in regulatory design and implementation to support growth and new business models; and

• reforming key inefficient areas such as local government’s regulatory role and government procurement.

IMPROVING SERVICE DELIVERY AND LOWERING THE COST OF REGULATOR INTERACTIONS FOR BUSINESS

Businesses find Victoria’s regulatory structure difficult to navigate and often have to deal with multiple regulators that do not coordinate activities. Victoria has approximately 60 regulators, in addition to 79 local councils, that also administer state government regulations. Businesses can supply similar information multiple times, to the same or different regulators and undergo numerous compliance inspections. Many regulators are too narrowly focused to recognise and manage the total impact on business from all regulation. Some are small and have limited resources to find better ways of doing things.

Number of regulators Business type

Cafe serving liquor

Meat, poultry &small goods retailer

Dairy farm

Regulatory environment facing three different business types

Local government regulator

Other regulators

Number of licences or permits

24

33

188

8

10

There have been successful examples of consolidating regulator functions. The establishment of the Victorian Registration and Qualifications Authority in 2007 brought together three education and training providers: the Victorian Qualifications Authority, the Registered Schools Board and the Office of Training and Tertiary Education to provide businesses with improved access to information and lowered regulatory costs. While change is expensive in the short term, cost savings and service improvements can be realised over time.

39 Deloitte, (2014). Get out of your own way: Unleashing productivity; Building the Lucky Country #4


Implementation and regulator service deliveryRequirements specified in legislation are not the only driver of costs for business. The Victorian Chamber of Commerce and Industry members regularly report their greatest difficulty with regulation relates to compliance or administration, not regulatory standards themselves. Poor implementation can result in unnecessary costs through paperwork, approval delays and overly restrictive input requirements. Businesses also face unnecessary costs when information and guidance is difficult to find or understand, or when policy makers and regulators do not consider the overall burden of regulatory requirements, including reporting and compliance audits.

The Small Business Retail Regulation Review forms part of the Government’s regulatory reform program, and will work with stakeholders to identify reforms that improve the experience of starting and operating a small business in Victoria. The first review looks at the retail sector through the eyes of a small business and is soon to release proposed reforms for consultation that improve outcomes for these businesses. This review’s research indicated that businesses incur avoidable costs when:

• there is insufficient consideration of implementation at the policy development stage;

• there is little consideration or consultation between policy makers, regulators and regulated parties about the objectives and how these can be achieved at least cost;

• it is difficult for businesses to understand their obligations and regulator expectations;

• regulators do not collaborate on compliance and monitoring activity or share information;

• regulators focus on their enforcement role over assisting business to comply; and

• regulatory outcomes and feedback from business is not monitored to inform review of policy and regulator practices and there is a lack of transparency and accountability of regulator performance.

Victoria has commissioner and government resources dedicated to providing advice and services for businesses and working to reduce the burden of regulation.40 While continuing to improve and streamline government services and advice is important for business development, reducing the overall complexity of the regulatory environment should also be a focus for government.

OCCUPATIONAL HEALTH AND SAFETY COMPLIANCEThe Victorian Chamber of Commerce and Industry members have highlighted that:

• information is difficult to access, and guidance can be too complex or out of date (i.e. Australian Standards);

• inspectors rarely provide constructive advice or information to address identified problems;

• regulations provide little flexibility to achieve safety outcomes in innovative or lower cost ways; and

• onerous record keeping requirements have few direct safety benefits.

REFORM IN THE UK HEALTH SECTOR DRIVING REGULATORY IMPROVEMENT AND OUTCOMES FOR PATIENTSThe UK National Institute for Health and Care Excellence (NICE) is a non-departmental public body that develops guidance and quality standards for social care. NICE’s aim is to drive and enable excellence across the health and social care system by designing products to support decisions and system-level quality improvement aligned with the needs of the health care system.

40 Business Victoria is a DEDJTR website designed to help start, run and grow businesses. The Red Tape Commissioner works with businesses to identify areas of red tape. The Small Business Commissioner offers SME mediation services for dispute resolution and the Office of the Commission for Better Regulation reports on Victoria’s regulatory system.


PROPOSED REFORM DIRECTIONSGovernment should consider regulation from the perspective of business to identify ongoing reform opportunities. Regulators can improve service delivery if they listen more closely to regulated businesses and are accountable for regulatory outcomes rather than processes. This will enable an enduring framework for lowering the cost of interacting with regulators. Proposed reforms should also support the Government’s regulatory reform program, such as the Small Business Regulation Review and leverage existing resources, such as the Red Tape Commissioner.

The Panel’s view is that government, in collaboration with industry, should consider how best to improve service delivery and lower the cost of regulator interactions through policy levers such as:

2.1 Improvements to the structure of regulators and continuous improvement of regulator practices and business interactions, with specific measures including:

• increasing regulator collaboration and coordination, potentially through co-locating, consolidating or integrating:

- regulators that undertake onsite inspections and audits;

- sector-focused regulators, to broaden the scope of regulators;

- consumer protection and essential services regulatory functions; and

- licensing and registration bodies.

• establishing a whole-of-government regulator performance framework, building on existing tools (such as Ministerial Statements of Expectations for regulators) and supported by:

- a regulator code of conduct and principles;

- one single regulatory advisory body responsible for working with businesses and regulators to strengthen overall regulator capability; and

- a requirement for all regulators to actively seek feedback from business.

• improving use of guidance material and technology to make it easier for business to find and provide information to regulators; and

• improving the timeliness of decision making through reform of approvals, notifications and licences.

RECENT DEVELOPMENTS IN REGULATORY COST REDUCTIONS FOR BUSINESS Service Victoria received $81.1 million in the 2016 State Budget to create an online one-stop-shop for individuals to connect with state government services.

Service NSW is an online portal that makes it easier for residents and businesses to connect with government by providing simpler transactions and a single point of contact. Service NSW is trialling an online form that shares information with multiple NSW agencies during business applications, and is providing small businesses in five priority sub-sectors with a one-stop-shop and case manager to assist with compliance.

INCREASING FLEXIBILITY IN REGULATORY DESIGN AND IMPLEMENTATION

Advances in technology inspire businesses across the world to reinvent how they operate. Innovative businesses are harnessing new technologies and driving productivity growth, innovation and competitiveness by challenging existing ways of delivering goods and services. While new technologies facilitate new ways of providing goods and services, they can also pose challenges for regulators in monitoring conduct and enforcing rules. Some new business models face excessive costs in complying with Victoria’s regulation or are operating outside the current regulatory framework.

Victoria’s regulatory design and implementation needs to support the growth of new business models and ensure regulations remain fit-for-purpose, while still meeting community expectations. Failure to appropriately adapt the regulatory system could prevent Victorians from enjoying significant economic and consumer benefits and increase enforcement costs for government.


Prescriptive regulation limits business flexibilityOverly prescriptive regulation can hinder the development and adoption of technologies or restrict how an activity is undertaken. This can stifle innovation in a sector, create barriers to competition, and discourage the development of new business models. The Productivity Commission states that in order to get the most from technological change, governments need to ensure regulations are flexible and adaptive.41 Regulation should be outcomes-based to require business to meet defined regulatory objectives, but provide flexibility to achieve these outcomes in the most efficient and effective way for each business.

REFORM TO NEW SOUTH WALES AND SOUTH AUSTRALIA REGULATION OF UNIVERSITIESUniversities compete in a global market and need to be able to respond quickly to market dynamics. Recent reforms to university regulation in NSW and SA allow greater flexibility for land dealings, borrowings, commercial activities and council appointments. There are opportunities to consider how Victorian regulation could support universities in remaining a leading export industry and contributor to the economy.

