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Competition not Complacency: the imperative for national reform and
individual productivity in a globally connected and disruptive world
Phil Edmands, managing director, Australia
AmCham business briefing, Melbourne
14 October 2015
**Check against delivery**
Thank you Richard, and good afternoon distinguished guests, ladies and gentlemen.
My thanks to the American Chamber of Commerce in Australia, and to all of you who have taken the time
to be here today.
Before commencing I wish to first respectfully acknowledge the Traditional Owners of the land on which
we gather, the Wurundjeri people of the Kulin Nation, and pay my respects to their Elders both past and
present.
Recent market volatility reminds us of the uncertain world we live in, and is a backdrop to the two things I
want to explore with you today.
First I want to suggest how national reform should focus on maximising prosperity and insulating Australia
against uncertainty.
Secondly, I want to suggest how business participates in that reform, but also individually responds to the
challenges disruption and change are presenting.
Let me start though by quoting what CSL’s Gordon Naylor said when explaining why CSL decided to build
a new $500 million plant in Switzerland, creating 500 jobs there:
“These countries, such as Switzerland, they get it that they’re competing. [In Australia] there’s actually not
a national imperative to compete.”
Now he was making those comments before the recently re-energized reform debate.
However the World Economic Forum’s most recent Global Competitiveness Report again shows Australia
lagging.
It lists Switzerland number 1 globally and our near neighbour Singapore number 2. The United States is
3, Germany 4 and the United Kingdom 10. Interestingly each of those countries is in the top 12 globally
for innovation.
Australia is ranked 21st globally for competitiveness, an improvement of one from the previous year, and
23rd for innovation, an improvement of two from the previous year. The single greatest problem for doing
business in Australia is listed as restrictive labour regulations, despite very little appetite in Australia to
tackle that. Other problems listed include tax rates, bureaucracy and tax regulation.
And whilst there seems to be a general view that 21st isn’t too bad, that complacency is part of the
problem.

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We are seeking to protect a very high standard of living in Australia. Indeed the community expectation is
that living standards will continue to improve. With Australia entering its 24th year of uninterrupted growth
there are many in the Australian workforce who have never experienced a recession. We won’t be able to
maintain let alone improve our standard of living by being mediocre.
It is also true that, by international standards, our debt problems are small, and we are in no immediate
danger of losing our AAA credit rating. But Australia’s debt and budget position suffered dramatic reversal
because of the GFC. It triggered a $70 billion deterioration in the budget over just two years. And
demographic change means pressure on State and Federal budgets is growing.
If we had another GFC now, and suffered a similar further reversal, our deficit and debt levels would be
looking decidedly problematic, particularly given the recent dramatic deterioration in our terms of trade.
Our current structural deficit of $40 billion could potentially balloon to perhaps $110 -150 billion, moving
from 3 per cent of GDP to 2 or 3 times that.
We need to get match fit again to insulate Australia from this risk, and from the risks posed by digital
disruption, a shift in the locus of global power, globalization and demographic change.
As the World Economic Forum notes, competitiveness leads to resilience.
Reform that drives innovation and growth is key. And whilst we don't face an immediate cliff, proper
reform takes time. Unless we pursue it with urgency we will miss our window for perhaps a decade. By
then we will face a crisis.
Actually there is general community acceptance of the need for reform, but a stasis around how we
achieve that.
Really there are two problems to solve for. The first is what specific reforms or business strategies should
be implemented to address the unprecedented change we face. The second is how, practically, we
achieve that reform.
Starting with the second point, I suggest that community engagement is the key to unlocking reform
stasis. Community engagement will build acceptance and political consent for reform, and business
participation in that engagement will deal it into the reform debate.
At the heart of how our world is changing is the new phenomenon of mass connectivity. That is changing
the political cycle and discourse, and it is changing business models and the way business is perceived.
At the moment business is caught flat footed. It is struggling to get its narrative out in a format that is
engaging and accessible to a new tech savvy generation. This is in stark contrast to activists that are
seeking to influence and often usurp political processes.
Business can’t afford to let the activists go unchallenged. Almost every day now there is an attack on
some business’ social licence to operate. When businesses speak of their reputation they are really
speaking about community trust. Whether they deserve that trust is being increasingly questioned.
Part of addressing this is communicating in a way that engages and connects.
I will concentrate on another aspect, namely how business through its actions rebuilds trust and
credibility.

