Australia's next growth driver: services exports in pole position

It's a great pleasure to be in Hong Kong to attend this year's CLSA Investors' Forum.

The Forum is renowned for hosting thought leaders and business people, and attracts its fair share of political leaders.

Hong Kong itself hosts a significant number of Australian businesses and around 90,000 Australian nationals.

They benefit from the continuing operation of "one country, two systems", the rule of law, and the political freedoms that underpin it.

For Australian firms, establishing an overseas presence or affiliate can be costly and time consuming, but particularly when it comes to what I'm talking about today, trade in services, it's often essential to their expansion.

The saying that trade and investment are two sides of the one coin is never truer than when it comes to services.

Hong Kong has, over many years, been an exemplar of this – with the world's leading investment banks, fund managers and law firms investing here in order to export services to this market and the region.

So I'm honoured to be able to address you today about some of the driving forces that will underwrite the continuation of Australia's record-breaking 25 year run of growth – the rise of services exports as our next growth driver.

Building the regional architecture to facilitate growth in services exports is a key component of the Turnbull Government's economic plan for the transition of our economy to the post-mining boom area.

In many ways, this is a poorly understood area. Yet the growth of global value chains in services and integration of services trade into the global economy is poised today where the growth of manufactured goods sat a generation ago.

And crucially, for you as investors, failure to understand the importance of services exports to the new Australian economy will lead you to get your macro call on Australia wrong – as many investors have over the past three years.

A popular thesis among some macro hedge funds/equity analysts was that the end of the record-breaking mining investment boom, combined with a bust in prices at the end of the commodity supercycle, meant Australia's golden run of growth was now sure to end in tears.

These analysts argued that Australia's manufacturing base was hollowed out with Australian dollar rising to parity with the US dollar, and that the manufacturing sector at just over 6 per cent of the economy was too small to make a difference and fill the gap by expanding again when the dollar returned to more normal levels.

So the lucky country would finally be out of luck.

Well we didn't go into recession. Far from it. Unlike other resources powerhouses like Canada and Brazil, the Australian economy kept on keeping on, posting growth of 3.3 per cent in the year just ended. One of the highest in the developed world. Why? How could the street get it so wrong?

Partly it's a failure of imagination. Analysts missed areas that are hard to see. Trade in so called invisibles – services, particularly in our case, education and tourism.

Education and tourism are Australia's largest services exports sectors.

Education services are our third largest export. The sector currently generates around AUD$19 billion a year of services exports and employs over 130,000 people.

We are the world's third-largest educator of international students, after the US and the UK.

By 2025 there will be an estimated one billion students in the world, many scouring the globe for an international education. Australia is positioning to ride this wave by embracing the potential of new technology that is changing the way students learn.

Our educational and research institutions rank as some of the best. Our universities are ranked ninth in the world - ahead of Germany's and Japan's. Six of the top 100 universities are Australian, and Australia has five of the 30 best cities in the world for students based on student mix, affordability, quality of life, and employment prospects.

Crucially, though, Australia is also at the forefront of an educational revolution driven by technology. We currently have over 1,100 online education providers generating approximately $5.2 billion in revenue.

Australia's tourist sector generates just under $31 billion of export revenue. It employs over half a million people.

Australia's natural beauty is a key asset but other factors are also critical: our food and wine, our people and cultural life and the quality of our hotels and resorts.

A record 7.8 million international visitors came to our shores in the year to June. More than one million visitors came from China in 2015, and this is expected to double by 2020.

But with Asia's middle class expected to grow from 600 million to 3 billion by 2035, we need to work hard to ensure we have the right infrastructure in place to deal with higher demand.

Our hotels, resorts and tourist attractions are being upgraded with new investment, including foreign direct investment (FDI).

Australia has a liquid and global market for hotel real estate and was ranked third in the world for real estate transparency by international property firm Jones Lang LaSalle.

International investors have a long history in Australia's hotel and tourism sector. Clearly they like what they see.