Regulation needs to change to stay ‘fit-for-purpose’Regulators and policy makers need to be aware of changing market dynamics and incentives so they can consider how new business models can be accommodated without jeopardising regulatory objectives. In some cases regulatory objectives may need to be revisited. Most Victorian regulations will automatically expire after ten years so government must review the policy including the objective, impact and outcome of regulation.

More regular review may be needed to address the challenges facing new and emerging markets along with additional measures to ensure Victoria has a regulatory environment that can adapt and respond to the needs of business. Advances in technologies and new business models may require regulation to be suspended while new approaches are tested and information is gathered to inform market development and regulatory reforms. This is sometimes referred to as a regulatory ‘sandbox’ – which is a mechanism to allow safe trialling and testing of promising new products or services in a controlled regulatory environment, enabling innovators to essentially ‘play’ with ideas to explore their viability.

THE TAXI INDUSTRY

Taxi industries across the world have been re-shaped by new entrants that use technology and contracted drivers to more efficiently and effectively provide point-to-point transport services. Companies such as Uber and Lyft use smartphone applications to connect individuals to drivers, enabling greater service choice, availability, frequency and quality. When Uber entered the Victorian market in 2015, it operated outside of the regulatory framework because Victoria’s regulations were unable to accommodate non-traditional business models. In 2016, the Victorian Government announced that Victoria’s taxi regulations would be reformed to accommodate ridesharing services and future possible disruptions to the market.

PROPOSED REFORM DIRECTIONSImproved regulator engagement with business and a greater focus on facilitating compliance will strengthen government’s ability to recognise and respond to market developments and emerging technologies. Identifying principles of best practice for regulators and formalising a performance framework will also enable better outcomes for businesses, as highlighted in the previous section.

The Panel’s view is that government, in collaboration with industry, should consider how best to increase flexibility in regulatory design and implementation through policy levers such as:

2.2 Facilitation of business innovation by strengthening the drive towards flexible regulatory implementation in the short term and outcomes-focused legislative reform in the longer term, with the aim of promoting new thinking and ways of doing things.

2.3 Facilitation of new business models by working to address aspects of the regulatory framework that are getting in the way of innovation, including helping businesses test ideas using concierge services and regulatory ‘sand-boxes’ where appropriate (see Chapter 3: Digital transformation and disruption).

41 Productivity Commission , (2016). Digital Disruption: What do governments need to do? Productivity Commission, Canberra


REFORMING LOCAL GOVERNMENT’S REGULATORY ROLE

Victoria’s 79 local councils play a significant role in Victoria’s regulatory system due to their local knowledge and proximity to businesses and the community. They have responsibilities under a large number of state laws, including in areas such as planning, food safety and environmental health. They also have the power to make local laws. Victorian Competition and Efficiency Commission (VCEC) research suggested 11% of all Victorian businesses deal with multiple councils on regulatory issues of some sort. The costs to business from land-use planning regulations administered by councils were estimated at around $688 million per year, including paperwork and delay costs of around $262 million.

Consultation with business highlighted that local government regulation is often implemented in a fragmented way:

• regulatory approvals are disconnected and a lack of coordination across regulatory requirements makes it difficult for small business to navigate through multiple regulatory requirements;

• local councils sometimes interpret regulation differently;

• variations in permit arrangements across local government can result in inconsistencies and increase costs for businesses operating in multiple council areas, and there can also be significant variations in fees;

• local councils are sometimes reluctant to provide guidance before applications are lodged; and

• licence applications are unnecessarily restrictive and burdensome, due to the number of different licences and the lack of coordination across councils, particularly for temporary or ‘pop-up’ businesses and events.

The Victorian Government is currently progressing a number of reforms that will improve local government’s regulatory functions, such as:

• Smart Planning to make information easier to find and understand through a user-focused online portal;

• the Victorian Design Review Panel providing expert design and architectural advice to councils and reviewing development applications, and the Victorian Planning Authority assisting councils with master planning work;

• the Local Government Act 1993 review, which will enable councils to be more innovative, collaborative and efficient; and

• proposals by the Panel for planning reform for state and regionally significant business development in Victoria.

PROPOSED REFORM DIRECTIONSThere are opportunities to reduce the regulatory burden and costs for businesses that would complement existing reform efforts to streamline local government regulation and implementation.

The Panel’s view is that government, in collaboration with industry, should consider how best to improve local government’s regulatory role and functions through policy levers such as:

2.4 Streamlined local government regulatory services through increased decision-making consistency, strengthened regulatory capability and improved provision of information and guidance, with specific measures including:

• allocating regulatory decision making to a separate entity (or entities), allowing local councils to focus on strategic planning, community engagement and policy setting; and

• sharing regulatory expertise and experiences across councils, allowing for better decision making in shorter timeframes.


IMPROVING ACCESSIBILITY AND EFFICIENCY IN GOVERNMENT PROCUREMENT

The Victorian Government procures over $6 billion in goods and services every year. Suppliers include multinationals, not-for-profits, SMEs and sole traders. Local government is also a significant contractor of goods and services. Procurement processes and polices can be improved to provide better service delivery, greater accessibility and reduced costs for businesses, particularly SMEs. Businesses experience difficulties accessing procurement opportunities and inefficiencies in government procurement processes because:

• there are multiple access points and different processes and requirements across state government departments, agencies, and local councils;

• there is a lack of clear guidance on how to participate and meet requirements, which creates barriers for SMEs;

• some tendering rules and insurance obligations are prohibitive;

• supplier payment processes are inefficient particularly for SMEs and businesses that operate across multiple government agencies; and

• poor feedback limits improvements for future selection processes.

Additionally, SMEs are unlikely to complain, commence dispute resolution mechanisms or provide feedback to procurers on how to improve processes because they are concerned it will jeopardise future opportunities.

PROPOSED REFORM DIRECTIONS

Government is a large purchaser of goods and services in the Victorian economy. Streamlining administrative interactions with suppliers can have a significant impact on efficiency for both business and government, allowing time and resources to be redirected to more productive activity. Helping businesses easily and smoothly access government procurement opportunities is likely to be particularly significant for SMEs.

The Panel’s view is that government, in collaboration with industry, should consider how best to improve accessibility and lower costs for business and government procurement through policy levers such as:

2.5 Better business experience with government procurement and improved efficiency of procurement practices and processes, with specific measures including:

• establishing a single, consolidated supplier-facing portal that:

- holds consolidated information about procurement opportunities and registered businesses;

- allows lodgement and tracking of documentation; and

- improves transparency of selection criteria and processes and feedback mechanisms.

• consolidating government procurement processes, while maintaining departmental or agency autonomy over procurement that will:

- standardise procurement specifications, increasing consistency and enabling opportunities for business to innovate through greater use of incentivised and outcomes focused contracts;

- enable consolidated payments systems;

- allow improved monitoring, evaluation and reporting, including government objectives pursued through procurement practices; and

- manage a supplier facing portal and engagement with suppliers, including training and education initiatives, feedback and dispute resolution.


3. DIGITAL TRANSFORMATION AND DISRUPTION

Internet-enabled digital technologies, including artificial intelligence (AI), automation and robotics, the Internet of Things (IoT) and data analytics, are the next ‘wave’ of industrial revolution, with significant potential to drive global productivity and economic growth.42 In Australia, the economic contribution of the internet- and digital-enabled economy is forecast to increase from $79 billion in 2014 to $139 billion by 2020, rising from 5% to 7% of GDP.43

$66bn$13bn

$123bn$15bn

Projected growth in Australia’s digital economy by 2020

Source: Deloitte Access Economics (2015)

In the broadereconomy

Within the Information Management Technology (IMT) industry

2020

2014

To harness the economic potential of the digital economy, the Victorian Government can encourage the development, adoption and diffusion of new generation digital technologies by being proactive in:

• providing or supporting development of the enabling infrastructure, skills, and industry and research capabilities that will enable Victorians to be digital innovators, early adopters or even disruptors;

• addressing regulatory and other barriers to adoption of new digital technologies, while balancing the risks to safety, security and privacy; and

• minimising economic disruption by anticipating and supporting the transition of disrupted industries, businesses and jobs, and ensuring that disadvantaged communities are not left behind.

