KIM CARR: Well, thank you very much for coming. Today we're to receive the report from the Innovation Review Panel, it's the most important review of Australia's innovations system in a generation. Many elements of this system have been in place since the late John Button developed Australia's first innovation policy in the 1980s. It's time for a root and branch rethink and, of course, the setbacks of the Howard years have made the need for review even more urgent.
Innovation is critical to solving problems, like climate change and lifting Australia's productivity and competitiveness. The Prime Minister makes no bones about our readiness to offer incentives to design innovation approaches to long term challenges. The review was an election promise and this is a government that keeps its promises.
I'd like to thank Dr Terry Cutler and his colleagues, Dr Megan Clark, Professor Glyn Davis, Professor Steve Dorwich, Professor John Foster, Dr Nicholas Gruen, who's here with us today, Narelle Kennedy, Catherine Livingston, Professor Mary O'Kane and Dr Jim Peacock.
I'd also like to thank my Department. Now, there were 740 submissions received which, of course, is the backdrop of this review, and I want to thank the thousands of Australians who wrote submissions, who took part in stakeholder consultations and who attended workshops.
The report contains 72 recommendations. That is 72 recommendations aimed at boosting our innovation performance. That's the performance of business, of universities, of public sector research agencies, and the performance of government.
Now, I don't propose to go through the recommendations in detail, but the report's big ideas include increasing the level of Commonwealth spending on science innovation, scrapping the R&D Tax Concession and replacing it with two R&D tax credits, adopting national innovation priorities to focus our efforts and our resources, meeting the full cost of university research and providing open access to the results of publicly funded research.
The Government will release a White Paper policy response to this innovation review and we'll do so by the end of the year. Its goals will be to reverse the neglect of the past, to steer safely through the difficult times we are experiencing at the present and to prepare Australia for the future. Now, this will be a very big task, but we don't start empty-handed. This report gives us plenty of work to be able to provide the basis of such a response.
Thank you very much.
[Applause]
Now, I understand - are there any questions or [indistinct].
QUESTION: [Indistinct]
KIM CARR: Well, the report - the review panel has provided us with some very, very useful material. It's provided us with some very good ideas to assist us try to bridge the gap that now exists between Australia and the rest of the world. It will provide us with food for thought for addressing some of the fundamentals to allow this country to maintain living standards and keep pace with our competitors.
Yes, there are so many calls on the budget as a result of this review and those questions will be answered in the White Paper. It is our intention to examine carefully the recommendations and to provide responses through the White Paper, together with the Treasurer, by year's end.
The budgetary requirements that the review panels have recommended do involve considerable expenditures. We will respond in accordance with the capacity of the budget to deal with these issues, given the nature of the current economic circumstances and given the fact that there are many demands on available resources. We will make careful, considered judgements, based upon the best advice that we have available and in response to the submissions that come forward now, because this is an ongoing process. There will be further discussions with the public and with those that are affected by these recommendations.
QUESTION: The full cost of research is on the agenda. Do you have any idea, is there any indication of about how much that would cost?
KIM CARR: The costings of these matters are, of course, subject to the assumptions that underpin them. It may well be as much as $300 million a year, extra. It may well be a figure of that type, but it will depend upon how it's done and that's why I've asked my Department to examine carefully this report to make recommendations to me about how it might be done within the funding envelope that's actually available. And it may, of course, be done at a much lower rate than that figure of $300 million a year.
There are many other recommendations here. To take - to close the gap that has now emerged, the drop in some - of 27 per cent in terms of the resources that were spent on research and development in the period of the early 90s to now, may cost as much as $2 billion a year extra. That's clearly an expenditure claim on any one budget that can't be met and won't be met. But it will provide the basis for further discussion about the way in which we can responsibility manage the need to close that gap.
QUESTION: [Indistinct] why is there that gap between Australia and the rest of the world?
KIM CARR: Because we've had 10 years of neglect. Essentially, what's occurred in this country as - what the review panel draws to our attention - is that as a consequence of the failure of the previous Government to actually keep pace with developments by our competitors, we are now falling further and further behind.