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One action I suggest will be business responding appropriately to ever increasing demands that it justify
individual actions in an increasingly transparent and judgmental world. Another will be by business better
reflecting the community it operates in.
A feature of our new hyper connected world is that it is delivering greater power to the people, and in real
time. Unless business engages it is likely to be judged without the benefit of any business counterfactual,
and judged harshly and often unfairly.
Increasingly the community is demanding that business do not only what is legal, but what is right.
That, in fact, is not a bad yardstick for making long term sustainable decisions. The Hon Justice Neville
Owen in his very lengthy Royal Commission Report into HIH Insurance more than 10 years ago got to the
heart of why HIH Insurance failed when he said:
“I found myself asking rhetorically: did anyone stand back and ask themselves the simple question – is
this right?”
The community increasingly expects business to ask itself this question. Indeed there are currently topical
examples of corporate failings that may have been avoided if that question had been asked.
Of course business does not need to accept external views of the answer. But business does need to be
able and willing to articulate why it believes everything it is doing is right, and its management and people
need to believe in that narrative.
Historically business has mostly confined itself to straight commercial issues. We are especially wary of
wandering into the minefields and swamps of broader social policy.
This reluctance to engage in the full range of public policy discussion only reinforces the view that
corporations are somehow separate from the rest of society. And yet most modern corporates are
anything but.
Rio Tinto, the company I represent, is really just the sum of its human parts. These are an increasingly
diverse group of everyday citizens - our employees - and an equally diverse group of investors – our
shareholders, including directly or indirectly millions of ordinary Australians.
And the concept that business should reflect the community it operates in is gaining increasing traction.
I will first take representation of women at senior levels in business to illustrate how this calls for a
response.
In my submission business still needs to go a long way to achieve the right culture for gender equality. I
think there is a difference between on the one hand opening up a club to new members who were
previously excluded, but keeping the same rules, and on the other hand both opening up a club to new
members and rewriting the rules to suit the more diverse membership.
The rules that were formed when senior echelons of business were almost exclusively male are not
written down – they are cultural norms, and they are often unconscious. They have nonetheless operated
to exclude women in initially direct and subsequently more subtle ways from reaching leadership
positions. They have also constrained their voice and limited their ability to advance once reaching
leadership positions.

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And it is hard to articulate just how this comes about. In choosing the best person for the job or going
with the best idea how do you divorce yourself from your own unconscious bias?
In my submission you can’t – at least as a collective. The way you get change is by increasing the actual
representation of those who have experienced those subtle blockers. I suggest that, until women are
appropriately represented at all levels of business, cultural bias against them cannot be fully addressed.
And yet addressing this issue is of great importance to Australia’s prosperity, and to business being
competitive.
Demographic change in Australia will increase the imperative to lift participation rates amongst older
Australians and women.
The McKinsey Global Institute has recently suggested that US$12 trillion could be added to the global
economy by 2025 if all countries in each region matched the best performing country in their region on
gender equality. US$28 trillion could be added to global GDP by then if gender parity were achieved.
More particularly diversity adds additional perspectives and ideas relevant to making fully informed and
effective commercial decisions. It is also harder to engage with the broader community if you are not
representative of it. Finally greater diversity militates against “group think” and promotes a challenge
culture that is very important in preventing governance failings.
Representation of the broader community of course extends beyond gender.
Rio Tinto generally operates in remote areas within Indigenous communities. It is in our and their interests
that Indigenous participation in our workforce is maximized across the whole spectrum of available roles,
and that there be regional economic activity that sustains those communities.
And it is not hard to go on and accept that empowerment of those communities will be a great impetus for
this occurring. Empowerment means acknowledging people and their culture, acknowledging their
visceral connection to land, and recognizing that they need to have their own voice and be able to make
decisions for themselves about how they live their lives.
That does not lead Rio Tinto down the path of deciding any model for Constitutional Recognition of
Aboriginal and Torres Strait Islander communities. Those communities need to decide that for
themselves. It does lead us to support the Recognise campaign, and the concept of recognition, as part
of a complete turning away by Australia from the assimilation policies of the past.
There is increasing recognition that Australia should celebrate and honour Aboriginal and Torres Strait
Islander culture and identity, and empower Indigenous communities to protect, preserve and indeed
strengthen that culture and identity whilst taking their rightful place in the economic and social fabric of
modern Australia.
Greater economic participation by Indigenous communities will be an economic boon to Australia,
including to the opening up of northern Australia. At the same time it will provide a greater pool of
employees and talent for businesses, provide them with better ability to relate to the community they
operate in, and again enable better and more fully informed decision making.
Let me now make some specific comments about both reform and business’ response to our competitive
environment.