LEVERAGING GOVERNMENT INFRASTRUCTURE AND ASSETS

Telecommunications infrastructure and servicesThe quality and availability of telecommunications services, supported by necessary infrastructure, is a key driver of productivity and growth, with telecommunications infrastructure projected to deliver over $12 billion in gross value add in Victoria by 2031.44 Victorian businesses need fast and affordable telecommunications to use IoT and other digital technologies. However, the rollout of the NBN is proceeding slowly and the capacity of non-fibre to the premises options (such as mobile, satellite and fixed wireless services) to meet the digital needs of regional and rural Victorian businesses is uncertain.

The Victorian Government owns a range of telecommunications infrastructure and assets that could be better utilised to support Victoria’s digital future. Victoria’s small geographic size also presents a comparative advantage as it can provide better, more widespread connectedness for digital technologies more efficiently, including in regional cities and towns. 5G technology now being trialled will be more than 100 times faster than the NBN, putting mobile broadband into the category

42 McKinsey Global Institute (2013) Disruptive Technologies: Advances that will transform life, business and the global economy

43 Deloitte Access Economics (2016) Australia’s Digital Pulse, report prepared for the Australian Computer Society. 44 Infrastructure Australia (2015) Australian Infrastructure Audit: Our Infrastructure Challenges April 2015


of technologies (such as electricity and the automobile) that have driven large scale innovation. Qualcomm estimates that the 5G value chain could boost real global GDP growth by $3 trillion cumulatively from 2020 to 2035.45 Full enablement of 5G will, however, require integrated use of public, private and commercial telecommunication assets.46

NT

TAS

ACT

SA

WA

QLD

VIC

NSW

0 2 4 6 8 10 12 14 16 18

Projected value-add (direct economic contribution) of telecommunications infrastructure, 2031

Metropolitan area

$ billion

Rest of state/territory

Source: Infrastructure Australia (2015) Australian Infrastructure Audit

GOVERNMENT SUPPORT FOR IOT

The Victorian Government has funded Internet of Things (IoT) demonstration projects in the North West, Macalister, Serpentine and the Goulburn-Murray region, to help local businesses connect with the latest digital technology. $12 million is being provided for internet-enabled on-farm technologies.46 The trials will not only demonstrate the capabilities of IoT technologies but also inform the government on how it can support the wider adoption of IoT technologies.

Getting more out of government data Data is increasingly integral to how economies function, and is often a critical enabler of innovation. However, a recent Productivity Commission report on data access and utilisation estimated around 22% of all data generated in the ‘digital universe’ was potentially useful as an input into subsequent analysis but less than 5% of that data was actually being used.47 The potential to create economic value from government data in particular has grown through availability of the internet, improved data analytics and smart device applications. The annual economy-wide value of open government data in Australia is estimated to be around $25 billion.48

Like most Australian states and territories, Victoria has an open government data policy and a database of available data sets. However, although 6,198 data sets have been released from 44 Victorian Government organisations since 2012 (as at mid-May 2017),49 this is relatively modest compared to other governments. The value of making further data available, and the utility of doing so, is a significant opportunity that should be explored.

There are also many opportunities for the private sector to make better use of government-held data in building viable businesses that deliver public programs and services in a far more innovative, cost efficient and effective way than is currently achieved by government. In health care, for example, big data analytics is already showing tremendous potential to predict epidemics, cure disease, avoid preventable deaths and improve quality of life through a range of predictive health management techniques.

45 https://www.qualcomm.com/news/releases/2017/01/17/landmark-study-impact-5g-mobile-technology-released46 http://www.premier.vic.gov.au/connecting-regional-victoria47 Productivity Commission (2017) Data Availability and Use, Productivity Commission Inquiry Report.48 Australian Government Department of Communications and the Arts Bureau of Communications Research

(2016) Open government data and why it matters February 2016 49 www.data.vic.gov.au



The Panel’s view is that government, in collaboration with industry and research organisations, should consider how best to leverage government infrastructure and assets to improve Victoria’s productivity, through policy levers such as:

3.1 Better utilisation of existing telecommunications/other public infrastructure and assets, with specific measures including:

• taking a more coordinated approach to managing Victorian Government owned telecommunications infrastructure to maximise the availability of high speed broadband services, including to test and enable IoT technologies in remote locations, such as agricultural IoT technologies;

• accelerating the availability of 4G and 5G mobile broadband in Victoria and sponsoring an early 5G test bed for business to trial next generation digital technologies; and

• reinvigorating Victoria’s open government data efforts to create more value while taking any necessary measures to de-identify personal data.

ADDRESSING THE SHORTFALL IN SKILLED DIGITAL WORKERS

Australia’s digital workforce is expected to increase from its current base of 629,000 to around 695,000 ICT workers (including ICT workers in the broader economy) by 2020, with an annual growth rate of 2.0% compared to 1.4% in the broader workforce.50 Victoria’s ICT workforce is also forecast to grow by 2.7% each year.51 However, only 67% of computer science graduates achieved full time employment in 2015, down from 84% in 2008.52

Source: Deloitte Access Economics (2015)

2015

2020

Growth in total ICT workforce by 2020

Workforce Using ICT Skills

ICT workforce

2.687m

695,364

2.492m

628,810

Unsurprisingly, the number of students now seeking to enrol in computer science degrees is low and courses are undersubscribed. This is despite the fact that demand for graduate and postgraduate qualified ICT workers is forecast to increase at 3.0% and 2.9% respectively over the next five years.53 This seeming mismatch in unmet demand at the same time that ICT graduates struggle for positions is an indication that the education system is not producing graduates with the right mix of sufficiently developed skills to meet employer needs. Employers instead seek out ‘work ready’ ICT workers with at least of 3-5 years’ work experience and a generalist set of skills in addition to the specialist technical skills that graduates have.

50 https://www2.deloitte.com/tl/en/pages/economics/articles/australias-digital-pulse.html51 http://www.launchgroup.com.au/2016/05/18/acs-report-reveals-skills-mix-essential-in-ict-employment-in-victoria/52 Department of Employment (2015) Labour Market Research –Information Technology (IT)53 https://www2.deloitte.com/tl/en/pages/economics/articles/australias-digital-pulse.html


PROPOSED REFORM DIRECTIONSAction is required to address the quality and diversity of the education of ICT graduates and their work readiness, including greater collaboration between business leaders and higher education providers.

The Panel’s view is that government, in collaboration with industry and higher education providers, should consider how best to address the shortfall in skilled digital workers through levers such as:

3.2 Facilitation of collaboration between business and higher education providers to create more ‘work ready’ digital graduates to meet current and future skill needs, with specific measures including:

• collaborating in the design and/or delivery of ICT courses;

• collaborating to provide work-based and business-research projects, internships and work experience; and

• collaborating with the higher education sector on new education models for supplying job-ready graduates, such as the NZ ICT Graduate Schools.

ADDRESSING REGULATORY AND OTHER BARRIERS/DISINCENTIVES TO DIGITAL DISRUPTION

Since the early 2000s, digital businesses have been disrupting established markets, achieving global success and taking significant market share from traditional incumbents. Governments have, in general, been slow to respond to the regulatory challenges posed by these companies even though a faster response would benefit the economy.

