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Monday, 11 May 1987
Page: 2929

Dr HARRY EDWARDS(5.42) —In my brief remarks tonight I wish to refer to the amendments to the Management and Investment Companies Act 1983 which are set out in Schedule 1 of the Statute Law (Miscellaneous Provisions) Bill (No. 1). These amendments relate to the powers of the Management and Investment Companies Licensing Board to impose conditions and to vary or revoke such conditions when granting a licence, or during the currency of a licence. The explanatory memorandum is anything but clear about the precise import of the amendments. I take this opportunity to offer some comment on the management and investment company program as it now stands after some three to four years of operation. That program stemmed from an initiative of the Hon. David Thomson, the Minister for Science in the Fraser Government.

Mr McGauran —A good Minister, too.

Dr HARRY EDWARDS —Yes, a good Minister. He commissioned a report, the so-called Espie Report, to be prepared under the chairmanship of Sir Frank Espie of the then CRA Ltd, heading a committee of the Australian Academy of the Technological Sciences. On its accession to office, the Hawke Government picked up this report and legislated for the establishment of the management and investment companies-MICs-in late 1983. The complementary tax measure was enacted in the nick of time in June 1984. The program thus got under way in the middle of 1984, and so it has had three years of effective operation.

The purpose of the measure was to promote the establishment and development of a private sector venture capital market in Australia. The formation of management and investment companies was to be fostered by the provision of a tax incentive to encourage investors to subscribe capital to them. The incentive is that such subscriptions are 100 per cent tax deductible in the year that the capital is subscribed. In turn, the role of the management and investment companies is to invest in new, fledgling, high technology, export oriented and potentially fast growing businesses. Thus, the selecting of investments and the risk taking, the picking of winners and losers in this high tech area, if one wants to put it that way, is a matter for the private sector and the market-place, where it belongs. I would add that the role of the management and investment companies is to afford a new business not only finance but also management, technological and marketing assistance.

Provision was made for a board to license management and investment companies as part of a mechanism for limiting the cost of the tax concession to government. The present amendments in the Bill refer to the powers of this licensing board. My initial reaction was a fear that these amendments represented an unwelcome increase in the powers of, or the potential for the exercise of powers by, the licensing board-and I refer to powers to impose conditions on the management and investment companies-because this board is the instrument of government involvement in this scheme. Happily, the record is that, in the granting of most licences, to date, no conditions have been imposed. The whole scheme has been virtually a 100 per cent private sector operation, as indeed was originally intended. So, in the light of the explanation given to my colleague, the honourable member for North Sydney (Mr Spender), to which he referred in his speech earlier today, one's fear has been largely allayed.

Within the framework to which I have referred, the quantum of tax deductible capital subscribed has been limited in this way to the order of $40m each year, at a cost to the Government in tax forgone of the order of $20m each year. This limitation on the total dimensions of the program has been the rub. The scheme is now in its fourth year of operation in formal terms and the position is that the management and investment companies are undoubtedly strapped for cash. In that three to four years, some 11 management and investment companies have been licensed. They include companies such as BT Innovation, Continental Venture Capital, Western Pacific, CP Ventures Ltd and so on. Those companies have fostered the development-in most cases, the successful development-of upwards of 100 new predominantly high technology companies.

The basic problem is that the $40m of new money each year is too little to be shared among the 11 management and investment companies. The position that most of the companies now find themselves in is that the bulk of the money presently unallocated, together with the next instalment of capital raising under the scheme-that for 1987-88-is needed for further round financing of their existing investments. This situation is thus effectively limiting the making of new investments. Earlier this year a proposal was put up and approved in principle by the Minister for Industry, Technology and Commerce (Senator Button) to allow the management and investment companies to issue two types of shares-one class A, to attract the tax deductibility for investors, and the other, class B shares, which would be non-tax deductible. This would have required only minor change to the Management and Investment Companies Act and it was hoped that this proposal could be implemented reasonably quickly-perhaps the changes could have been made in this Bill. However, in respect of that very reasonable and costless proposal, the Government has dragged its feet and nothing has happened. Some companies have sought to exploit one possibility under the present Act, namely, to approach and seek additional capital from pension funds. One company, CP Ventures Ltd, is planning to raise some $25m, I understand, from this source in an attempt to lift its capital towards the $50m mark, widely judged to be the minimum size for a viable venture capital fund in the United States of America and Europe.

In conclusion, the real issue is whether the management and investment companies program is succeeding in its stated objective of kick-starting, of seeding, a venture capital industry in Australia. In the general context of financial deregulation of recent years, this question is difficult to assess, also because of the macroeconomic policy failures of this Government. There is the yawning balance of payments gap, the mounting overseas debt-matters which the Prime Minister (Mr Hawke) chose not to refer to when answering the honourable member for Lowe (Mr Maher) on the alleged good economic performance of this Government-and, most pertinently, the associated crippling level of interest rates in this country, still fully 7 to 10 percentage points higher than any of the other Organisation for Economic Co-operation and Development countries, which are very adversely affecting the business investment climate. In the event, the Government has requested the Bureau of Industry Economics to carry out a review of the scheme to make an assessment of its general success and the extent to which the private venture capital market has developed since its introduction. I gather that even the proposed changes in relation to capital raising, to which I have referred, will await the Bureau's report. It does need to be borne in mind that the scheme has been in effective operation for only three years. On the basis of evidence as to the high success rate of the companies supported by the scheme, the high proportion of export income in their gross sales, and yet continued anecdotal evidence of the difficulty fledgling companies confront in obtaining venture capital, there would seem on the face of it to be a pretty strong case for its continuance for some years yet. However, the definitive inquiry by the Bureau is to be welcomed and then an explicit government decision is required in the face of rumours that the scheme could be terminated.