Introduction

1. Although small by world standards the automotive industry is one of Australia's major manufacturing sectors. In 2006–07, it generated $4.7 billion in export revenue, and employs around 80 000 people.¹ The industry is particularly important to the economies of Victoria and South Australia, where the major motor vehicle manufacturing facilities and automotive supply chain companies are concentrated.

2. Globally, the automotive industry is being transformed and realigned in the context of emerging markets, such as China and India, freer trade and changing consumer preferences.² These changes are impacting on various parts of the industry, including in Australia.

3. The Automotive Competitiveness and Investment Scheme (ACIS or the Scheme) was established in 2001 as part of the Australian Government's post 2000 assistance package for the automotive industry.³ The purpose of the Scheme is to provide:

… transitional assistance to encourage competitive investment and innovation in the Australian automotive industry in order to achieve sustainable growth, both in the Australian market and internationally, in the context of trade liberalisation.⁴

4. ACIS is open to Australia's motor vehicle producers (MVPs)—Ford, Holden, Mitsubishi and Toyota—and to companies operating within the automotive supply chain including: automotive component producers (ACPs); automotive machine tooling producers (AMTPs); and automotive service providers (ASPs). At 30 June 2007, there were 245 participants registered under the Scheme.

5. Once registered, participants are able to earn import duty credits for investing in plant and equipment (P&E) and in research and development (R&D). MVPs are also able to earn credits for producing motor vehicles. Duty credits have a nominal value of one Australian dollar, and can be used to offset the duty payable on certain imports (motor vehicles and related parts) or traded with other Scheme participants and third parties.⁵ The benefits to individual entities under ACIS have so far ranged from tens of thousands of duty credits to, in some cases, hundreds of millions of duty credits.

6. ACIS was originally established to run for a five-year period until 31 December 2005. In December 2002, the Government announced a ten-year extension to the Scheme, comprising two five-year stages. Stage 2 of the Scheme commenced on 1 January 2006 and runs until 31 December 2010, while Stage 3 commences on 1 January 2011 and concludes on 31 December 2015. Up to $7 billion worth of duty credits are expected to be provided to participants over the 15 years of the Scheme.

7. In Stage 2, there are two funding pools from which duty credits are issued—a $2 billion capped pool and an uncapped pool. MVPs are entitled to claim $1.1 billion (or 55 per cent) of the capped pool, with the balance available to supply chain participants. The uncapped pool is available only to MVPs and is expected to cost around $800 million in Stage 2.

8. The major change from Stage 1 to Stage 2 was the introduction of the $150 million Motor Vehicle Producer Research and Development (MVP R&D) Scheme. This Scheme provides funding to MVPs on a competitive basis, and is directed at encouraging investment in ‘high end' R&D technologies.

Administrative arrangements

9. The Department of Innovation, Industry, Science and Research (DIISR) is responsible for administering ACIS under the ACIS Administration Act 1999 (the Act) and accompanying regulations.⁶ The Australian Customs Service (Customs) also delivers aspects of the Scheme, under its separate legislation.⁷ Broadly, the agencies' responsibilities are as follows:

• AusIndustry, a division within DIISR, is responsible for the day to day delivery of the Scheme. This includes registering applicants, issuing duty credits to participants and transferring credits to Customs, to be used on eligible imports; and
• Customs is responsible for facilitating the use of duty credits on eligible imports and for reporting to DIISR on the use of those credits.

10. To receive duty credits, participants are required to submit a claim form to DIISR each quarter detailing their investment in P&E, R&D and, for MVPs, the production of motor vehicles. The department issues duty credits to participants once the claim is received, and subsequently checks the integrity of claims. DIISR's principal means of identifying mis claiming are by conducting compliance audits on selected participants, and by using ACIS customer service managers (CSMs) to review participants' quarterly claim forms. CSMs may also verify some aspects of participants' claims during site visits to participants' premises. For example, confirming that capital equipment previously claimed exists, and is allowable under the Regulations.

Audit objective and scope

11. The ANAO undertook a previous audit of ACIS in 2002–03 during Stage 1 of the Scheme. The audit made six recommendations to improve the department's management of the Scheme covering aspects of governance, performance reporting and risk management arrangements.⁸

12. The current audit has focussed on Stage 2 of the Scheme. Its objective was to assess whether ACIS is being administered effectively by DIISR and, as relevant, by Customs. In particular, the audit examined the department's arrangements for:

• assessing the eligibility of participants to receive duty credits;
• calculating duty credits accurately and adhering to the funding limits for the Scheme;
• checking the integrity of participants' claims, which are self-assessed;
• accounting for the duty credits transferred to and used at Customs; and
• measuring and reporting on the performance of ACIS.

13. The audit also followed up on whether the ANAO's previous recommendations have been addressed.

Conclusion

14. ACIS is the Australian Government's key measure for supporting the automotive industry. As at July 2007, more than $3.4 billion in duty credits have been issued to eligible companies from the automotive industry since the Scheme began in 2001. In 2004, the department assessed whether the stated objectives of the Scheme were being achieved, and early indications were that ACIS was helping to promote a more competitive and sustainable automotive industry in Australia. DIISR plans to evaluate the performance of ACIS again in 2009, one year before the end of Stage 2. As well, the Productivity Commission is scheduled to review government assistance to the automotive sector in 2008. ACIS is legislated to run until 2015.

