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Uncovering the key opportunities in 2021 and beyond

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Danielle Wood, CEO of Grattan Institute, in conversation with David Donnelly and Mark Malinas, Allens Partners.

Covered in this webinar:

  • Opportunities for growth in the year ahead in Australia
  • Key ways we can rebuild our economy to be more sustainable and inclusive
  • The shifting tone of corporate accountability and responsibility
  • Deal trends we are seeing in a rebounding M&A and PE market.

This session was recorded on Wednesday, 3 February at 12pm

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Core area: NSW/VIC/QLD Professional Skills | WA Professional Skills CA2.
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David Donnelly Oh hi everyone, welcome and thanks for joining us for 'uncovering the key opportunities of 2021 and beyond'. I'm David Donnelly and I'm a partner here at Allens and I lead the Infrastructure Sector. I'll be hosting today along with Mark Malinas who's a partner in our M&A team and the co-head of our private equity practice. I'd like to start by acknowledging the traditional owners of the various lands on which we are all meeting today and paying my respects to their elders past, present and emerging. Before we turn to today's agenda, some housekeeping. Your screens can be altered to suit your preferences, just drag the boxes around and make certain items bigger or smaller. The key I think is to drag the two vertical lines across to make the slides slightly smaller and the boxes slightly bigger. You can of course make me smaller if you'd like. There's a Q&A field on the page; please submit your questions throughout the webinar and we'll endeavour to answer them. We've allowed some time for that after the presentations and so we'll take as many questions as we can in the time. If you experience technical difficulties, press F5, that will refresh your browser. We are also recording this webinar so it will be available online shortly after the conclusion of the event. Today's slides are located in the 'Learn More' section at the top of the page and you can download them from there.


Danielle Wood Fantastic. Thank you, David. I am really excited to be here to kick off this topic about the challenges ahead. I did a few of these sort of 'state of the world' type conversations towards the end of last year and I have to say I was sort of left feeling a bit depressed by them all. But the good news really is that since November, every single piece of economic data that has come out has surprised on the upside which is, sort of a polite economist way of saying it's outperformed all of our expectations. So I want to talk a little bit about why that is. What's driven that recovery, first of all today. I'm also going to point to what's still a number of significant risks for the profile of economic recovery going forward. I am then going to talk about some of the sector-specific points that David flagged. Really, where are some of the opportunities for growth? On the other hand, which are some of the sectors that might take a little bit longer to come back? And finally, being a policy wonk, I did want to talk about what could be the big policy conversations in 2021.

So the first thing I want to say on the economic situation is that a lot of the success we have enjoyed is really tied to our success in managing the virus, and we see when we look around the world, the countries that have been most successful in containing the fallout are those that have managed the virus the best. That obviously points to one area of risk going forward and I'm going to talk a little bit about vaccines later. None of that is to say, though, that this wasn't a huge economic shock in terms of the depth of the recession. That was the biggest shock, the biggest annual fall in GDP since the Great Depression. But the good news has been really, particularly when we compare the past downturns, the last sort of four major downturns, we see economic activity and we see jobs bouncing back a lot faster. That's partly a reflection of the nature of the downturn itself. This was a blindside shock when the Government decided to shut down large swathes of the economy. Obviously as things reopened, we get that kind of bounce-back in jobs and activity. But the good news has really been …what economists worry about … was that was going to lead to a second-round demand shock. So when you shut down, people lose jobs, people lose income, businesses shut their doors, and that kind of has a domino effect on demand across the economy. The reason that has been, it hasn't been avoided but it has been contained, is the sheer amount of money that the Government's been pumping in. Over 10% of GDP in support and stimulus payments over the past year, unprecedented by historical standards, but we are seeing right across the advanced world, governments are putting a lot into their economies this recession and I think we will get some new macro-economic wisdom coming out of it. But in Australia it has been incredibly successful. In a couple of extraordinary figures, business profits actually increased in the first half of 2020 on average compared to the previous six months. Household disposable income rose on average in the midst of the pandemic. That is extraordinary. That is down to those Government supports, particularly JobKeeper and JobSeeker. You will see that we weren't totally successful in keeping consumption up, it still went down significantly. But that difference between disposable income and consumption is savings. So we know that households have got much stronger balance sheets than when they went into the recession, and Treasury and the RBA are certainly banking on some of that additional money getting spent and coming into the economy over the next year or two. Those are not crazy expectations. We are starting to see a real turnaround in consumer confidence. You can see their spending intentions have hit a ten-month high. So I think it's right to expect we will continue to see the kind of long-tail effects of those support payments flowing through the economy over the next year.