There has been an assumption that India and China have been trading on their low wage cost structures. That's just not true. The Chinese and the Indians are doubling their research and development expenditure, the Chinese are doubling it every seven years. They are moving up the value chain at a rate of knots that many people in this country have failed to understand.
The truth of the matter is that by international standards our expenditure on research and development is very low. The 2020 Summit drew our attention to the need to effectively double our R&D effort in this country, to come to within cooee of our competitors. This report recommends that we should be in the top percentage of nations, doesn't necessarily go directly to that point, but a doubling of our R&D effort would move us from about 1.8 per cent, as it is at the moment, to 3.6. That's a very significant jump and will require very careful planning.
It can't be done by the Commonwealth alone. It will require assistance from the States and it will require assistance from the private sector. And that's the important part of this review. The need to actually get a better fit between the public and private sectors when it comes to the questions of research and development and the broader innovation system. And that's the great strength of this review. It actually talks about how we could achieve that outcome.
QUESTION: Are you also prepared then to accept the failures that might come along with trying to invest in research and development which we may not necessarily get right the first time?
KIM CARR: Well, perhaps I'll ask some of the review panel members to actually speak to you about what this report proposes.
But I want to say to you this in general terms, we need to be less risk adverse in this country. We need to take some chances. The truth of the matter is that because we are falling behind our competitors, we need to take the necessary steps to try to catch up. Now, this is incredibly important if we want to maintain living standards in this country. If we want to maintain the way of life that we've come to enjoy, we simply cannot go on the way we have been.
We need to invest in the future and we need to ensure that our people are prepared, in terms of skills formation, in terms of investment in research infrastructure, we need to ensure that our private companies are able to drive a culture of innovation, that every person, no matter whether on the shop floor or in the board room, has an understanding of the role they can play in improving our productivity and our competitiveness. That's what this report talks about. That's why it's quite a valuable document for the Government to consider in the context of the White Paper.
Perhaps I'll ask - if you'd like to comment.
TERRY CUTLER: First of all I'd like to go back to your question about the cost and the size of some of the recommendations we're making. I think it's important to recognise that what we're looking at here is a long term, forward strategy for the country around innovation that will not depend on one budget. This is a direction for the future and I would expect it to be realised over time.
The second thing is, I think, we need to change our language and think - and talk not about expenditure here, this is about investment. And when you look at the quantum of the investments and some of the proposals we're making in this report, it's making the link between, say, our current levels of under-performance in a whole lot of areas are a direct consequence of significant underinvestment over time. So what we're talking about is re-investment to restore our performance.
The issue about risk and failure, it's really interesting when you look at science. We accept failure, the failure of an experiment, the null hypothesis, as positive learning, and we build on that. What we need to do is to apply the same to innovation and firm activity and innovation across the board. The important thing is do you learn from failure and do you fast-fail.
And one of the proposals we've put forward is a greater focus on, sort of tranche venture capital type funding of industry programs, where you have a first phase of proof of concept funding. And a lot of those won't go any further but those that do then go forward. And the bottom line is not to count the successes and failures but, like a venture capital firm, say what's the return on the overall portfolio, because that's the bottom line for the country.
QUESTION: The question about the R&D changes. Will that allow firms to get the credit even if they weren't paying tax?
TERRY CUTLER: Because it - well, firstly, it does two things. It introduces, as Nick reminded me, a bias back towards small business and it provides a bias towards companies in tax loss who previously, before the introduction of the more modest tax offset, were not able to claim any benefit of course from the R&D Tax Concession.
Now, these are the firms, particularly in high technology areas like biotech, that often are in tax loss for a long time before they move into profit. So, opening up cash flow for these firms is a huge benefit, one I think is one of the major benefits of this re-jigging of the system that we're proposing.
QUESTION: Sorry to harp on about the costs [indistinct]. How much would that [indistinct] would that change [indistinct].