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As we know Australia faces unprecedented disruption. A huge percentage of current jobs are threatened
by automation in the medium term. Commentators have suggested that 47 per cent of total US
employment is at risk of being automated using artificial intelligence.
It is hard to conceive how we, as the country with the fastest growing population in the OECD, can create
sufficient jobs. What is clear is that the fundamental imperative is to grow a strong and diverse economy
because we are going to need as many new high tech jobs as we can get, and we are going to need
them in this country and not offshore.
There has been significant debate recently about Australia leveraging its areas of comparative advantage
to do this. The Government’s Industry Innovation and Competitiveness Agenda has identified five areas
of comparative advantage, and is setting up growth centres for each.
I am going to focus on one area most closely related to Rio Tinto’s operations.
It is generally accepted that Australia should leverage its comparative advantage in mining to enhance
comparative advantage in mining equipment, technology and services (METS).
The challenge is other foreign competitors, including those I mentioned at the outset.
London is one of the most significant mining services centres in the world, and yet the United Kingdom
has a small domestic mining industry. London succeeds because it has a wealth of intellectual capital, is
the premier global hub for mining finance and is increasingly emphasizing innovation.
Indeed the World Economic Forum suggests that London has set itself up as the epicenter of the
European tech and start-up scene.
Australia also has a strong METS sector, but like everything its future strength and growth cannot be
taken for granted. There is always someone in the wings ready to eat our lunch.
At the moment it is estimated that in Australia the time between idea generation and commercialization is
between 5 and 15 years. You only have to say that aloud to realise that this length of time is wholly
infeasible going forward.
Both the METS sector, and innovation more broadly in Australia, have to be supported by our educational
system. CSL cited declining skills in Australia along with regulatory complexity and an uncompetitive tax
rate as reasons to locate its new facility in Switzerland. In saying this I would not want to be
misrepresented as calling for a Swiss-like tax rate. I am merely highlighting the downsides of Australia
being uncompetitive in our highly interconnected world.
Australia’s educational system is not emphasizing basic Science, Technology, Engineering and
Mathematics (STEM) skills, despite the fact that an estimated 75 per cent of new jobs will rely on these
skills. Furthermore, when people are being highly trained this is often training them to be clever rather
than smart – in other words it is training them to be technically excellent but not necessarily practically
focused.
And whilst there is a need for policy intervention here, business needs to step up to the plate. We need to
engage more with educational institutions in curricula development, and in work experience opportunities.
We also need to advocate for development of STEM skills learning, and we need to partner more with the
tertiary sector.