What are the risks? Clearly a third wave of the virus and a setback in terms of the health situation is the biggest single risk. There's a, as we are seeing kind of second and third lockdowns play out overseas, an interesting debate about the more times you do it, whether you end up with more scarring and not bouncing back as strongly with each successive time. So I think that's a genuine concern for Australia. The other concern that I think we have spoken less about is the point, is that we recover 90% of the way and then we get stuck and you know, I think what we really know is that the last mile is the hardest. If we look at where the RBA is thinking we are, these are their forecasts in terms of unemployment that they put out in November. There's going to be some new numbers coming out on Friday that we had a bit of preview of yesterday. What they are saying now is they are expecting unemployment will still be at 5.5% by the end of next year, not touching on full employment until 2024. So that is a very long-tail recovery. Essentially, we would be kind of back in that lacklustre economic world that we were in pre-COVID. Many of you will remember unemployment was kind of bouncing around that level, consumption was pretty flat and that was partly driven by the fact that there just wasn't any firing in the labour market and that was keeping inflation wages growth down. So all the forecasts are at the moment, that that is the world that we are going to be in again. I think from a policy perspective, that's probably not good enough and I think that's where a lot of the policy arguments about how hard we should run the economy are coming from.

So coming to some of the sector-specific stuff now. We know that every crisis creates both winners and losers. Challenges and opportunities. This one has been no different. The fascinating thing about this recession is that we've had incredible amount of real-time data where we can monitor shifts in consumption patterns, and we can kind of see how behaviour is changing as it's played out. And I've certainly been watching a lot of the spending data closely as things have evolved. This is some pretty recent data coming from NAB looking at some of the subsectors that are performing really strongly and really poorly. I thought this particular cut was very interesting. Particularly because construction is performing surprisingly well, that was one of the sectors that economists were very worried about. Very exposed to demand shocks, it's really kind of picking up. I think partly because of the sheer amount the governments have thrown at the sector and some of the specific programs there, but also because we are seeing a lot more buoyancy in the housing market than most people were expecting. Other sectors performing well, e-commerce and I will talk about this more in a moment, but things like internet publishing, online gambling has been a huge area of growth during the shutdowns. On the other hand, transport well away from a bounce back, particularly air transport. As are some of the arts and recreations sectors, including films. E‑commerce, probably the big story or the big opportunity of COVID. You can see there that online sales data on the left-hand side and that's a level shift in activity and you sort of see retail analysists talking about it pushing that curve five to six years into the future. The question that everyone's grappling with of course is, what part of that is temporary? People just looking for online alternatives during the lockdowns versus what is going to be an actual structural shift. But I think there's kind of enough data now to suggest that in many areas we are going to see permanent shifts in behaviour because of this. I think a couple of interesting observations, we've seen movement into more purchases of necessities like groceries online, and some of that will continue. Big growth in services online, so video conferences obviously, we are all familiar with. Remote learning has been on the rise and a whole lot of some health and wellness services. Again, some of that will have been temporary but I think the behavioural changes we've seen will in some cases stick. And also the movement into new market demographics and for a lot of older people, this might have been their first time using the internet for purchasing and what we know is once people have tried it, once they've got over that initial hurdle, you would expect that at least some of their purchases would continue to play out in that way. That has tied in with a shift in payments, which again has been happening for a long time. Cash had been in decline for a long time now and COVID has only accelerated that with the concern that a lot of merchants had over taking cash for health reasons. We've seen a really interesting and dynamic market for alternative payment methods with a lot of innovation in this space. That has only picked up during COVID and you can see where 'buy now pay later', for example, there is extraordinary growth. The other very interesting interception with the COVID recovery is the regulatory framework around those things, so if anyone has watched the language of the Government, they're very much pitching this as a good news story as part of the recovery.They're seeing the innovation going on, cheaper payments are a good news story for the recovery and interestingly some of the regulators seem to have picked up on that shift or they're certainly changing their language about the likelihood of those products being brought inside the regulatory net.

The less good news story, I think all of you would be aware, is that any industry that's highly reliant on international visitors is struggling and this to me is one of the more striking charts I've seen during COVID. We've gone from about 1.8 million visitor arrivals per month to about 5,000 essentially overnight, and listening to any of the health experts, we're not going to be back I think to anything like open borders until well into 2022. That clearly impacts accommodation and food services, which includes tourism. Arts and recreation is still well down on where it was pre‑COVID, and the education sector. It strangely hasn't really shown up in the data yet but I'm certainly expecting to see that that will be a slow recovery, particularly for higher ed - which we know is very reliant on international students.

Big policy conversations in 2021, I don't know if anyone saw Prime Minister Scott Morrison's address to the Press Club earlier this week? He set out the following five priorities which seem to me to be pretty on the money. The vaccine and economic recovery, essential services, I think you can read into that health and particularly aged care, I think that will be a real focus of this year, with the Aged Care Royal Commission results coming out. Protecting and securing Australian interests in a challenging world, I think you can read into that dealing with the emerging challenge of China and that relationship, and care for our country which is one I've seen pop up a few times in Morrison's speeches. I think that is marketing code for climate change.

A few words about a couple of those. Vaccine rollout is absolutely crucial both at reducing the risk of the third wave and, I think, underpinning the economic recovery in those lagging sectors. The current timeframe has a full rollout completed by the end the year. I think there are valid questions being asked about whether we adopted enough diversification in our vaccine procurement strategy and we did really put a lot of faith in the UQVSL vaccine which, as we know, is a non-starter. Nonetheless, the rollout will proceed and we did get behind a number of others, but we are rolling out slower than a lot of other countries and I think how well we manage, or how well the Government manages that I should say, will have big bearings of course on the health and economic situation, but also on their political fortunes this year.