More than 50 per cent of the capital invested in established Australian hotel real estate over the past 20 years has come from offshore; and 52 per cent of new rooms are being funded by capital sourced from Singapore, Malaysia, Hong Kong and China.

Many of these projects are expected to set a new standard for Australian accommodation.

• In 2015, Hong Kong's Far East Consortium International Limited signed a AUD$212 million agreement with the Ritz-Carlton Hotel Group for the development of a luxury 250-room hotel in Melbourne.
• Far East Consortium International is also building a 204-room Ritz-Carlton hotel in Perth, valued at more than AUD$350 million, expected to open in 2018.
• Dalian Wanda Group, China's largest five-star hotel owner, is developing a tourism-related project on the Gold Coast worth AUD$ 1 billion.
  • The Jewel hotel development will include a Wanda Vista luxury five-star hotel with 160 rooms. The addition of a new high-end Chinese hotel brand to the Australian market, with strong distribution networks across China, will have benefits across Australia's tourism industry.

But crucially, these two sectors of education and tourism are, in Australia, mostly made up of businesses that are either privately held or not listed on Australian stock exchanges (in the case of hotels and resorts) or are not for profit entities (in the case of Universities, Schools and state-owned TAFEs).

It's harder to follow progress in this area. There aren't so many ways for equity fund managers to "play the sector". The University of Melbourne doesn't issue quarterly earning reports.

Yes, on the Australian Stock Exchange you'll find the listed airlines (Qantas, Virgin) and a few listed hotels (Mantra, and the integrated casino resorts of Crown and the Star).

Village Roadshow are there in theme parks and a handful of education-linked stocks, but it's only a keyhole view into these sectors.

It doesn't capture the many thousands of small-medium enterprises operators in the tourism sector, or any of the not-for-profit leaders of our education sector.

To come back to my earlier point, some macro analysts are missing a trick when they analyse Australia's economy. This is one reason their calls on Australia's GDP and employment growth have been too bearish.

They have underestimated the growth impulse of what's been dubbed the silent boom of Australian services exports.

Services exports are pushing the horizon potential out for Australia's economy – not just tourism and education, but in areas like finance, health, aged care, architecture and legal services.

Australia recorded a 10 per cent increase in services exports in 2015 to reach a total of AUD$66.2 billion.

The biggest markets are China, the US and the UK.

With the five-year growth trend running at about 5.5 per cent, clearly there is some momentum here for this new dynamic driver of growth.

I want to say a few words today about the constellation of forces that are creating one of, if not the most, competitive services markets in Asia.

Several powerful factors are at play. Some are relevant to any country;

• The ongoing digital revolution expanding the services that can be traded efficiently is one.
• The growth in global value chains, for which services are a key facilitator, is another

But Australia also has unique characteristics that bolster our services success in the region.

We have a world-leading education system training versatile, skilled and creative workers. We speak English, the global language of business, but around two million Australians also speak an Asian language at home.

Our regulations are gold standard and are enhanced by an open and transparent legal system. Strong intellectual property protections give businesses based in Australia certainty.

And, unlike most other high-skill, high-wage economies competing with us at the premium end in services, we are in the Asia time zone.

But the "sine qua non" of a competitive services sector is to be open to foreign competition, via foreign investment. We opened up our markets in Australian banking, in aviation, in tourism, in telecommunications, made them contestable – including to foreign investors - via a series of micro-economic reforms from the 1980s onwards.

That openness to foreign investment, opening us up to competition also from foreign service providers, is a key reason why our services sectors are match-fit, and ready to compete and win in the emerging market in global services trade.

So foreign investment plays a crucial ongoing role harnessing these forces for the benefits of Australia's economy.

And foreign investment has helped create world-class services offerings clustering around advanced manufacturing, and even in our export mainstays of resources and energy.

Boeing, for example has invested over AUD$800 million in Australia over the last decade, including AUD$370 million in its facility at Fisherman's Bend, Port Melbourne.

About 1,200 people work at the facility, primarily making wing flaps for Boeing's Dreamliner and 777 aircraft. But Boeing's investment also involves services. The aircraft maker liked its manufacturing hub in Australia so much it established its largest R&D site outside the United States there too.