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Where Australia is competitive there is enormous goodwill. All things being equal Rio Tinto would like to
support Australian manufacturing. We are very heavily invested in this country, and we want it to
succeed. Its social and economic success is very important to us. There are many Australian businesses
that feel likewise.
All those businesses, however, are dealing with intense pressure to increase productivity and limit costs.
At Rio Tinto we are seeking to do this through initiatives such as our autonomous trains and trucks;
autonomous drilling; big data analytics to manage risk, predict maintenance requirements and reduce
downtime; our operations centre in Perth from which we control 15 mines and a complex rail and port
system; our cutting edge scheduling system for our trains; and the work of our Processing Excellence
Centre in Brisbane to drive process improvement.
Interestingly these all rely on innovation and technology, and the big dollar savings are often lots of little
dollar savings added together.
Let me now turn now to tax reform.
Whilst we are urged to stop talking about tax reform principles and start working through specific
proposals, the reality is that the underlying issues and trade-offs have not yet been adequately explained
to the broader community.
This brings me back to my community engagement point, which business needs to be part of.
Even with this engagement each community sector will look to its own representatives for assurance on
the detail. So business also needs to engage with community organisations and representative groups.
Finally we need political engagement involving the Federal Government, the States and Territories, the
Opposition, and very importantly the Senate. We have the largest crossbench since Federation. We
should all call on its members to work constructively with the Government and try to reach a reform
compromise in the interests of the country.
As to the content of that compromise it is worth bearing in mind that all taxes distort behaviour and
impose an economic drag, some more than others.
We levy taxes because we need services and infrastructure, and a decent and adequate safety net. The
tax system can also be used to incentivise desirable outcomes like innovation and greater workforce
participation by women and older Australians.
But subject to the tax system meeting these needs and being fair we want the lowest and most efficient
taxes possible because all overreach is going to pull down economic activity - meaning it will limit growth
and productivity and so limit jobs.
Furthermore, whilst we can stage implementation we should be ambitious. In the UK the incoming
Government in 2010 set out a 5 year tax reform blueprint, notwithstanding its fiscal, budgetary and debt
constraints, and stuck to it. As a consequence its tax system is more competitive, the UK is better placed
to attract business and UK based businesses are themselves more competitive.
But one of the problems with policy debate in Australia is pursuit of the perfect to the detriment of the
good. The fact that we are finding it hard to get to first base on tax reform should tell us that we shouldn't
be trying to boil the ocean here. The imperative is to concentrate on making the fundamental changes we
need, and not on designing the perfect system.

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We do, however, need to include all of those fundamental changes. The tax system is just that - a system
- involving trade-offs and compromises. So we can't defer baking in anything fundamental even if its
implementation may be deferred. The trade-offs need to be determined at the outset because anything
left out will miss its offsets and consequently miss the boat.
The issues with Australia's tax system are well known – it is narrowly based, relies on economically
inefficient taxes, and is complicated. Problems include heavy reliance on income and corporate taxes,
insufficient reliance on broad based low rate taxes like the GST and land tax, a payroll tax system that
has so many exemptions and so many inconsistencies between States and Territories that its economic
efficiency is severely undermined, State and Territory reliance on stamp duty which is a highly inefficient
tax on transactions, and too many taxes with 10 raising 90 per cent of revenue and the other 110 raising
the rest.
In particular our corporate tax rate is increasingly uncompetitive and out of step with our competitors. The
UK is moving to 18 per cent, the OECD average is 25 per cent and the average in Asia is 22 per cent. On
that basis 30 per cent long term is too high. It will dampen foreign direct investment, reduce capital
deepening and damage the competitiveness of Australian companies.
But business has good social as well as economic arguments for reduction of corporate tax rates, and
needs to prosecute these given that they are not well or broadly understood.
According to Treasury each extra dollar of corporate tax reduces living standards by 50c in the long run
because of reduced investment, and much of the incidence or burden of corporate tax falls on Australian
workers by reducing investment and productivity, and thus ultimately real wages.
Also, a not insignificant amount of any reduction in the corporate tax rate would be clawed back by
dividend imputation, but progressively because only those on higher tax thresholds would have to make
top up payments.
Separately the Business Council of Australia and the IMF have both argued for a rebalancing of our tax
system towards low rate broad based taxes like the GST. Whilst each $1 of corporate tax imposes a 50c
economic cost, each $1 of GST is estimated to impose a 19c economic cost. With adequate relief for the
less fortunate, the GST is not intrinsically regressive. It can provide a more efficient means of not only
enhancing Australia’s capacity to compete and grow, but to provide services and an enduring safety net.
Of course tax reform without reigning in unsustainable real spending increases will not work. If this is not
done increases in expenditure will more than consume any advantage gained from tax reform.
Finally some concessions will need to be looked at regardless of whether they have any large revenue
impact, because absent this occurring the community will not accept that the changes as fair.
Nor will the community buy into tax reform without assurance on integrity and transparency. Here it is in
business’ interest that we sort the wheat from the chaff.
Australia already has some of the most effective integrity measures in the world. No doubt there is further
work to do as it keeps pace with the changing nature of international commerce. But we shouldn’t see
tightening up integrity as the solution to the tax reform imperative.
Much of the current argument around profit shifting for instance is misinformed and disproportionate. Of
course profits earned in Australia should attract tax here. But there can be no restriction on activities
being performed and earning profits in other jurisdictions.