15. In its administration of the Scheme, DIISR has implemented effective internal controls to assess the eligibility of participants to receive credits; to calculate duty credits claims accurately, based on the information provided by participants; and to adhere to the funding limits for the Scheme. DIISR has also established appropriate arrangements for managing the $150 million MVP R&D Scheme introduced in Stage 2.

16. Since DIISR administers ACIS on a ‘self-assessment' basis, it requires effective arrangements to promote accurate claiming and to identify any mis claiming by participants. Compliance activities have identified some $141 million in inappropriate claiming since 2001. The department uses various methods to educate participants on Scheme requirements, and it conducts risk-based compliance audits to check whether self-assessed claims are accurate. These audits have covered all of the largest recipients of duty credits. However, most participants have been audited only once since ACIS began in 2001. While it is a matter of judgement where the appropriate balance lies, the level of audit coverage is relatively light for such a significant program that operates on a ‘self-assessment' basis.

17. To further strengthen its compliance program, there is an opportunity for DIISR to systematically analyse, and use, the results from its compliance activities to improve participants' understanding of Scheme requirements. Such analysis could also be used to better inform DIISR's approach to determining the coverage and scope of compliance audits. Audits with a stronger focus on high risk areas are likely to be more cost-effective, providing capacity to increase the extent of coverage.

18. DIISR has established a ledger to record the number of duty credits held by Scheme participants, and Customs has a sound control framework to ensure that duty credits which are transferred from DIISR to Customs are used only on eligible imports. However, the department's processes to account for transferred duty credits have not been sufficiently robust in recent years. This has impacted on its ability to identify errors in participants' duty credit accounts, and to report accurately on ACIS, including in its financial statements. A more comprehensive reconciliation process is now being put in place between DIISR and Customs.

19. DIISR collects performance data on the Scheme's intermediate outcomes and annual outputs. However, little information has been reported publicly for the benefit of external stakeholders, including the Parliament. The department has concerns about the commercial sensitivities involved in reporting publicly on aspects of ACIS, particularly the number of duty credits issued to individual participants. However, given that ACIS is the Australian Government's key assistance measure for the automotive industry and involves a substantial amount of government support, there is scope to provide greater disclosure of the duty credits issued to Scheme participants.

20. The ANAO has made three recommendations aimed at improving the administration of ACIS, and to ensure that aspects of the ANAO's previous recommendations are fully implemented.

Key findings by chapter

Issuing ACIS duty credits (Chapter 2)

21. In Stage 2, around $2.8 billion in duty credits are expected to be issued to participants. The Act prescribes who is eligible to earn duty credits, how duty credits are to be calculated and overall funding limits for the Scheme. DIISR has established a sound control framework to comply with legislative requirements and to manage financial risks when issuing duty credits. It has well developed processes to assess the eligibility of participants to receive credits; to calculate individual duty credits claims accurately, based on the information provided by participants; and to adhere to the funding limits for the Scheme.

22. DIISR's key mechanism for adhering to the $2 billion funding cap for Stage 2 (as with Stage 1) is by setting a modulation rate to reduce participants' claims, where those claims are forecast to exceed the available credits. In Stage 2 the modulation rate has fluctuated between 0.70 and 0.62 for MVPs, and between 0.71 and 0.63 for supply chain companies. In Stage 1, the $2 billion capped funding limit was not exceeded, and some 99 per cent of available duty credits were issued.

23. DIISR has also implemented appropriate processes to manage the allocation of credits under the $150 million MVP R&D Scheme introduced in Stage 2. This includes monitoring whether participants are complying with the requirements of their funding agreements, and taking appropriate actions when these requirements have not been met.

Claims made by Scheme participants (Chapter 3)

24. DIISR administers ACIS on a ‘self-assessment' basis. Participants determine what they are entitled to claim under the Scheme, and DIISR issues duty credits based on their quarterly claims. This approach allows duty credits to be provided on a timely basis. It also means that DIISR needs to manage the risk of mis claiming, to ensure that duty credits are issued appropriately and equitably.

25. Since ACIS began on 1 January 2001, DIISR has identified some $141 million in ineligible activities claimed by participants. Compliance audits undertaken at participants' premises are DIISR's best tool for identifying mis claiming. These audits have been focussed on those participants DIISR considers to be high and medium risk, and who receive the vast majority of duty credits. However, most participants have been audited only once in the six years since ACIS began. In practice, this means that DIISR relies to a large degree on the voluntary compliance of participants.

26. DIISR uses various methods to assist participants to lodge accurate claims. This includes publishing customer guidelines on various aspects of the Scheme, and assigning a customer service manager to each participant. Notwithstanding these measures, the level of mis-claiming identified to date suggests that further efforts are needed is this area. In particular, DIISR has yet to systematically analyse, and use, the findings from its compliance activities to improve participants' understanding of Scheme requirements. The ANAO's analysis of 20 completed audit files indicated that more targeted guidance material for participants is likely to reduce some of the mis-claiming that is occurring. Such an approach would also address a concern of participants, which is that the department should be more proactive in providing guidance on activities able to be claimed under ACIS.