VICTORIAN LEGAL CHALLENGES TO AIRBNB

Airbnb provides a digital platform for private home owners to rent out rooms or whole properties to travellers, disintermediating commercial accommodation options. Airbnb has faced many regulatory challenges and has been banned in some cities. In Victoria, the Supreme Court has found that owners corporations cannot ban short stay operators.

5

10

15

20

2010

17M

2011 2012 2013 2014 2015

Number of guests staying with Airbnb hosts

Regulatory challenges posed by new technologies New technologies, including artificial intelligence, robotics and automation are challenging existing regulatory regimes, in particular where they impact on human activity (i.e. drones in populated places), carry out tasks with humans (i.e. automated machinery) or require ethical decisions (i.e. health or medical treatment). Businesses face barriers to trialling and testing these technologies as, until they become marketable, there is little impetus for governments to amend regulations or intervene in markets.


Disincentives to digitisation for government, businesses and consumersDespite the many benefits of new digital technologies, their diffusion into the economy beyond early adopters can be slowed as governments, businesses and consumers struggle to overcome many challenges and disincentives to adoption and digitisation more generally, including:

• data security – protection of data assets, including intellectual property and customer information, is an increasingly high priority for businesses, with 19% of Australian businesses experiencing a cyber-attack in 2016;54

• cyber-fraud and crime – through their digital engagement, businesses and individuals are increasingly vulnerable to sophisticated and evolving threats. Around 33% of Australian businesses experience cybercrime each year (with 60% of all targeted attacks striking SMEs) and the average cost per cyber attack is estimated to be more than $275,000 per business;55

• privacy – control of personal information is becoming increasingly difficult for businesses and individuals as digital business models and technologies are designed to harvest, share and exploit personal data;

• data residency and sovereignty – cloud and other internet-based services create uncertainties around where data is stored and the sovereign laws to which it is subject; and

• consumer protection – consumers need to be aware of how digital devices harvest and use their data, and a minimum level of trust and assurance needs to be established and maintained.

USE OF HEALTH AND FITNESS INFORMATION COLLECTED BY FITNESS AND HEALTH TRACKERS

Health and life insurance companies are incentivising the use of health and fitness tracking devices while using the data captured by the devices to calculate risk and premiums, raising questions about how the data could result in discrimination by the insurers or third parties who may receive the data.

PROPOSED REFORM DIRECTIONSGovernment can play a role in improving the capacity of the Victorian economy to absorb disruptive technologies.

The Panel’s view is that government, in collaboration with industry, should consider how best to address regulatory and other barriers to digital disruption through policy levers such as:

3.3 Increased flexibility of the regulatory environment to facilitate investment and ease introduction, trialling and early adoption of new technologies, with specific measures including:

• accelerating the use of digital technologies and data utilisation in the delivery of public services, such as e-health, digital transport technologies and customer service platforms, to support improved outcomes and productivity;

• engaging with businesses to better understand the regulatory ‘hotspots’ and markets that need reform;

• establishing a ‘digital sandbox’ program to enable early stage development of new digital technologies with high growth potential, supported by fixed-term and purpose specific regulatory exemptions;

• providing information and advice to businesses on addressing privacy, security and data sovereignty issues; and

• looking for opportunities to enhance how cyber-crime and cyber-fraud is reported and addressed and to improve the protection of consumers when using data-sharing technologies and devices.

54 http://www.cso.com.au/article/609308/uninsured-small-australian-businesses-breached-nearly-twice-rate-us/55 https://www.staysmartonline.gov.au/sites/g/files/net301/f/Cost%20of%20cybercrime_INFOGRAPHIC_WEB_

published_08102015.pdf


ASSISTING THE TRANSITION OF DISRUPTED INDUSTRIES AND COMMUNITIES

Digital technologies will drive fundamental change in many existing industries. Robots are likely to be performing 45% of manufacturing tasks by 2025, compared to 10% today, and 44% of jobs in Australia are considered to be at high risk of computerisation and automation.56 However digital technologies won’t necessarily drive net job loss. In some industries, like aged care and agriculture, they may fill some labour shortfalls and in others, they will create new jobs. While digital technologies are already demonstrating the significant potential to improve peoples’ home and leisure lives, and their education and employment opportunities, they also have potential to leave behind parts of the community who are unable to access or use them.

It is important that the Government – where appropriate – plays a proactive role in seeking to minimise the adverse effects of digital disruption and ensuring the benefits of digital transformation are shared equitably, including that job creation is maximised (for example, by seeking to ensure the next disruptive technology is based here in Victoria) and economic growth is realised as broadly as possible across the whole Victorian economy.

PROPOSED REFORM DIRECTIONSThe Government has a vested interest in ensuring that the disruptive impact of digital technologies on affected industries is harnessed to create value and that no Victorians are left behind.

The Panel’s view is that government, in collaboration with industry, should consider how best to assist the transition of disrupted industries, businesses and communities through policy levers such as:

3.4 Partnership with industry to proactively target, manage and assist disrupted industries and businesses, with specific measures including:

• supporting workers in disrupted industries to help them transition to new roles or change industry;

• ensuring that digital transformation creates value for all Victorians by encouraging digital literacy; and

• providing information and assistance on digitally driven changes to disadvantaged community members.

56 Data61 (2016) Tomorrow’s Digitally Enabled Workforce


4. FINANCIAL SERVICES

The financial services sector is critical for Victoria’s future prosperity. The provision of sophisticated banking, superannuation, insurance and other services underpins broader productivity growth by making it easier for firms to invest, innovate and grow, while helping consumers better meet their personal goals.

Just as importantly, financial services (including insurance) is the largest and most productive sector of the Victorian economy. Financial services accounted for 13% of economic activity57 and 115,000 skilled jobs58 in 2015-16, while labour productivity is three times the all-industry average. Key sectors in Victoria include superannuation, health insurance and infrastructure funding, which also support related businesses, such as accounting, IT and legal firms.

However, Victoria’s performance and reputation as a financial services centre is significantly below that of NSW. Victoria’s financial services sector is smaller than NSW as a share of the economy and there is a growing gap in multifactor productivity. Sydney is also seen internationally as Australia’s principal financial services centre.

While Victoria has several acknowledged strengths in financial services, including its location in the growing Asia-Pacific region, there are clear opportunities to lift the scale and productivity of the financial services sector closer to that of NSW or international comparators. Doing so would directly improve Victoria’s economic performance (by boosting an already highly productive sector) and support growth in the wider economy (by ensuring that businesses and consumers are able to access the financial services they need).

0

50

100

150

200

250

1990-91 1995-96 2000-01 2005-06 2010-11 2015-16

Multifactor productivity – Finance & Insurance

Ind

ex =

10

0 in

19

90

-91

Source: Department of Treasury and Finance calculations based on ABS Cat. No 5206.0.55.002, Cat. No 5220.0, Cat. No 5220.0.55.005, Cat. No 6202.0, and Cat. No 6291.0.55.003

VIC

AUSTRALIA

NSW

Specific actions that the Victorian Government can take include:

• support Victoria’s financial services sector to grow by leveraging our existing strengths and identifying new opportunities domestically (for example, scaling up the emerging FinTech sector) as well as internationally (through the provision of superannuation and other financial services to the growing Asia-Pacific region);

• consider initiatives that will help Victorian businesses access deeper capital markets and new, efficient financial products; and

• improve financial inclusion, including strengthened financial literacy and management skills, particularly for SMEs and disadvantaged groups.