The Australian Government's research body - the CSIRO – and nine Australian Universities are collaborating at Boeing Research and Technology Australia, conducting ground-breaking research and developing a range of new aviation products.

Among other things they have built an enviable capability in next-generation materials that reduce costs and production times for the industry.

In Australia's energy sector, some $200 billion of capital expenditure in the Liquefied Natural Gas sector, much of it financed by foreign investment, will not only soon vault us to the number one position globally for LNG exports, but has spurred some of the world's leading energy companies to establish global hubs of technical excellence servicing their global operations.

Chevron's Global Technology Centre, Shell's Centre for Floating Liquefied Natural Gas Learning & Research, and GE's Oil and Gas' Skills Development Centre, were all attracted to build these global services export hubs in Western Australia by virtue of strong applied research partnerships with our universities and proximity to the Asia-Pacific regional growth markets.

All this has occurred because of Australia's openness to foreign investment, bringing with it not just capital, but infusions of technology, know-how, and linkages into global supply chains.

So the Australian Government understands the importance of foreign investment to our national prosperity. We recognise that, as a capital importing nation since the days of the European settlement, our country has been built with successive waves of foreign investment: First from Britain, then the United States, Japan and now, increasingly – although off a low base – from China.

We are working hard to maintain this attractive environment. We welcome an overwhelming majority of investment proposals from proponents around the world.

Like all sovereign nations we also have measures in place to protect the national interest in specific circumstances. But it's important to keep things in perspective. Rejections are extremely rare.

Over the past 15 years, we have averaged around 1,000 business investment applications a year to our Foreign Investment Review Board (or FIRB, for short). In that time, we've had the grand total of five rejections. Just five, out of fifteen thousand.

In the handful of cases where FIRB has intervened, these cases involved transactions of national significance and highly complex issues, where specific concerns unique to a particular asset have arisen. These transactions were at the pointy end of the nexus of national sovereignty and security.

As the Minister for Trade, Tourism and Investment, I strongly advocate for foreign investment into Australia.

And as I am in Hong Kong, I want to take a moment to recognise one of Hong Kong's most high profile companies, Cheung Kong, and the contribution it has made over many years to building Australia's prosperity.

Through its investments, Cheung Kong Infrastructure (CKI) supports Australian communities, including in regional Australia. For close to 20 years, its investments in Australian infrastructure have provided reliable essential services to millions of customers.

For example, CKI's AUD $3.5 billion investment into ETSA utilities in 1999 - which later became SA Power Networks - allowed the South Australian State Government to retire debt and boost its credit rating.

It protected South Australian jobs and ensured the ongoing delivery of reliable electricity to 850,000 customers.

CKI has also been a trusted supplier of electricity to over a million customers in Victoria, of gas to over a million customers across our eastern seaboard, and of water to regional communities in Victoria. Its sister companies have made valued investments in areas as diverse as vineyards, cropping and salt production.

So CKI is a valued and respected owner of essential services businesses in Australia.

In that context, I'd like to comment briefly on the recent decision by the Australian Treasurer to reject two applications by foreign businesses to invest into the Ausgrid business in New South Wales.

The very fact that CKI is held in high repute underscores that the Ausgrid decision pertains to the asset itself, not to the potential owners.

There's something very particular about Ausgrid. As the Treasurer has stated, Ausgrid's footprint includes critical power and communications services that Ausgrid provides to business and government. The national security concerns relate to the transaction structure and the nature of the assets – not to any particular investor.

We'll have more to say soon on the Australian Government's policy framework with respect to foreign involvement in critical infrastructure.

The policy will ensure that Australia's approach to foreign investment is non-discriminatory between nation-states; proportionate to the risks involved; supportive of continued foreign investment and Australia's reputation as a foreign investment destination; and be consistent with our free trade agreement (FTA) undertakings.