On the economic recovery, the big policy question is how soon is too soon to step away from those Government supports that have been so crucial at underpinning the economic activity? Most of them are due to come off by mid this year, including the major ones – JobKeeper and JobSeeker, but also a number of the other programs. That is a real risk and I think a chance of getting stuck there in second year is very real and is contrary to the position that a lot of other countries are taking. If you watch the language in the US for example, they are talking about continuing to pump money in and pushing the economy hard until they get unemployment down close to 4%. So that is a very different approach to the language we're hearing here which is sort of a plan to switch back to prosperity pretty quickly. I do think that is a riskier approach and I think there's good arguments that we should run the economy harder for longer.

Finally, climate action. I think all of us are hopeful that maybe this year we see some real movement on this front. I think there is a perfect storm of factors that are really pushing the Government to act. First of all, all of our major alliance partners are now committed to net zero by 2050. We have the conference later in the year in Glasgow. A number of countries making noises about carbon border adjustments and the penalties for laggards that don't take serious action on climate. Also because we have a big swell of support in the business community of trying to get some policy certainty in this space after two decades of chopping and changing. And finally I think the bushfires are still there as a kind of political timebomb, and while this issue might have got pushed out of peoples' front of mind because of COVID, I think as fires start to emerge again, as we are already seeing in WA, that will be an important reminder for the electorate. Scott Morrison's language is shifting, and I think he's very well aware of these pressures. It's subtle and it's slow and I sort of think he is hoping that he if moves slow enough the backbench might not realise he's making the shift. I do not think we are going to be in a world where under this Government we get an economy‑wide carbon price or anything equivalent to that. But there are a whole series of kind of sector-specific, second-best, third-best type solutions that you could envisage that would put us on a much better trajectory and that's certainly something Grattan is going to be thinking about over the course of this year.

So that is where I'm going to leave it for my opening comments and I'm now going to hand over to Mark to say a few words.

Mark Malinas Thank you, Danielle, and look it's always fascinating to hear an economist's speech about data like that so we really value you sharing your insights there. Look, I will just speak briefly on the state of the global M&A market. I think there is some good data and interesting data to unpack there and touch briefly on some sector trends that we're seeing where activity I suppose is highest, and then also briefly comment on Australia's foreign investment regulation and changes we've seen this year and I guess the impact that that may or may not have had on M&A activity locally.

What's interesting to see, I suppose from a regional M&A comparison overview, when you look at the world collectively over the past twelve months, and when those in the future look at 2020 and see what happened, they'll see a year where, yeah M&A dropped 6 or 7% globally, perhaps it wasn't a bad year. And I think overall that was certainly the case, the year was strong but it was certainly a tale of two halves, and when you look at the regional data, the US - which generally counts for about 50% of the global M&A market in North America - suffered a decline in activity. Compare that with the Asia-Pacific region, including Japan, which saw substantial growth in M&A activity. Sector‑wise the top sector globally by some way was the technology sector and I think that picks up on some of the comments that Danielle made around where the opportunity is, and we've certainly seen Syntech type acquisitions, acquisitions in payment systems-type business, other data-rich businesses driving activity there, and then secondly in energy resources and in particular with a real focus on renewables - another sector where there was significant activity and more than you'd think and I think a stabilisation or a trend perhaps slightly more left in terms of where climate policy should sit and border economies coalescing around what should happen could give a little bit more certainty for investors in renewable space, so I think that was again pleasing to see. So a tale of two halves. I think Q1 and Q2 were almost the lowest M&A quarters since the GFC. We didn't see much activity at all when what really happens in March when the Western economies were in particular hit, was transactions just going on pause or being aborted, new action processes being pulled or deferred and buyers who had committed themselves to transactions but were yet to close looking at every way possible they could try to get out of those transactions. So we saw a dramatic rise in buyers looking to exercise material adverse change-like clauses in agreements and really going confrontational with the vendors there to try to get out of those transactions. Banks were obviously looking at their debt portfolios and where they loaned, and we saw a typical icing, a real freeze of M&A scratching of the head about would we diligence assets if we can't travel and a real concern about existing investments. As time progressed and as we got into Q3 and Q4 and the markets, as they ordinarily do, pricing risk and now they price risk very quickly, banks were willing to lend again, you have the continual mountains of dry power in the private equity space and the financial sponsor space which needs to be deployed and we saw the biggest turnarounds in M&A activity in Q3 and Q4. I think Q4 was the highest quarter since the quarter just before the GFC in 2007 and your overall second half of last year, the highest M&A value activity in history. So certainly it's a remarkable turnaround, so it does tell the story certainly of the two halves. This graph that's on the webinar now illustrates that in the right hand column. In Australia in particular, especially in March, those of us that were advising on particular cross-border deals were concerned about the Treasurer's changes to the FIRB rules in Australia and in essentially the withdrawal of the exempt thresholds, which transactions didn't need approval and what would that mean for the activity in the year, and whilst I think there was a lot of concern initially, I think FIRB conducted themselves very well. I think they resourced up, they were able to deal with the applications quickly, thoroughly and I think the concern was perhaps a little misplaced and if you look at where we saw FIRB, I suppose block transactions or give a strong indication to the buyer that they would not be willing to approve a transaction, they were typically focused on a few China bidders and a couple of transactions in Western Australia, Northern Territory, around the resources market and perhaps the biggest one was the China Mengniu Dairy acquisition of the Lion Dairy business here in Australia which was blocked by FIRB and then ultimately acquired by Bega later in the year. So not a huge impact in terms of transactions proceeding or not but certainly an issue for acquirers and foreign acquirers to concern themselves about.