57 ABS (2016) Australian National Accounts: State Accounts, 2015-16, Cat. No. 5220.0, Department of Treasury and Finance

58 ABS (2016) Labour Force, Australia, Detailed, Quarterly, Nov 2016, Cat. No. 6291.0.55.003


RECOGNISING THE SIGNIFICANT OPPORTUNITY FOR THE FINANCIAL SERVICES SECTOR TO GROW ITS SHARE OF VICTORIA’S ECONOMY

Successful financial services sectors typically develop in clusters where a critical mass of financial services firms and support services develop together to provide high quality financial products. These clusters are underpinned by high quality infrastructure, a pool of highly skilled labour, high quality tax and regulatory settings and a reputation for ‘liveability’. The productivity benefits of such clusters are the support they provide to development of expertise, knowledge diffusion and innovation.

Adapted from: The Committee for Sydney (2015). Bringing benefits to all – how Sydney’s financial services sector leads the Australian economy. Sydney

Financial services

Banking &insurance

Savings Investmentfunds

Business & consumer

lending

Venture capital

Personal & commercial

life insurance

Ancillary & supportservices

KnowledgeCreation

Organisationchange & creation

Spinoffs

Skilled labour& higherwages

Superannuation

Capitalmarkets

Assetmanagement

Broader spill overs to the economy

Broader economic growth

Victoria’s financial services sector is relatively mature, with acknowledged strengths in key areas (particularly superannuation, health insurance and infrastructure and debt funding, share registry services and benefit administration services, as well as a nascent FinTech sector). But there are also potentially significant challenges facing the sector – for example, automated processing and management of insurance claims could start to replace highly skilled workers. 59

FINANCIAL SERVICES IN REGIONAL VICTORIA59

While most of Victoria’s financial services firms are based in Melbourne, there are significant clusters in regional Victoria. Geelong is becoming an increasingly important centre for insurance, rehabilitation and personal injury services by hosting the head offices of the National Disability Insurance Agency and the Transport Accident Commission. Geelong’s status will be further boosted by the impending relocation of the WorkCover head office. Other personal and health insurance providers with a presence in Geelong include GMHBA, BUPA and Medibank Private. A banking cluster is also developing in Bendigo, based around the head office of the Bendigo and Adelaide Bank, which is the only domestic bank with headquarters located outside a capital city.

Leveraging Victoria’s strengthsThere are emerging opportunities for growth and innovation in financial services that play to Victoria’s current strengths. Examples include the consolidation of superannuation funds and ‘in-housing’ of funds management and other activities, plus the gradual development of new financial products for retirement (including unlocking home equity). Ensuring that these activities remain in – or are attracted to – Melbourne is important for the ongoing strength of the financial services sector.

Generally there are good incentives for private firms to spend money to research and develop new products or enter new markets that increase their profitability. But in other cases, there may be sector-wide benefits from research or co-ordinated action where firms find it costly or impractical to co-ordinate their activities that provide a case for government action. The Victorian Government has already undertaken a number of practical measures, including support to establish the Australian Centre for Financial Studies and sponsorship of the Melbourne Mercer Global Pension Index. In addition, the CSIRO-Monash Superannuation Research Cluster brings together academia, industry and

59 Source: Boston Consulting Group (2015), Professional Services Fact Pack. Melbourne, p 10.


government to undertake research to influence policy and support innovation. Both of these are designed to promote Melbourne as a world class financial services centre and support research that benefits the sector as a whole. While these are valuable measures, more could be done to play better to Victoria’s strengths.60

SYDNEY: A ‘FIRST MOVER’ ON FINANCIAL SERVICES

Sydney’s position as a principal financial services centre reflects a critical mass of key sectors, including retail and investment banking, the Australian Stock Exchange, major industry bodies and the principal financial regulators (ASIC, APRA and the RBA), and the NSW Government has been proactive in seeking to grow financial services and boost Sydney’s reputation. The Committee for Sydney has recently put Melbourne on notice, noting further opportunities to expand Sydney’s financial services sector, including “significant scope to challenge [Melbourne] as the primary base for the industry superannuation sector by building on the growing retail superannuation sector based in Sydney.61

Boosting international linkages61

Although Victoria is well-integrated into international financial markets, there are opportunities to develop these links further, through identifying and pursuing opportunities to increase our exports of financial services as well as enhancing Melbourne’s reputation as an international financial centre and destination of choice for international financial service firms. This will not only help to grow the financial services sector, but also to deepen our access to international capital markets and to new financial products and services.

The Asia-Pacific region is a high growth region with relatively under-developed financial markets in key areas where Victoria has a comparative advantage (notably superannuation and insurance). The introduction of the Asia-Pacific Financial Passport in 2018 is expected to create new opportunities for Australian financial services firms. However, our current export performance appears poor: Victoria’s share of Australia’s exports of financial services is just 8%.62 This partly reflects the fact that superannuation is largely a domestic-focused industry. Domestic and international regulatory and trade barriers – which the Commonwealth needs to address – clearly play a significant role in gaining access to international markets, but limited information about the knowledge and expertise available in Melbourne together with geographic, cultural or linguistic differences can also present significant challenges and may reinforce a ‘home bias’ in financial services.

Developing Melbourne’s FinTech sectorFinTech captures the intersection of financial services and technology and the resulting development of new products, processes and business models. The opportunities from FinTech are potentially significant: existing firms can reduce costs and deliver services more conveniently to customers, while new products and services will provide greater choice for investors, borrowers and customers.

Melbourne currently has a small but vibrant FinTech sector with one small, privately owned innovation hub – the York Butter Factory – that is intended to provide advice and networking opportunities for a range of start-up firms. In common with start-ups elsewhere, Melbourne’s FinTech sector reports a range of challenges, including difficulty in: attracting and retaining key staff; accessing private capital; acquiring customers (including limited access to consumer data and engaging with large businesses); and accessing networking, knowledge sharing and mentoring for start-ups.63

The Commonwealth is implementing a range of regulatory and policy measures – for example, comprehensive credit reporting and data reform to improve data on the creditworthiness of customers and support the development of new peer–to-peer lending models. The Victorian Government has been developing various measures to support the FinTech sector – notably the launch of the Professional Services Strategy in 2016, which included a proposal to develop a FinTech hub in Melbourne through Launch Victoria.64

60 The Committee for Sydney (2015). Bringing benefits to all – how Sydney’s financial services sector leads the Australian economy. Sydney, p 12.

61 The Committee for Sydney (2015). Bringing benefits to all – how Sydney’s financial services sector leads the Australian economy. Sydney, p 12.

62 DFAT (2017). Australia’s Trade by State and Territory 2015-16. DFAT, Canberra.63 Stoyan, S (2015). Melbourne FinTech Census64 Government of Victoria (2016). Professional Services Strategy. Melbourne.


There is, however, a clear view that Melbourne is lagging on the performance, opportunities and profile of the FinTech sector. The 2016 Ernst & Young FinTech census65 reported that 28% of Australia’s FinTech businesses were based in Melbourne (compared to 54% in Sydney), while anecdotally, some Melbourne-based FinTech firms have relocated to Sydney to better access capital and other support.

Reducing barriers to growth and innovationMost policy levers for financial services rest with the Commonwealth Government including tax and regulation. Following the Australia as a Financial Centre report in 2009, the Commonwealth has committed to, or is in the process of implementing, reforms in this area. But progress appears slow.

Significant opportunities exist for the Victorian Government to be a strong advocate for the timely implementation of key reforms by the Commonwealth, as well as ensuring ongoing engagement with key Commonwealth agencies (particularly the Sydney-based financial services regulators and Austrade). This will ensure an ongoing focus on key regulatory issues that are relevant for Victorian-based financial services businesses and leverage Commonwealth trade initiatives to exploit opportunities in the Asia-Pacific region.