27. Systematic analysis of the results from compliance activities could also be used to better inform DIISR's approach to determining the coverage and scope of compliance audits. For example, where analysis indicates a higher level of mis-claiming in certain activities (for instance, offshore R&D), compliance audits could focus on this specific issue, rather than attempting to examine all aspects of a claim, as currently happens. Audits with a stronger focus on high risk areas are likely to be more cost-effective, providing capacity to increase the extent of coverage.

Use of ACIS duty credits (Chapter 4)

28. Since ACIS began in 2001, more than $3.4 billion in duty credits have been transferred from DIISR to Customs, to be used to offset the duty payable on eligible imports or to obtain a refund for duty previously paid.

29. DIISR has established a ledger to record the number of duty credits held by Scheme participants, and Customs has a sound control framework to ensure that transferred duty credits are used only on eligible imports.⁹ However, the agencies have experienced difficulties in reconciling their records on the duty credits tranferred to and used at Customs.¹⁰ For example, at 30 June 2006, there was a variance of around $136 million between the expected balance of unused duty credits at Customs, and the balance reported by Customs. In recent years, the absence of a more robust reconciliation process has affected the department's ability to report accurately on ACIS for financial statement purposes, and to provide assurance that participants have not used more credits at Customs than were originally issued by DIISR.

Effectiveness of the Scheme (Chapter 5)

30. ACIS is a transitional assistance scheme intended to assist the automotive industry to adjust to a lower tariff environment. In 2004, DIISR assessed whether the Scheme was meeting its stated objectives and early indications were that the Scheme is assisting the industry to become more competitive and sustainable. Also, the high demand for duty credits in Stage 1 and Stage 2 (to date) suggests that the Scheme has been effectively promoted within the automotive industry. DIISR plans to evaluate the performance of ACIS again in 2009, one year before the end of Stage 2. As well, the Productivity Commission is scheduled to review Government assistance to the automotive sector in 2008.

31. Although DIISR collects performance data on intermediate outcomes and annual outputs, only limited information has been reported publicly for the benefit of external stakeholders, including the Parliament. The ANAO recognises that the department has concerns about the commercial sensitivities involved in publicly disclosing aspects of the Scheme, including the number of duty credits issued to individual participants. However, the absence of performance information has limited the transparency of ACIS, which is the Government's key assistance measure for the automotive industry.

Summary of agency response

DIISR

32. The department notes the ANAO's conclusion that it has established a sound control framework to facilitate compliance with legislative requirements and to mange financial risks when issuing credits in the ACIS scheme. In addition the ANAO has indicated that the department has well-developed processes in place to assess the eligibility of scheme participants to receive credits and to accurately calculate individual claims while ensuring adherence to the funding limits of the scheme. Further, the ANAO has found that the department has implemented appropriate processes to manage the allocation of credits under the
$150 million MVP R&D Scheme. The department accepts the recommendation to provide more public reporting; the recommendation to enhance its targeting of compliance actions and the recommendation to upgrade its credit reconciliation process with Customs.

Customs

33. Customs notes the ANAO finding that Customs has a sound framework to manage the use of ACIS credits for eligible imports. Similarly, the ANAO found that Customs' controls over the payment of ACIS refunds, and refunds generally, are satisfactory.

34. Customs recognises the need to update and further develop procedural documentation with DIISR to ensure that the responsibilities of each agency are more clearly defined.

Recommendations

35. The ANAO has made three recommendations to assist DIISR and Customs to improve their administration of ACIS. The agencies agreed to all three recommendations.

Footnotes

^{1 Department of Industry, Tourism and Resources, Automotive Industry Policy Fact Sheet, 2007, [Internet], available from <http://www.industry.gov.au&gt; [accessed 16 October 2007].}

^{2 See KPMG, Momentum 2007 KPMG Global Auto Executive Survey, KPMG, Munich, 2007.}

^{3 Other parts of the package include the now defunct Automotive Market Access and Development Strategy, and changes to the tariff regime for motor vehicles.}

^{4 Section 3 of the ACIS Administration Act 1999.}

^{5 The trading of duty credits allows participants who do not import eligible goods to obtain a financial benefit from ACIS by selling their duty credits to other parties.}

^{6 This department was established following the election of the Labor government in November 2007. Previously, ACIS was administered by the Department of Industry, Tourism and Resources.}

^{7 Customs undertakes its functions under the Customs Tariff Act 1995 and accompanying regulations.}

^{8 Australian National Audit Office Audit Report No. 63 2002–03 Administration of the Automotive Competitiveness and Investment Scheme, pp. 21–24.}

^{9 These include certain motor vehicles for the transportation of passengers and goods, including used and second hand vehicles, and certain components for those vehicles.}

^{10 Of this amount, some $122 million was subsequently found to relate to an inaccurate balance provided by Customs for one Scheme participant.}