Where we see activity being I think strongest this year, is again a bit of a doubling down in the technology sector. As I just mentioned earlier, payment systems, Syntech, other businesses of that ilk, e-commerce, I'm sure we're all getting the parade of Amazon deliveries at our homes during the various lockdowns across the country so we do think that will be a high trend, and then ancillary businesses to e-commerce, so again encryption-type businesses and other businesses that sit around that I think will be of particular interest. And then software platforms that underpin those certainly and then again I think energy security is a big issue and continues to be; there's talk in Australia about gas being a driver of economic growth in this country and again I think activity in those sectors will be very very important and ones to watch going forward.

That's my canter through, but I think as everyone will more likely wish, like to hear much more from Danielle than from myself and I might ask Danielle a few questions and then hand it over a little bit later to David to speak a little bit about infrastructure and explore that a little. But Danielle I guess with the current situation and perhaps focusing more on Australia than globally, economically, how do you view the current landscape in Australia? And you mentioned a few areas of opportunity there around e-Commerce in particular, but where do you see the opportunities perhaps more in the medium than longer term for us here?

Danielle Wood Great question. Look, I think over the course of the next year, contingent on the health situation going well, we will see a continuation of that bounce back. The RBA's now talking about 3.5% growth as their central estimate for this year. That would put us back to a pre COVID level of economic activity by about the middle of the year, which is certainly not a bad outcome and I think better than most countries in the world will hope for. In terms of opportunities, you're right, I entirely agree that I think e-commerce, Syntech, associated services, logistics, all great short-term opportunities. In the medium to longer term, I think there's a lot of opportunity in the health personal services space and I say that because we have an aging population, we are now seeing the mid-to-tail end of the baby boomer group moving into retirement age and I think their expectations around retirement and what that looks like will be very different to previous generations. They have a level of wealth that is unprecedented for any generation in history, so they are very cashed up. So I think there is probably some opportunities there in terms of more innovative services in that space. The other big area of opportunity you just flagged a bit there too Mark is I think around energy. We have extraordinary opportunities here in Australia given our incredible wind and solar resources and I think that's going to translate into not just energy itself but things like green manufacturing that hangs off that. So we've done some work looking at this space and really I think big potential around things like green steel. Once you start bringing hydrogen into the mix instead of coal, you really turn the economics of production on its head. So whereas historically it's been much more economic to export the iron ore and export the coal and it gets made in a low-wage country, hydrogen is quite expensive to export and what it means is all of a sudden making things locally becomes a lot more viable. So I think that may well not be that far into the future. It's also politically pretty exciting for governments because you could be talking about job creation in those industries that are going to suffer from decline of thermal coal, for example, so I think governments are going to be looking at strategies to try and build up those industries over time.

Mark Malinas Thank you. It was really interesting to hear the growth of hydrogen in this market I think and it's probably where renewables perhaps was 10 or 15 years ago and still in its infant stages but certainly one where lots of different groups are looking at building or developing a project of some scale. It would be remiss not to touch a little bit on the China Australia relationship. Obviously, a lot has been said and a lot has happened this year and obviously diplomacy between the two countries is probably at its lowest level for many, many years and we've seen obviously trade barriers now in relation to certain products and a bit of a tit-for-tat discussion, whether it's over social media or through the various press between various persons on both sides. How do you see that relationship playing out? I'm thinking about things like supply chains and things like that. Where do you see perhaps the opportunities for Australia to look beyond China and for our corporates to also look beyond China for supply going forward?

Danielle Wood Yeah, it's a huge question and I really do feel for the Australian Government in terms of this relationship. They have struggled to even get basic dialogue going on and just restarting trade in some of these areas. Look, I would say, interesting from a macro-economic perspective, it hasn't had a huge impact and that's really because China's been, I think, very strategic in the products it's chosen; it's really picked off those ones that are likely to get big headlines in Australia but ones where they can pretty easily find substitutes. So you see things like beef and wine, they haven't moved on iron ore which really dwarfs all of our other exports into China. So we're still running quite a strong trade surplus and we're not seeing it affect our overall economic performance, but I think they have been quite clever at hitting those particular industries. I'm not getting a sense that that's flowing through then to supply chains either. I think they have focused on closing off the import markets, but I think businesses, looking at the way China's behaved during this period, are very rightly going to be thinking that there is increased risk in supply chains where you're very exposed to China. So I think there will be a push towards diversification; though a willingness to bear somewhat higher supply chain costs in order to de-risk the chains and I think a lot of the other countries in our region and in South East Asia will be part of that conversation. The other point I think to make on China, I think the other industry where they could really bite us if they chose to is higher education. We haven't seen movement there yet, largely because there's no need to, effectively. That market is closed for now anyway, but we know that the Government could pretty effectively shutdown Chinese students coming from Australia if they chose to and I think that could be another one where we see the relationship bite over the next year or so.