The Victorian Government also plays a significant role as the owner, regulator and provider of statutory insurance and compensation schemes, and could act to address policy or regulatory barriers that may be limiting innovation and choice in financial services.

Other Australian jurisdictions have allowed greater private sector involvement in the provision of statutory insurance – most recently South Australia, which allowed private insurers to offer compulsory third-party motor vehicle insurance from 1 July 2016.66 The potential benefits from reforms to premium setting and private sector claims management include: stronger financial incentives to improve outcomes for injured people; better claims management; new approaches to treatment and rehabilitation; and better management of financial risks to the state.67 The case would need to be made in light of the current performance of Victoria’s schemes but is worthy of further, detailed consideration.

PROPOSED REFORM DIRECTIONSThe principal way the Victorian Government can help to develop the financial services sector is to ensure the fundamentals are in place (high quality transport and other infrastructure, a highly skilled workforce, a strong reputation for liveability) and support the Commonwealth to maintain a high quality, adaptive regulatory framework.

The Panel’s view is that government, in collaboration with industry, should consider how best to facilitate the development of a larger, more diverse and innovative financial services sector through policy levers such as:

4.1 Deepened links to international capital markets, and attraction of talented individuals and firms, with specific measures including:

• signalling Victorian Government support for the financial services sector (e.g. through a dedicated sector strategy); and

• better promoting Melbourne as an international financial centre (e.g. leveraging our reputation to become a destination of choice for overseas financial services firms and professionals).

4.2 Facilitation of industry-led research and collaboration with universities and other groups to undertake basic research supporting innovation and informing policy design, aimed at the creation of new products, market intelligence and skills.

4.3 Development of new financial products, with specific measures including:

• removing regulatory/policy barriers to a more diversified and innovative financial services sector – for example, by reviewing the benefits and costs of greater private sector involvement in the delivery of statutory insurance schemes; and

• prioritising the implementation of a FinTech hub and other measures that support knowledge sharing, improve access to expert advice and facilitate collaboration across the sector.

65 Ernst and Young (2016). EY FinTech Australia Census 2016. FinTech Australia.66 Government of South Australia (2016). CTP Insurance Regulator website. (http://www.ctp.sa.gov.au/,

accessed 22 February 2017)67 PWC (2014). Potential benefits of private underwriting of statutory insurance schemes. PWC for the Suncorp

Group, Sydney.


ENSURING BETTER ACCESS TO CAPITAL FOR BUSINESSES AND THE COMMUNITY

Access to financial services for businesses and consumers is hindered by significant information problems – for example, customers will always know more about their own circumstances than investors, banks or insurers, but may also find it difficult to credibly demonstrate their true financial position. Both financial services firms and their customers have incentives to overcome these problems and have developed a range of mechanisms to do so. But some of these can be costly to design and implement, and may be difficult for some businesses and consumers to satisfy. This can mean that in some cases genuinely viable investments are denied access to capital, while creditworthy households do not have access to basic financial products.

SME access to capitalA relatively small proportion of Australian SMEs appear to face difficulties in accessing the capital they seek – for example, ABS data indicates that between 25% and 30% of SMEs have limited access to capital,68 while Deloitte Access Economics suggested that approximately 10% of SMEs were unable to access capital.69 However this headline data appears to mask several important trends that may make it difficult, costly and time consuming for some businesses to access capital. Given the size and importance of the SME sector to Victoria’s economy (over 550,000 firms) improving access to capital for some businesses could boost productivity, innovation, growth and employment.

30

20

10

00-4 Persons 5-19 Persons 20-199 Persons 200+ Persons

Firms citing lack of access to additional funds as a barrier to innovation, by size

Source: ABS (2015), Innovation in Australian Business 2014-15, Cat. No 8158.0Pe

r ce

nt

of

inn

ova

tio

n-a

ctiv

e b

usi

ne

sse

s

Several factors appear to have contributed to limiting access to capital for SMEs,70 including:

• start-ups typically have a limited financial history and/or supporting documentation as well as a lack of collateral, which can make it difficult for investors to assess risk;

• banks have revised their risk assessments to better reflect the risks of lending to SMEs, which has been reflected in higher interest rates for SMEs since 2009;

• changes to bank lending practices may have reduced the expertise, information and capacity to assess risk for some SMEs;

• even where SMEs are able to access capital, they are using private homes as collateral or credit cards for working capital; and

• a relatively small venture capital sector, which may reflect historically poor returns from Australian venture capital funds.

68 ABS (2015) innovation in Australian Business, 2014-15, Cat. No. 8158.069 Deloitte Access Economics (2013). Access to capital for small and medium-size enterprises, report prepared for the NSW

Business Chamber.70 Ralston, D. and Jenkinson, R. (2016). Lending to Small and Medium Enterprises. Submission to Financial System

Inquiry. Australian Centre for Financial Studies, Melbourne; and Udell, G.F. (2015). SME Access to Intermediated Credit: What Do We Know and What Don’t We Know. Presented to Small Business Conditions and Finance conference. Reserve Bank of Australia, Sydney.


Other factors may also limit the demand for capital from some small businesses, including:

• the size of the Australian market may provide sufficient returns for some SMEs with limited ambition;

• owners may be reluctant to lose control of their business by bringing in outside capital; and

• SMEs may lack financial skills or access to expert advice (e.g. to develop a credible business plan).

Small Business Victoria has a range of programs to improve financial literacy and support SMEs, including online information and advice, mentoring programs and workshops. There are also specific programs to support disadvantaged groups to develop and grow SMEs (e.g. the Aboriginal Business Advisors Program). Some private firms have also developed programs to improve access to capital for small businesses – for example, the National Australia Bank Microenterprise Program. There are, however, some limits to these programs, such as the use of mentors that may not have up-to-date knowledge of capital markets.

Addressing financial exclusionFinancial exclusion can limit the ability of Victorians to benefit from our growth and prosperity. Financial exclusion occurs when consumers are not able to access basic financial products (a transaction account, credit card or general insurance) from a mainstream financial institution. Approximately 17% of adults in Australia were ‘severely’ or ‘fully’ financially excluded in 2013 in that they were unable to access at least two of these basic financial products.71 The impacts of financial exclusion can be significant: limited access to credit can make it difficult for people to purchase some higher cost goods or services and manage short-term financial pressures, while limited access to insurance makes it difficult for people to protect their assets. Under-insurance and non-insurance continues to be an issue, particularly for disadvantaged groups and/or those in high-risk locations who have limited ability to self-insure.

For some people there can also be broader effects from financial exclusion – for example, limited access to credit and the high cost of insurance may make it difficult for some people to own a motor vehicle, which in turn may limit their mobility and access to employment or government services. The causes of financial exclusion are complex and varied; some factors vary by age, gender, and education, while some people will be affected by multiple factors. Significant factors across most groups include:

• the cost of financial services – in 2013, the annual cost of obtaining these basic financial products was $1,801; while the cost of bank accounts and credit cards had fallen, the cost of insurance increased by over 6%.72 Stamp duty continues to affect the cost of insurance; and

• poor financial literacy – where people lack the skills and knowledge to make informed financial decisions and assess risks, which is exacerbated by the variety and complexity of financial products.

Reducing financial exclusion has direct benefits for the people affected, as well as flow-on impacts on the economy. Greater use of – and better knowledge about – financial services will reduce the risk of poor outcomes for consumers while supporting a more sustainable business for financial service providers.

PROPOSED REFORM DIRECTIONSThere is likely to be limited value in government directly providing capital to SMEs as the information problems are likely to be magnified, which means that higher risk projects are more likely to seek government funding.