In recent years, Australia has secured a number of important Free Trade Agreements with our biggest Asian trading partners - Korea, Japan and China. Why do these matter to the services sector? Because these are truly 21st century agreements, creating the regional policy architecture to facilitate much deeper integration of Australia's services sector into the rapidly growing markets of Asia.

As noted earlier, we're already doing pretty well at what I might call the first level of trade in services – where people come, buy a service in Australia and then leave – that's our current boom sectors of tourism and onshore education.

It's great we're doing well in that, but we're never going to have 10 million students or 100 million tourists come to Australia. However, if Australian businesses are free to invest into the markets of Asia, we can scale our offerings in off-shore markets, building campuses within Asia or delivering education online to educate tens of millions of Asia's emerging middle class. With the FTAs we can now do that.

We can build points of presence in-country to train the trainers in-market.

Furthermore, we are only at the beginning of the emergence of global value chains in services – where different stages of production in services move through different countries via e-commerce or a physical presence, via recognition of professional qualifications to facilitate cross-border trade in services, and via regulatory coherence across regions.

These are the things increasingly being addressed in Australia's modern FTAs.

So the FTAs we are negotiating today don't just lower tariff barriers for the movement of goods, they also make doing business and investing in third countries and the delivery of high quality goods and services in the market easier for Australian firms and Australian workers.

This regional framework will enable Australian companies to take advantage of the digital revolution to deliver premium projects, products and services across the region.

Geographic borders won't prevent our firms from choosing the best people and expertise they need in every aspect of the value chain to deliver quality output to Australia's gold standards.

Let me give you some examples of the superior services market access Australia has negotiated under the China-Australia Free Trade Agreement (ChAFTA).

Australia services companies can now:

• in the healthcare sector, hold 100 per cent of the equity in private hospitals and nursing homes;
• in the finance sector, hold 49 per cent of joint venture futures companies (no foreign participation was previously allowed) and 49 per cent of securities firms (above China's WTO commitment of 33 per cent);
• in the legal sector, have guaranteed access to establish commercial associations with Chinese law firms in the Shanghai Free Trade Zone (SFTZ) offering Australian, Chinese and international legal services.
• and in telecoms, invest in value-added telecommunications services in the SFTZ.

No other country has this level of access.

We have delivered similar outcomes in our FTAs with Korea and Japan.

In addition, all our North Asian FTAS have a mechanism in place to develop mutual recognition of professionals - this will make it easier for our professionals to work where they are needed.

These high quality FTA outcomes mean international companies with a genuine Australian presence can access this "FTA advantage" through preferential access to high-growth export markets in Asia.

This is a compelling reason to look at Australia for your next export-focused services investment.

Looking forward, Australia and Hong Kong, along with 21 other parties, are also negotiating the Trade in Services Agreement (TiSA), a services-only trade agreement, which will deliver tangible commercial benefits for services exporters.

TiSA parties collectively account for around 70 per cent of global trade in services. TiSA will contain a range of rules including on qualification and licensing requirements that will improve general business operating conditions in third markets.

Provisions to facilitate trade in services will also be in the Regional Comprehensive Economic Partnership (RCEP), a free Trade Agreement including ASEAN, India, China, Korea Japan and New Zealand of which Australia is a part, covering half the world's population and 30 per cent of world GDP.

We are also in the 12-nation Trans-Pacific Partnership covering some 40 per cent of world GDP. Economic co-operation around the region is pursued not just through FTAs but also through the regional forum of APEC – of which HK is a part.

The growth of the middle class in emerging economies and the continuing digital revolution means demand for services will continue to grow.

Growth in services exports has been an integral part of the story of Australia's prosperity in the post-mining boom era.

And we expect this trend to intensify as Australia integrates more with the Asia Pacific through FTAs. The whole gamut of Australian services will be in demand in the next few decades.

Capitalising on this demand through our trade policy initiatives in services is a key component of the Turnbull Government's economic plan for a stronger and more diverse economy.

The outlook is bright. With the right investors and the right relationships with key partners in Hong Kong and beyond, Australia's services sector will underwrite our next wave of growth.

Thank you