(Adds government reaction, paragraphs 7-8)
CANBERRA, June 27 (Reuters) - Australian government subsidies to the nation's auto sector should be extended for five to 10 years as import tariffs drop, but the industry should stand on its own by 2015, the Productivity Commission said on Thursday.
In its preliminary report on options for auto sector aid beyond 2005, the government's principal review and advisory body on microeconomic policy said the subsidy should continue as a transitional measure as the government drops the import tariff.
The commission said the auto industry, whose turnover exceeds A$17 billion ($9.6 billion) a year, remained one of the most highly assisted industries in Australia, with total federal budget aid of around A$730 million in 2000/01.
But it said government assistance under the Automotive Competitiveness and Investment Scheme (ACIS), which is due to expire in 2005, should be extended for between five and 10 years.
"A decade of policy certainty is desirable to give the industry further time to adjust and become truly internationally competitive," associate commissioner Philip Weickhardt said in a statement released with the report.
"However, we believe this should be the last period of special treatment. By 2015 the industry must be capable of prospering on its own merits," he said.
Industry Minister Ian Macfarlane said the government was reviewing what assistance it would give the nation's auto industry once tariffs were reduced to 10 percent in 2005.
"At this early stage, the government doesn't rule anything in, it doesn't rule anything out. If the taxpayer is to support assistance beyond 2005, the impediments to growth must be addressed," Macfarlane said in an email.
INDUSTRY POSITIVE
The report was viewed positively by the industry which has lobbied strongly for assistance to continue post 2005.
"The commission appears to have taken a significant step towards acknowledging the validity of the industry's arguments," Federal Chamber of Automotive Industries chief executive Peter Sturrock said.
The government has frozen tariffs on auto imports at 15 percent until 2005, when they will drop to 10 percent.
The commission recommended the tariffs be stablised at the 10 percent rate for five years until after 2005, before dropping to 5 percent in 2010 and pausing again at that rate until 2015.
"As a transitional measure, ACIS could largely retain its present structure. Funding should not exceed current rates and under options being considered could end in either 2010 or 2015," the report said.
About 55,000 people are employed in the auto sector, with 17,000 in vehicle assembly, 30,000 in component making and the rest in tooling and auto service, the commission said.
The report said a key weakness of the industry was the adversarial industrial relations environment in Australia, where the conservative government is battling stiff political and union opposition to reform workplace relations.
There are four vehicle producers in Australia, all subsidiaries of overseas auto companies -- Holden, the Australian arm of General Motors Corp , Ford Motor Co , Toyota Motor Corp and Mitsubishi Corp .
Mitsubishi Motors Australia president Tom Phillips said the report would promote "productive discussion".
"The commission has taken a constructive and thoughtful approach to a complex subject and we look forward to a further dialogue in relation to the post-2005 policy options and the opportunities for the Australian automotive industry," he said.
Toyota and Holden also welcomed the report while a Ford spokeswoman said the company would comment after examining its detail.
($1=A$1.78)
(Additional reporting by Wendy Pugh in Melbourne)