Mark Malinas Yeah, it's an interesting one, the foreign students and I guess the money spent on infrastructure development for student accommodation and other growth in campus sizes etc here in Australia. I might take the opportunity to perhaps pass over to David with his Head of Infrastructure hat on at Allens and perhaps David you could make some observations I guess on the sector, and pick up the Q&A with Danielle with that focus?

David Donnelly Yes thanks Mark. It's interesting Danielle, your slide that shows the different sectors and how they've been impacted because we have heard a lot about infrastructure as a stimulus and when you look at construction and building – it's actually running far stronger than it would otherwise. But if you think of infrastructure broadly as a sector, it includes airports and other assets which are at the bottom of that list, so it's a bit of mixed bag, like M&A was a tale of two halves, infrastructure is a tale of two cities - there's some that are winning and some that are losing. Through our propelling city growth campaign I've been advocating for a broader range of projects, securing broader benefits for a broader group of people, trying to get into the idea that we need to spread the spend in order to maximise the benefits and particularly if we're going to be spending into generational, if you like, levels of money. We need to make sure those benefits flow to the future taxpayers who will be essentially repaying that stimulus investment. And when asked to sort of pick some winners and losers out of that, or where do I think the money would be best spent, I have sort of focused on trying to solve homelessness for instance, and whether social housing is part of that. Green energy which we already talked about, or care for the country as you have now labelled it, or Scomo's now labelled it, but sort of that element. And then finally, trying to find resilience or efficiency gains. We'll leave green energy for now because we have sort of touched on that already but in terms of social housing as a stimulus measure, I would be interested in your thoughts on whether or not that represents a good use of stimulus money and also in terms of resilience or efficiency, maybe with a health lens, whether there needs to be efficiency gains in the hospital system in order to fund that retirement or to deal with that population-aging issue that you have mentioned.

Danielle Wood So look I'll take social housing first and I think very clearly it's a great stimulus measure, and I say that for a couple of reasons. One is we've talked about building construction tends to take a pretty big hit during recession, it's a labour intensive sector. It's one that you can kind of scale up quickly and really importantly it's delivering something of considerable social value as you have pointed to. We now know a lot from overseas, homelessness is obviously a kind of a complex problem and there's a number of factors that are feeding into it, but the single best thing you can do to deal with it is to get people into housing and then you help them with the wrap-around services. So I think this is kind of a once-in-a-generation opportunity to go hard at it and make serious inroads into that, that problem. The Federal Government has been reluctant to go there in terms of stimulus measures. We have seen some of the states step up and Victoria in particular has had announced a very significant investment in social housing, but I still think that is one that government should look to. As part of the economic society, we do a poll once a month of fifty eminent economists and when we ask them 'what's the best stimulus measure?', social housing came up number one by some margin. So this is very well supported by the economics profession. In terms of how do we fund health services and aged care services going forward, that's obviously a very big issue. There absolutely is scope. For greater efficiencies in the hospital system, certainly our health team at Grattan has done a lot of work on this. Very strange things still go on. You see huge differences in the cost of a given operation, even once you adjust for patient characteristics across different providers, across different hospitals, so we don’t have a kind of strong price control or benchmarking system. There are a lot of issues with the way in which some costs like prosthesis are reimbursed and it's very hard for private hospital providers and health insurance advisers to keep those costs low. So there is a lot of scope for efficiencies there but I think that's a much bigger conversation about how do we actually sustain this social spending as the population ages? And I think you do have to look at things like the mix of taxes as well as trying to contain things on the cost side.

David Donnelly I'd love to keep throwing you infrastructure questions as, when I look at the audience questions coming through there, there is quite a lot coming through on the Q&A so I want to pick up on something Mark mentioned which was student accommodation and the sort of money that's being spent developing those assets at a time when at the moment we don't have foreign students coming into the country and one of the questions from the audience there is around the fact that has been a major export and it's been a major, I guess piece of stimulus for the economy. So just your thoughts on the likely impact of having shut down that sector and in the medium term the closed borders and where you think that impact might play out?