The Panel’s view is that government, in collaboration with industry, should consider how best to improve the access to capital for businesses and the community through policy levers such as:

4.4 Improvement of financial skills and access to advice for borrowers, with specific measures including:

• improving financial literacy to better enable SMEs and households to make informed choices about financial products and services;

• promoting collaboration between government, financial services providers and community groups to develop systems, processes and financial products to support at-risk or financially excluded people; and

• removing barriers to, and supporting the development of, financial products targeted to SMEs and financially excluded people.

71 Connolly, C. (2014). Measuring Financial Exclusion in Australia. Centre for Social Impact – University of New South Wales for NAB

72 Connolly, C. (2014). Measuring Financial Exclusion in Australia. Centre for Social Impact – University of New South Wales for NAB


5. CONSTRUCTION

The construction industry makes a significant contribution to the Victorian economy, generating $23.9 billion (or 7.7%) in economic activity73 and employing over 265,000 people in 2015-16.74 Construction is the third largest employing industry in Australia and Victoria’s fifth largest employer. The outputs of the construction industry also drive the economic performance and productivity of the State, providing homes, workplaces, recreation facilities, roads and highways.

There are a number of ways to measure economic performance in the construction sector. Victorian Government analysis using data from the Australian Bureau of Statistics suggests that multifactorial productivity (indexed to 1990-91) in the Victorian construction sector is above that of New South Wales but below the national average. When it comes to labour productivity, the analysis shows a recent drop below New South Wales – with both states below the national average. There is an opportunity to improve economic performance and productivity in the sector to help boost the Victorian economy.

0

20

40

60

80

100

120

140

160

1990

-91

1995

-96

200

0-0

1

200

5-0

6

2010

-11

2015

-16

Multifactor productivity – Construction

Ind

ex =

10

0 in

19

90

-91

VIC AUS NSW

1990

-91

1995

-96

200

0-0

1

200

5-0

6

2010

-11

2015

-16

VIC AUS NSW

0

10

20

30

40

50

60

70

80

Labour productivity – ConstructionG

ross

Va

lue

Ad

de

d (

$)

pe

r h

ou

r w

ork

ed

A high performing construction industry is critical to efficiently deliver both private and public infrastructure projects that underpin Victoria’s economic performance. Increased growth and productivity in the industry will have significant flow-on benefits for Victoria as well as for construction businesses. Enhancements to the built facilities that underpin the productivity and quality of life for Victorians, including housing, schools and hospitals and high quality public transport, all depend on the construction industry delivering successful, good quality and efficient projects. The residential and non-residential buildings, infrastructure and heavy engineering sectors of the industry have different challenges and issues, however opportunities for the Victorian Government to enhance the productivity and economic performance of the construction industry include:

• improving the supply of skilled workers;

• examining Victorian Government procurement for options to reduce the costs to industry and enhance outcomes; and

• supporting greater innovation and uptake up of new technologies.

73 ABS (2016) Australian National Accounts: State Accounts, 2015-16, Cat. No. 5220.0, Department of Treasury and Finance

74 ABS (2016) Labour Force, Australia, Detailed, Quarterly, Nov 2016, Cat. No. 6291.0.55.003


ENSURING SUPPLY OF SKILLED WORKERS

Given its labour-intensive nature, access to a highly skilled workforce is a key success factor for the construction industry. Construction projects require many types of workers, including skilled trades people, engineers and designers, management and administrative staff, and unskilled labourers. Employment in construction increased by 4.7% in the five years to 2015 and is projected to grow by 8.3% over the five years to 2020, including 65,500 new jobs in construction services.75

Need for skilled workers including entry-level workersDespite the growth in construction employment opportunities, there are ongoing issues in the supply of trained construction workers:

• Victorian construction worker vocational training completions are low, falling to below half of commencements in recent years;

• apprentices do not have a common certification standard, creating uncertainty for employers and workers about skill levels and proficiencies; and

• there is an ongoing shortage of skilled trades people in the residential construction industry driven by ongoing population growth.76

0.0

2.5

5.0

7.5

10.0

2011 2012 2013 2014 2015 2016

'00

0s

Year ending 30 September

Commencements

Completions

Commencements and completions of construction apprenticeships and traineeships in Victoria

Source: NCVER, (2017). Apprentices and trainees 2016 September quarter: state and territory data tables

EVIDENCE OF A SHORTAGE OF SKILLED WORKERS

In a Commonwealth Department of Education, Employment and Workplace Relations survey of 17 construction trades, 10 indicated skills shortages or difficulty in recruiting workers,77 and in particular skilled construction workers, entry-level qualified workers and sufficient formal training of existing workers.

77

75 https://australianjobs.employment.gov.au/jobs-industry/construction76 https://buildersacademy.com.au/australian-recruitment-trends-building-construction-industry-july-2016/77 DEEWR, Skills Shortages in the Construction Industry, June 2011, p 3



There are a number of ways the Victorian Government could seek to improve the supply of skilled construction workers through the vocational education system.

The Panel’s view is that government, in collaboration with industry, should consider how best to ensure the supply of skilled workers through policy levers such as:

5.1 Encourage upskilling of the current workforce and development of a larger pipeline of new apprentices for the sector, with an emphasis on skilled tradespeople for future projects, with specific measures including:

• advocating for improvements to the system of verifying construction trade qualifications and experience to reduce the time and expense to employers and provide more accurate information;

• exploring ways to better capture skills and training acquired on the job to help with recognition of skills within the local industry;

• encouraging the uptake of construction industry careers and training as well as retention, where appropriate, in particular for those groups with low participation rates (including women), through information and awareness campaigns that highlight the opportunities for well-paid and skilled careers to help attract new recruits and overcome low vocational education completion rates;

• exploring long-term strategies for encouraging education completion and engagement of apprentices in collaboration with industry and education institutions.

CHANGING PUBLIC SECTOR PROCUREMENT PRACTICES TO IMPROVE PRODUCTIVITY

In 2016, 20% of construction work in Australia originated from the public sector.78 The Victorian Government has committed $39.4 billion to infrastructure investment from 2017-18 to 2020-21.79 Furthermore, Victoria’s infrastructure investment is growing substantially, from an average of $5.6 billion per year over the past decade to around $9.6 billion per year from 2017-18 to 2020-21.

Source: Department of Treasurary and Finance

2009-10

2007-08

2011-12

2013-14

2015-16

2017-18

2019-20

Correct title to: Victorian Government Infrastructure (GII) 2007-08 – 2020-20

Average GII 2007-08 to 2016-17 ($5.6 billion)

Average GII 2017-18 to 2020-21 ($9.6 billion)

9.3 10.1 9.8 10.1 8.45.3 5.8 5.4 5.4 5.6 4.7 4.85.0 4.5

Government procurement balances many competing requirements that can drive up the cost to tenderers (tendering costs alone estimated at up to 3% of project cost),80 lengthen processes and deter potential tenderers. It can also stifle the use of productivity-enhancing innovative productions and materials81 and discourage effective pre-procurement market engagement, including due diligence the prior performance and suitability of tenderers.

78 ABS, Construction Work Done, Australia, Preliminary, 2016, Cat No. 8755.079 Department of Treasury and Finance 80 Chan, C., Forwood, D., Roper, H. and Sayers, C. 2009, Public Infrastructure Financing: An International Perspective,

Productivity Commission Staff Working Paper, Canberra.81 IBISWorld Industry Report E4111, House Construction in Australia, January 2011


The way the Government procures construction goods and services from the market therefore presents substantial opportunities to improve the productivity of the industry and the value delivered to Victorians. Improving procurement practices could create greater competition in tenders, reduce the cost to tenderers and time taken, and encourage more efficient markets and innovative products.

