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Senate Committee Manufacturing Industry Inquiry Recommends Periodic Review of R&D, Commercialisation, and Investment Incentives

The Senate Economics Committee has this week released its report of inquiry into the Australian manufacturing industry.

The terms of reference of the inquiry included review of the role that government can play in assisting domestic manufacturing industry, with regard to research and development and other factors.

Notable statistics from the report include:

• Australian investment in R&D has declined over the last 20 years and is well below the OECD average. Relative to Australia’s GDP, R&D expenditure is around 1.8 per cent––its lowest levels since 1995;
• In 2019–20 the Australian Government spent around $10.2 billion on private and public sector R&D, with around $772 million—or 20 per cent— of this going to manufacturing. Key measures include the Research and Development Tax Incentive (RDTI) ($2.4 billion, CSIRO ($616 million) and cooperative research centres (CRCs) ($145 million);
• Private investment in R&D has also declined since the mid-2000s with manufacturing firms spending $4.6 billion on R&D in 2017–18;
• Australia has relatively low rates of collaboration between business and industry and low rates of innovation, impacting on its global competitiveness

The inquiry went on to conclude that

• “Australia’s R&D performance has some bright spots but is generally not delivering on its full potential” and that more is needed to address the industry’s skills shortage, including focus on skills and training, and creating secure, well-paid employment;
• “Collaboration needs to be improved both domestically and with international partners to develop the innovation and scale necessary for Australia to realise the benefits from its R&D activities”;
• There are “serious deficiencies in Australia’s skills and training in particular in Australia’s vocational education and training (VET) sector”;
• “The current levels of support provided to apprentices are inadequate to support them through their qualification and are insufficient to attract the new blood necessary to fill existing and forecast future skills shortages across a range of occupations”.

Among the 19 recommendations made by the Committee, was that the Australian Government:

• Consider the periodic review of R&D, commercialisation, and investment incentives and tax arrangements (including the effectiveness of existing incentives and governance, implementation, and reporting, and any further mechanisms that would improve R&D, commercialisation, and investment outcomes);
• Consider providing significant increases to manufacturing R&D and commercialisation support to improve international competitiveness and stimulate the development of self-sustaining manufacturing ecosystems;
• Consider changes to improve skills, industrial relations, government procurement and use of superannuation fund investment;

As an indication of divergence in policy between the major parties, the report also contained a dissenting report by Liberal Senators Paul Scarr and Andrew Bragg, who disagreed with a number of key recommendations, and argued that some recommendations “underpin a government driven interventionist approach in the manufacturing sector”.

Swanson Reed notes the following in respect of Senate Economics report of inquiry into the Australian manufacturing industry and implications for the R&D Tax Incentive:

• Local manufacturing capability is crucial, and the conduct of R&D Activity is vital if Australian industry is able to be competitive and sustainable;
• The R&D Tax Incentives plays a crucial role in providing companies confidence and support to conduct R&D Activity in Australia;
• The statistics in the inquiry citing a decline in Australian investment in R&D align with a tumultuous period in the R&D Tax Incentive whereby:
  • Several actual and proposed cuts to the programme were experienced;
  • The compliance environment was difficult for all participants (companies, advisors and regulators);
• We anecdotally noted during this tumultuous period that companies were reluctant to rely on the R&D Tax Incentives (particularly for long term projects) out of fear that legislative foundations or interpretations would be changed subsequent to or partway through companies’ investment;
• Progress has however been made in the past couple of years whereby the administrative operation and legislative foundation of the R&D Tax Incentive now appear better and more stable following changes and legislative amendments passed for the FY22 period;
• Given the high cost of the programme (approximately $2.5 billion annually over the programme’s life) it is important that the programme is periodically reviewed for effectiveness as has been recommended by the inquiry;
• We do note that there have been numerous reviews of the programme conducted in recent years, including:
  • The Government’s own review by Ferris, Finkel, Fraser;
  • The board of taxation review;
  • The Small Business Ombudsman review etc;
• Any future reviews should not propose significant changes to the administration or criteria of the R&D Tax Incentive, and given the recent tumultuous history of the programme, it should be subject to a period of stability so as to regain companies’ trust in the programme.