Danielle Wood Yeah, it's a hugely significant sector. So I'm coming to you here today from Carlton in Victoria, we're just behind Melbourne Uni and I can tell you that it feels like a very different place than it did a year ago. You can just really see the decimation both to all those accommodation providers, the local businesses, it's a very important export industry for Australia. I am concerned about the future. On the one hand, we've got a good story to tell, I think, to international students, particularly given how successful we have been at containing the virus, we could use that as a marketing strategy to try and attract them back. The big concern that universities face is that, once we sort of close those borders, that students start to look elsewhere, to think differently including about studying locally and we know that there are a lot of high quality universities in China for example, so we may see that students just decide to study at home rather than get an expensive education overseas. So I know that universities are grappling with this, they are trying to stay in contact, they are trying to keep those avenues open which I think will be incredibly important on the other side. I would say that I think that Federal Government hasn't been particularly helpful to the sector. It looked like a pretty active and deliberate stance to include them from the JobKeeper, to exclude them sorry from the JobKeeper payment. We've seen some pretty significant job losses in the sector and people that worked there talk about a lost generation of researchers. Once those people have left, are they actually going to come back in, even if the sector recovers. And then on top of that obviously to overlay some pretty significant changes to how they fund domestic students to do courses which has been incredibly disruptive for university management at the challenging time. So I think it is disappointing, particularly if you compare to how some other countries like the UK really looked after their university sector during COVID, and it certainly stands in stark contrast to they way some other sectors of the Australian economy have been treated.

David Donnelly We've got quite a few questions coming through around gas-led recovery and we, Mark mentioned gas in terms of potential M&A activity and that's been contrasted with hydrogen and so I guess there, sort of trying to merge a few of these questions that we are getting… do you see from an economic perspective there being some medium gas-led recovery or do you think we are transitioning straight to hydrogen? How do you see that playing out and what role do you think gas has in the sort of medium term?

Danielle Wood Look it's a great question and I, I would point people particularly interested to a fantastic Grattan report on this topic done by our energy program because I am far from an expert. But, they sort of came out that there is of course a continuing role for gas in the economy, particularly in balancing the energy supply mix. You have days when the winds stop blowing and the sun's not shining, you do need some sort of base supply and gas has a role to play there. But much less optimistic around the kind of rhetoric of the gas-led recovery. I think the days of very cheap gas that we enjoyed five or so years ago are over. There's nothing the Government could do that is going to push us back down the cost curve, and even if you go back to those days when we had cheap gas, we didn't have a growing manufacturing sector, we had a shrinking manufacturing sector, so I think reliance on this idea of cheap gas (1) isn't manageable and (2) isn't going to be the shot in the arm for the manufacturing sector or manufacturing jobs that the Government is claiming, and quite frankly some of the jobs numbers that are getting thrown around are ludicrous and I think the Grattan team did a good job of debunking some of those myths in the report. On the other hand something like hydrogen, as I said, really shifts the equation and may well I think be a source of opportunity. It's not here now but I would really like the Government, if they're going to be talking about the energy mix, energy opportunities going forward, to be paying more attention to those technologies that have really long-term potential.

David Donnelly And we've got a series of questions that I'm again going to try and blend together that are dealing with China and the trade tension there, with the opportunity for instance off the back of hydrogen for green steel and other manufacturing, there is a value judgment here about how much manufacturing we want to bring onshore and how we want to support that from a jobs perspective versus cost. So there's always going to be that balance, could it be done cheaper offshore, do we want it here for jobs and for other reasons. And so I guess there's a line of questioning coming through around that. Is there an opportunity to reset the China relationship and also have a greater jobs impact by moving some manufacturing onshore and where would be the focus if we did that?

Danielle Wood To be honest, I'm pretty sceptical about that as an economic strategy. So manufacturing jobs in Australia have been in decline since the '70s. We see the same around the advanced world. Partly that has been globalisation and the shift to lower-wage economies such as China, but now we actually see manufacturing jobs in decline in China as well and that's a function of improvements in technology. So I don't think that manufacturing jobs are a game-changer, except where the economics really support it. So what I would note is Government spend a lot of time doing manufacturing strategies and talking about these sorts of jobs. I think as I said like green steel there are genuine opportunities there because the economics are different, but I think fighting against those broader economic trends is generally hard. That said, there may be some supply chains that you decide to bring to the country for other reasons, non‑economic reasons, strategic reasons, health reasons - so things like PPE, pharmaceutical manufacture, you know I think you should have those conversations, but that should be based on a broader argument rather than the economics of job creation, and I just find it extraordinary that 80% of Australian jobs are in services. We have huge rolling demand in areas like aged care and areas like personal services and we don't have the people with the skills to do those jobs at this stage. We have a real problem with the pipeline, and I would like to see more discussion about job opportunities in those sectors rather than always coming back to manufacturing.

David Donnelly Just one of the questions I've got here picks up on your slide around renewable energy and the sort of potential for this to be the year for green energy. Essentially they're asking the question whether the sort of lack of movement so far at the federal level will be superseded by international pressures such that people will get on with doing it or those international leaders will, to use the care for country lingo – change the rhetoric and slowly, slowly change the view from the Federal Government around renewable energy.