TERRY CUTLER: That is a hard one to answer because anyone who's dealt with tax measures understands, they're not simple calculations. The real way of looking of that and the way I am sure the Department and the Minister is going to look at that is, if we continued with the current regime, what's the cost over the next few years in terms of trend lines, versus what's the increment or marginal cost here. And I am sure that's something that they'll be looking at in preparation of the White Paper.
KIM CARR: I'll get Nicholas to comment on that. Can I just - on the question of cost, the R&D Tax Concession at the moment costs about $700 million.
Now $700 million is actually more than we provide to the Australian Research Council. Now the R&D Tax Concession is our most substantial new policy instrument when it comes to innovation policy in this country. Now over the next four years or so, I've seen estimates where that figure is likely to move to some $1.1 billion per annum, just for the taxation concession as it's currently structured.
Now, the current taxations scheme provides 7.5 cents in the dollar, for every dollar that's invested; 7.5 cents. Now by international standards that's nowhere near enough. Even if firms attract the premium rate of 175 cents - 175 per cent, it's still only 11 cents in the dollar. What the panel has proposed here - and I'll get Nicholas to comment on this in a moment, actually allows a restructure of those arrangements to provide more assistance for small and medium sized enterprises, provide more assistance, particular for larger firms, like the pharmaceutical industry, than they currently would get. And it may be able to be done at a more cost effective means to government.
So when you talk about the financial implications of this report, you need to consider the full range, not just the additional cause on expenditure, but the ways in which we can get a more effective use of public investment as it currently stands.
Nicholas, did you like to add anything.
NICHOLAS GRUEN: Well, yeah, I guess where…
KIM CARR: Why don't you come to the camera.
NICHOLAS GRUEN: When I was explaining the thinking of the Tax Working Group to the panel, I used the example of the fact that Australia has one of the four Grand Slam tennis tournaments and Australia is more than usually good on grass. And what we did was we decided to take Kooyong, which was played on grass, and we decided to restructure that and play tennis on hard court in the Australian Open and we've never won an Australian competition since. We've never won and Australians have never won an Australian Open since that little move.
And I suggested that the way we have structured the R&D Tax Concession works in a similar way. If you ask which of the firms that are most cash constrained and doing the most aggressive and innovative research and development, it's likely to be start-ups. We say to the start-ups, here's a concession, it's an additional deduction against tax that you might not be planning to pay for about eight years, and when you do, you'll get 7.5 cents back in your dollar, that's a pretty bad surface to play on.
And what we've done is we've turned it around the other way so there is a basic - the tax credits that we've proposed provide a basic level of assistance of either 10 per cent or 20 per cent to firms that are in profit, but firms that are in loss, receive the cash benefit that they would receive if they were in profit by - from deducting that expenditure which is 30 cents in the dollar. And then may eventually - if they come into profit they will then eventually pay that back as increased tax.
And they'll end up - for instance - if they start off with - so, you've got two parts of the benefit. You've got a 20 per cent credit, which they will get and keep, and a 30 per cent bit of cash in hand from the losses, which they get to keep until they move into profit. So in the one case you say to - for - what we're doing now is to say to firms, you won't get - you'll get no benefits until you're in profit, and that might be eight or ten years. Now we're saying to firms you will get a higher rate of assistance until you're in profit after which time it gets taken back. Thank you.
And I'm - anyway I am happy to take people through that a bit more slowly with examples.
QUESTION: Question for Mr Carr.
KIM CARR: Yep.
QUESTION: Could you make a good life for yourself on the single aged pension?
KIM CARR: Well, I don't think anyone that has four kids could and I defy anyone to say any differently. We are highly conscious of the strains that pensioners are under. The Government is actively pursuing ways of improving the current situation. The Government, in the last budget, provided assistance through various means to actually relieve the current situation and we have active measures under consideration now to take further steps.
QUESTION: [Inaudible question]
KIM CARR: You'll just have to wait and see, I'm not the Treasurer.
QUESTION: [Indistinct] I just wondered where [indistinct].