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In Rio Tinto’s case, we paid more than $6 billion in taxes and royalties in Australia last year - or $32 billion
over the last five years - as detailed in our Taxes Paid reports. We have also received confirmation from
the Australian Taxation Office that “Rio Tinto is considered an engaged and transparent taxpayer who is
fundamentally compliant”.
And measures taken to tighten integrity rules should be part of a multilateral approach. Australia needs to
consider how it would fare if rules it unilaterally imposed here were to be replicated offshore. For instance
some have argued that China makes the market for many commodities and part of their sale value when
exported from Australia should be booked there.
Moving to workplace relations reform my opening point is that putting it on the backburner is elevating
convenience above necessity.
The Productivity Commission’s interim report has some valuable recommendations, but it is not ambitious
enough.
Australia’s current workplace relations system does not create an environment conducive to innovation.
What is needed for that is nimbleness and flexibility.
And at the heart of that is flexibility and efficiency of agreement making. The system should not proscribe
individual agreements, and enterprise agreements should not involve the intensity of resources and time
they currently do, nor venture into areas of management prerogative, nor set down inflexible rules for a
period of years once concluded, nor involve a combative as opposed to a collaborative process.
We need to move on from old world battles between labour and capital. In the United States 40 per cent
of the workforce or 53 million people are now freelancing through new business models like Airbnb,
Airtasker and Uber. In this new world everyone can be an entrepreneur.
We need a system that is not focused on protection of power structures, but on outcomes – working
conditions underpinned by a robust safety net but flexibility and nimbleness that promotes growth and job
creation.
And business needs to dispel the mistruth that it seeks greater productivity through reduction in real
wages. Quite the opposite – business seeks more output for the same or less input, and higher real
wages which drive domestic demand.
In particular the decision to implement new technology is a management decision. The true workplace
relations issue is not whether new technology should be deployed but ensuring that, if it is, workers are
treated fairly.
And whilst new technologies may reduce traditional jobs they open up the opportunity for higher end jobs.
To the extent there are fewer of these that simply highlights the need to grow the whole pie.
Let me conclude though on a positive note.
First we all know that China is in transition involving tapering capital intensive investment and a greater
emphasis on services and consumption. This will lead to slower growth, but ultimately to higher quality
growth. And that growth is of course off a much larger base.
Urbanisation will continue, albeit at a slower pace with 220 million new urban residents in the next 15
years as compared with 320 million over the last 15 years. But there will be an emphasis on improving the

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quality of urbanization meaning more focus on public infrastructure, better public services and reduced
pollution. Also China will move up the value chain increasing its global share of highly transformed goods.
So there is much to come from China yet. Other parts of Asia in particular India and the ASEAN countries
will also experience considerable growth.
Australia has the great fortune of being in the fastest growing region in the world and increasingly
integrating into that region. A remarkable statistic that illustrates what has happened in Asia over recent
decades is the recent forecast from the World Bank that less than 10 per cent of the world’s population
will be living in extreme poverty by the end of 2015.
That is still not a good number, but it is a remarkably low one given that in 1990 37.1 per cent of the
world’s population lived in extreme poverty. And Asia has been a big part of that change.
As to integration of Australia into the Asian economic region we have seen conclusion of free trade
agreements with Japan and South Korea, we are on the cusp of ratification of the China Australia Free
Trade Agreement (ChAFTA) and agreement has been reached on the Trans Pacific Partnership which of
course additionally brings in the Pacific and specifically the United States. There is also the prospect of a
free trade agreement with India soon. These are a tremendous boon to Australia and all business should
urge ratification of the ChAFTA without delay.
In short Australia has many advantages. It is up to us to close on them.

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