Thursday, August 16, 2012

Mining makes us 6th richest

THE resources boom has given Australia the sixth highest GDP per head in the Western world but most of that comes from temporary causes that will reverse, making high productivity growth imperative for our future, a new report warns.

Global consultants McKinsey points to the resources industry as the main culprit for Australia's poor productivity growth in recent years, saying it is wasting capital by overambitious planning and poor project control.

In a new perspective on Australia's productivity debate, a McKinsey report shifts the spotlight from labour productivity to capital productivity. It says the efficiency with which we use capital has fallen in recent years, putting a brake on growth at a time when mining investment has dominated the economy.

"Capital productivity in mining is the major issue", McKinsey partner Chris Bradley told The Age. "Australia's productivity challenge is to do the major projects better. We're not even halfway through this resources boom. The amount of investment ahead is bigger that what we've seen so far. We have the opportunity now to leverage the experience we've gained in this area to make the second half much better.

"Prices are not going to stay high, in all likelihood, and we're not the only resources player."

The report, Beyond the boom: Australia's productivity imperative, was written by a team headed by McKinsey senior public sector partner in Sydney, Charlie Taylor. It says Australia is one of the "fortunate few" rich countries with good income growth but its causes are transient, and productivity growth must drive the economy in future. The report estimates that most of Australia's income growth between 2005 and 2011 came from one-off factors: mostly rising export prices (the terms of trade) and the boom in capital inputs (mining investment).

While most of the fall in capital productivity had sound reasons the long gestation period of new mines, and miners digging up lower-value seams while prices are high it says capital productivity in new mines could be improved 30 per cent by better timing of projects, using simpler solutions, and making the design fit the budget rather than vice versa.