Danielle Wood I mean it's been a challenging area for the Federal Government for a long time and one thing I would say of course is that we've seen a lot of movement from the states, and that policy vacuum from the Government has really led to the states stepping into the fray. That's a good thing. Some action is better than no action, but of course the cost of doing it on a state-by-state basis is we lose the advantages of national coordination which the national energy market was designed to sort of deal with. So I think that's a concern. I think the Federal Government will start to move. I don't know if I'm being too optimistic there but I do think the pressures, as I pointed to them in the slide, you need that sort of series of pressure, particularly the trade one, will start to bite and perhaps it was needed to give the Prime Minister and the other more policy-minded people on the Front Bench the cover that they need to move. The challenge has always been, you know, that particular segment of the party room that resist action and maybe that when it's about Australia's trade relationships that gives them the scope they need to take the action.

David Donnelly 

There's an audience question for me in here so I won't resist, I will have an attempt to answer it and then I'll throw to you Danielle.

The question is: if post‑COVID Australia actually means people working with greater flexibility and working from anywhere, does that mean regional infrastructure is a potential growth area, and I think my answer to that would be when I was speaking about a broader range of projects that suit a broader range of people, geography was also part of that.

The question I have which I'll ask you to comment on as well Danielle, is whether that will be a permanent shift or a more temporary shift. Obviously if people want to have a tree change and sea change, that's great, but if the infrastructure doesn't support that eventually they will come back, and there's good reasons - the conglomeration impacts and the like for working together in a common space, so I sort of see a more flexible view, I don't see everyone moving to the regions but equally I don't see everybody turning up to the city every day, so how that actually plays out – 'I don't know' is the short answer. But I think there will be change in movement patterns, so for instance people might accept longer commutes but fewer of them. People might work from home part‑time and work from the office part‑time and until we actually see how that plays out I think it's very difficult to crystal ball, but I assume the population movement data that more people moving to the regions at the moment means there'll be more demand in those regions. But it would be interesting, Danielle, in your view about whether that's a long‑term trend or a shorter-term trend and whether it may be a phase that we move back from over time.

Danielle Wood I think it's a fascinating question. I've really been watching all the survey data on this closely and really, I see this as a huge productivity opportunity if we do it well. So my guess, and certainly based on the preference data that I've seen coming from employees from organisations big and small, including my own organisation, is that most people are pretty attracted to the flex work model. So some days in the office and some days at home. I think if businesses can make that work, that's an incredible improvement in living standards so you still get that benefit of the face-to-face contact and all the spillovers that David was talking about that we know is, you know, I think is still incredibly important for overall productivity. Yes, we managed online for six months last year, at least in the case of Melbourne people, but I always sort of saw it as a bit of a tax on the social capital that we've built up as an organisation so I think face-to-face is important, but do we need that five days a week? No, I don't think we do, and you know the idea that you can support people to work at home and cut out the commute and give them more opportunities to do other things they care about I think is really exciting and fantastic. So if I'm right and that does become the norm in the types of jobs that we have, that does provide increase in demand I think for regional living. But regional living still within commuting distance of the CBD so that's really important. It's not going to be people moving four or five hours out. They might be willing to go one or two hours out because they are only doing that commute once or twice a week, so I think that's where the infrastructure demand is going to be. That was already happening a little bit pre‑COVID. We've absolutely seen it in the movement data over the past year and I suspect that's probably the area that's going to continue to grow and we'll see the demand for infrastructure.

David Donnelly There's a couple of questions that I may throw to Mark on. One is around whether or not boards are going to be increasingly focused on ESG when they're making investment decisions. That's the first one, and the second one is whether we would expect the private sector to take a more adverse view or view as increasingly risky working in aged care, health services, personal services, areas that during the pandemic there was quite a lot of criticism of the private sector for generating profits while perhaps care wasn't at the level that people were expecting. So from a sort of board and investment perspective Mark I was wondering if you could comment on those?