KIM CARR: Well, this report recommends that we should move to full cost of research. The current arrangements provide for a limited amount of the total cost of any research project. And this report argues that there has been cross-subsidisation of a research programs from teaching, particularly international education, and that that has meant that we're not providing as good an education experience in terms of teaching as we should and we're still not providing sufficient funds for research. So either side of the equation's missing out.
This report has made some suggestions, as I've indicated, the way in which we can address that. The Department - my Department will be making further representations in terms of the way in which we actually implement these arrangements and they'll be considered in the White Paper.
Further, the report draws our attention to the need to concentrate our research effort by establishing a series of research priorities, and changing the way we approach our research expenditure at the moment. And we will be looking very closely at those and how effective they might be.
The report also makes - draws our attention to the need to actually improve the levels of collaboration between the public and private sectors in regard to our research effort, and that's something that we're very keen to pursue. There will also be recommendations come through the CRC Review, the Review of the Cooperative Research Centres, which we're actively considering in the White Paper process as well.
Look, the fact is that unless we improve our research effort we will not be able to meet the living standards that our people expect. We do have the capacity to deal with the big challenges: the climate changes, the ageing of the population, the ways in which we've got to meet increasing international competitiveness. We can do that. We have the people and the capacity to do it, but we need to provide the resources to allow them to do it.
We want to open up our research effort to actually get more international competition in our research effort. We think that because of the quality of our researchers, we can perform well in any environment, and we want to open up opportunities for our scholars, for our research students to travel internationally, and we want to bring people here. And that's what we're doing through the Australian Research Council. And what this report recommends, that we do it a lot more.
The report also proposes that we should cooperate more effectively with countries of our type. Establish essentially a 2 per cent club; countries that contribute about 2 per cent of GDP to their research effort. And just like the Cairns Group did with trade, it's suggesting that we should do a similar sort of thing with regard to our research effort; that countries of our size, our type, cooperate and find ways in which we can collaborate.
We've already started a process in regard to building better linkages with the Europeans and with the United States. We also want to build much stronger linkages with smaller countries as well.
QUESTION: Senator Carr, [indistinct] consolidated environmental [indistinct] could you elaborate [indistinct]?
TERRY CUTLER: This just goes to a principle where - and one of the challenges that the Minister gave to us in commissioning this review was the apparent fragmentation of industry programs and just the sheer number of them. And so the point we're making in the report was when we come to look at some of the issues around new programs, perhaps around climate change, don't make things worse by having a whole series of new stand-alone programs. Bring them within the umbrella of current institutional arrangements that are in place, so that we get the critical mass, we get the expertise brought to bear on the administration of those programs and they're more cost efficient.
QUESTION: [Indistinct] that there should be a rapid - there could be a rapid transition to [indistinct]. How rapid do you think that might be, and how advanced are the current Government investigations into [indistinct]?
TERRY CUTLER: They're quite well advanced and the rapidness or otherwise is going to depend very much on the quantum that we're talking about and the implementation of the whole package.
KIM CARR : You need some more information. Look, what we've done is we've established a particular consultancy to - within the Department to actually look at these numbers in very close detail. We want to talk to the universities about how we can implement these proposals. They've got to do it within a funding envelope that the country can afford and we take the view that this can be done in the context of our arrangements with regard to the funding compacts.
That is the discussions we're having with the universities about how we can get a much clearer idea from the universities as to how they perform their duties, how they work with one another; how they encourage collaboration between their - the public agencies and private firms. We believe we can do that in the process of establishing those compacts, which we've already said will be done throughout next year with a view to having them implemented by 2010.
QUESTION: [Inaudible question]
KIM CARR: Oh, look, this question of research and development is not just a matter of whether, but it must happen. It's actually in a survival mechanism by which countries - as our own - have to lift their performance, but companies, individual companies, have to appreciate the fact that without it they will not survive.
Now, the fact is in this country, according to the ABS, two-thirds of firms do not spend any money on R&D or innovation, two-thirds. Our job is to change that attitude. That's why I say there needs to develop in this country a culture of innovation. We need to fundamentally change the attitude toward research and development. A cultural change is required so that people understand that you do not survive in this business without investing in your future.
You all done? Thank you very much.