INNOVATION AND COLLABORATION IN UK GOVERNMENT CONSTRUCTION PROCUREMENTS

The UK Government has changed how government departments work with main contractors and their supply chains in order to increase collaboration and innovative solutions. The Government now publishes: pipelines providing detailed projections of spending; cost benchmark data and cost reduction trajectories; information on project bank accounts which help speed cash through the supply chain; and minimum standards for procurement of built environments in the public sector.82

PROPOSED REFORM DIRECTIONS82

There are a number of ways that the Victorian Government could change its procurement policies and practices that could be explored in order to improve productivity in the construction industry.

The Panel’s view is that government, in collaboration with industry, should consider improving construction productivity in government infrastructure projects through policy levers such as:

5.2 Redesign of government procurement processes and methods with an emphasis on reducing the cost to business and encouraging the use of innovative products and processes, with specific measures including:

• reviewing procurement processes to minimise impediments to using innovative designs, materials and processes and, where possible, encourage them. New approaches could be piloted in the most suitable areas and evaluated before being considered for broader use;

• further standardising government construction procurement processes with an outcomes focus and increasing flexibility where possible, including approaches to market, contracts models and contracts administration to reduce the tendering burden on businesses and facilitate early business involvement in procurement processes;

• improving the due diligence conducted by government departments prior to and during tender processes, including through improving skills and capabilities of staff who manage procurement processes to minimise project delays and reduce risk to both the government and tendering parties; and

• considering the adoption of new, more efficient models of construction tendering and auctioning, such as those involving early collaboration with industry to increase competition and provide for innovative outcomes for businesses as well as government.

HARNESSING TRANSFORMATIVE TECHNOLOGIES

Digital technologies are disrupting industries globally, including the construction industry. UK analysis shows that construction firms that have embraced digital technology have grown their revenue by 5.9% and are optimistic about being able to drive growth further still.83

82 https://www.gov.uk/government/collections/government-construction#procurement-trial-case-studies83 https://www.designingbuildings.co.uk/wiki/Digital_technology_boost_to_construction_industry


Productivity enhancing technologies Globally, construction industries are utilising a range of new technologies, including in design and construction methods and advanced analytics. While adoption of some technologies will be straightforward, others may require trialling to confirm their utility (such as using drones to monitor or survey sites) or to address regulatory barriers (such as emerging robotics and automation technologies) and compliance with safety and other standards. Many governments are championing the introduction of Building Information Modelling (BIM) technology to create savings and efficiencies across the lifecycle of construction projects. BIM involves the generation and management of digital representations of physical and functional characteristics of places, resulting in a digital description of every aspect of the built asset and the collation and linking of all project information in one platform. In 2017, the Victorian Government will release a BIM implementation plan and will pilot BIM on selected government projects. Universities, research organisations and industry also play a critical role in developing and championing transformative technologies in the construction sector to drive innovation and productivity.84

UK GOVERNMENT USE OF BUILDING INFORMATION MODELLING TECHNOLOGY

The UK Government is embedding the use of BIM across centrally-procured public construction projects. BIM is estimated to deliver 20% savings on the costs of capital projects and has created an estimated £840 million in savings so far, including quantifiable savings for 2012 Olympics and Cookham Wood Prison projects.84

Upskilling the construction workforceThe construction industry is one of Australia’s largest employers. While there are forecasts that developments in technology, including automation, will result in the loss of manual jobs including in the construction sector, a net reduction in construction jobs is not inevitable. A recent report by Oxford Economics shows that despite manual labour job losses, 39% of UK construction firms surveyed said they do not expect any jobs to become obsolete from increased digital use and overall expected job losses were outweighed by the number of new jobs that are anticipated.85

The introduction of new digital technologies will, however, require changes in the skills and training of the construction workforce in order to realise the benefits of new technologies and support the transition of manual workers into skilled jobs.


The Panel’s view is that government, in collaboration with industry and education and research organisations, should harness the transformative potential of digital technologies in the Victorian construction industry, through policy levers such as:

5.3 Adoption of Building Information Management and other digital technologies and support to the workforce to adjust to digital disruption, with specific measures including:

• reduce barriers to the adoption of technologies such as pre-fabrication and BIM across the Victorian construction industry, e.g. by sponsoring demonstration projects or supporting its adoption on private sector projects;

• supporting the trial of other new construction technologies, including addressing regulatory and cultural barriers if required, while maintaining safety standards;

• working with the construction industry and unions to ensure the workforce is well positioned to adjust to the challenges of digital disruption.

84 https://sourceable.net/australia-falling-behind-in-bim-implementation/85 https://www.designingbuildings.co.uk/wiki/Digital_technology_boost_to_construction_industry

Source: McKinsey Global Institute

Five technologies poised to disrupt construction

Higher definitionsurveying andgeolocation

5-D BuildingInformationModeling

Digitalcollaborationand mobility

The internet of things andadvancedanalytics

Future-proofdesign andconstruction


MAKING A SUBMISSION

The Panel is interested in hearing a diverse range of views on how we can shape Victoria’s economic performance and productivity agenda to secure our future economic prosperity in the interests of all Victorians. This work will ultimately form a suite of specific reform ideas for government consideration within the proposed reform directions.

LODGING A SUBMISSION

Specific and practical reform proposals can be submitted in two ways:

1. lodging a formal submission, either through the online form at engage.vic.gov.au/enhancing-economic-performance-and-productivity, or by sending it by email to [email protected]

2. joining the interactive conversation online and quickly sharing your thoughts at engage.vic.gov.au/enhancing-economic-performance-and-productivity

Submissions are now open and must be received by 2 August 2017.

Proposed reform directionsThe Panel has identified a number of proposed reform directions to guide the submission process, which are summarised on page 10-12. These proposed reform directions reflect the potential avenues for government to work together with industry and the broader community to enhance economic performance and productivity through incentives, capabilities and flexibility. The initial five focus areas and related proposed reform directions reflect a deliberately targeted and selective approach to this first wave of reform, and are not intended to be exhaustive.

Stakeholders may also wish to propose reform proposals under alternate reform directions to those identified by the Panel in this discussion paper. Stakeholders can also suggest other focus areas for consideration in future waves of reform.

Guidance for writing a formal submissionThe Panel is seeking submissions with practical and systemic reform ideas that will improve economic performance and productivity. Please consider including the following information when submitting reform proposals:

• the focus area and reform direction(s) that the reform proposal relates to;

• a brief summary of the reform proposal;

• a description of the problem that needs to be addressed, with an example or case study of how a business or group is currently affected;

• evidence or estimates of costs and benefits of the proposed reform, including the scale of the expected impact on labour productivity, participation rates, job creation and/or income levels in both the short and medium term;

• the expected winners and losers of the proposed reform; and

• relevant policy levers and/or government institutions and/or key stakeholders, possible implementation issues and examples of where this has worked successfully in other jurisdictions

The Panel will synthesise submissions into a series of one-page reform ideas, which will form the basis of the Panel’s final report to government. An example of a one-page reform idea, with indicative level of detail and type of information that the Panel will present to government, is available on the website listed above.


Privacy noticeThis is a public consultation process – unless otherwise stated, all submissions should be provided as public documents that can be placed on the website for discussion. The Panel reserves the right to not publish material that is offensive or unrelated to this project. Copyright in submissions resides with the author(s). For privacy reasons, personal details (e.g. home and email address, signatures, phone numbers) will be removed from your submission before they are published on the website. Please do not include these details in your submission unless necessary.

ContactIf you have any queries regarding the submission process or the broader project, please contact [email protected]

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