Danielle Wood Yeah thanks David, I think both are really interesting questions. On ESG, absolutely I think that is coming more and more front and centre for boards. Obviously some of the mining organisations around the world with heritage-type issues of late and I guess the indigenous population and really the broader populations, you know, views on what happened there, you know, is a clear message to boards that, you know, issues beyond, I guess shareholder returns are very, very important and I think, the trend that we're seeing especially in the last perhaps year and half or two years has been, what would otherwise be referred to as passive shareholders. So that's big institutional funds that have, you know, mandates to invest and are clearly becoming more conscious of the ESG issues seeking time with boards and with companies to actually understand what they are doing in relation to particular areas of interest. Some of this comes from the member-driven demand for some of those hedge funds or institutional investors, so I think we'll continue to see more and more push from some of those institutions up to the companies and particularly for the listed environment, I think it's very important. And even when you think about organisations like, you know, private equity or sponsors where they get their cash from, they get their cash largely from LPs or limited partners who are largely pension funds around the world. So, I think that push, or that development, will only continue to gather legs. Obviously boards have this hard balancing exercise because, you know, you want to focus on shareholder return and, obviously profit for shareholders but I think there will be a way through that and I think perhaps those boards that are thinking about ESG issues more holistically and as part of the business may well see better returns for their organisations once they take those into account also. And it's not to say they aren't, but they are certainly in the headlines at the moment and it's certainly an area of focus for the institutions behind them. On the healthcare space, David, I guess, you know, trends that we've been seeing there, in particular, with … I look at the aged care sector, you know, 10 years ago, there was a, you know, let's call it 18 years ago, there was a flurry of, you know, consolidation of some of the full-profit sectors by private equity, and then listing those outfits on the exchange and, you know, it is clearly an area for debate as to what would be the best from a policy perspective, the best sort of ownership structure for those types of organisations and the purpose for which they serve. And I hope … I'd like to hope that there is … there can be a balance that is struck and perhaps this is an area where, you know, we've had a number of inquiries and conditions into the area and perhaps it's time to sort of take up some of those recommendations and explore what regulation needs to be, you know, put up and, you know, in Victoria, in particular, it was striking to see the difference between what happens during our lockdowns and pandemic waves here, in between the private and the public sector for those types of industries I think. In terms of things like dental or cancer care, etc, I think the Australian models of our hybrid private and public type setting for those types of services is being picked up and adopted by governments across the world and, you know, numerous examples of, you know, foreign entities liking the idea of what we do here in terms of cancer clinics, dental clinics and other care and making acquisitions and then launching Asia. And Asia sort of platformed with that type of .. that technology and those ideas behind them so I think we'll probably see some continued export of the Australian ideas in those areas and you can see consolidation around those, you know, the medical care that's not directly, you know, it's medicine but it's sort of ancillary to medicine and it's around the edges. I think Australia sort of really punches above its weight there and there's some good ideas.

David Donnelly So final question from the audience. I think people have realised we’ve had an economist on the line, and we haven't talked about house prices. So that's obviously had to come to the fore so, there is talk about a housing bubble. The question, I guess, is when the stimulus comes off, whether that's home builder or JobKeeper, do we see the interest rates start to bite and do we see the, you know, I guess, the bubble bursting this year. So I'll throw that to Danielle but noting we've only got a few minutes left, she can be very brief in her response.

Danielle Wood That's a shame I enjoy talking about house prices. Look, it's an important question. I had a conversation with my colleague early on in the pandemic and we said, you know, this is going to be the real test of just how much interest rates drive prices versus other demand factors and, you know, I think the question is right to point to support through the Government programs. But by and large, what we are seeing go on is a response to lower interest rates. Those households that didn't take a hit to their income during the pandemic have built up those savings and are now able to borrow more and that's feeding into demand in the market. So, there's some really interesting research done within the Reserve Bank where they estimated that for every, you know, 1% fall in the cash rate, that has a sort of short-term 1% fall, has a 10% increase of house prices, If that's a permanent 1% fall lasting more than three years, which RBA is signalling that it will, that's a 30% increase in house prices. So, you know, when you look at what's happened in the market, you know, I agree the prices look extraordinary, it's easy to conclude there's a bubble but really what I think is what we're seeing is a ramp up over essentially 20 years as interest rates have come down further, further and further, borrowing capacity's risen, so I don't think it's a bubble, but nor do I think that that kind of growth rate is one we're going to see in the future. Because let's remember once your interest rates hit zero, there's not much room to go down further. So we’ve kind of built that into the price levels. It has all sorts of weird distorting effects on the broader economy, you know, I worry about the inter-generational effects and the fact that we see plummeting home ownership rates amongst young people because it is really only quite high-income young people that can get into the market these days. So there's all sorts of flow-on implications from those house prices. The question of course is, you know, if interest rates rise again, what happens? I don't think that's something that we're going to see in the next few years. I know that if the reserve bank does start to move again, they will be doing that slowly with an eye to macro stability. What I think is more likely is if they start to worry about the impact of low interest rates, you know, pushing prices too high we might start to see a move back to macro prudential controls and things like restrictions on investor lending, higher LVRs put on banks, those sort of things to try and just take some of that froth out of the market in the short term.

David Donnelly Very good, thanks Danielle and thanks to the audience for their questions. They've been really insightful and I think they've really pushed the conversation along. I might now hand over to Mark to give a short wrap-up and thanks.

Mark Malinas Thank you, David. Look yeah on behalf of all the attendees I guess that are inside the space Danielle, thank you for joining us today for this hour and it's been a riveting discussion and I think we've all learnt something and a few ideas to take away to our respective organisations. So thank you. I'd like to also thank all those attending the webinar, many of you are clients, many of you are, you know, friends at Allens and, you know, thanks for joining us this afternoon. It's always a privilege to access your time and whether it's at home, if you're working from home at the moment or in the office, so thank you very much. Everyone who's attended will receive an email shortly with a link to the recorded version of this, or the on-demand version and, you know, feel free to forward that to some of your colleagues if you think they would be interested. And, of course, we always love to get feedback so a short survey will pop up at the end of this webinar and we'd love to hear your feedback, or if there are any other topics that you'd like to hear about in the future. Any ideas, we'll certainly consider them from our perspective. But, look once again, just on behalf of those joining, thank you Danielle for joining us today. Fantastic.

Danielle Wood Thanks for having me.

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