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Address to the Australian Private Equity and Venture Capital Association, New South Wales networking lunch, Sydney.



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NO.007

THE MELBOURNE DIALOGUE

ADDRESS TO THE AUSTRALIAN PRIVATE EQUITY AND VENTURE CAPITAL ASSOCIATION - NEW SOUTH WALES NETWORKING LUNCH

SYDNEY HARBOUR MARRIOTT

19 AUGUST 2008

Good afternoon.

I’d like to thank AVCAL for inviting me to speak with you today.

I’ve enjoyed the relationship that the ALP established in opposition with Katherine Woodthorpe, which has continued in Government.

AVCAL is an effective voice for venture capital and it is important venture capital has a strong voice.

And as Paul Krugman has said, when it comes to improving living conditions, productivity isn’t everything, but it is almost everything.

Fixing the productivity gap that has developed in Australia in recent years is front and centre of this Government’s agenda.

It permeates through the portfolios: Julia Gillard’s, Wayne Swan’s, Kim Carr’s, Stephen Conroy, Anthony Albanese and mine.

Improving our productivity performance is important of course in so many ways; not least in ensuring that our non-commodity industries are in as competitive position as they possibly can be when the commodity down turn eventually arrives - whenever that may be.

The Rudd Government has committed to building a culture of innovation and new ideas by strengthening investment in creativity and knowledge generation.

Private equity and venture capital environment

Over the five years from 1993 to 1994, labour productivity grew by 3.37% a year. It then fell to just 2.17% a year over the five years from 1998-1999.

Three years into the current productivity cycle that began in 2003/2004, productivity growth is further below its long term average, growing at an annual rate at just 1.1% a year.

Speech of 19/08/2008

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In comparative terms, Australia has now almost completely lost the relative productivity gains made in the 90s.

Improving our productivity performance is part of the policy challenge for dealing with our ageing population together with the other ‘p’s - population and participation.

There are of course two things that Governments can do to facilitate a healthy venture capital industry - firstly do its bit to ensure a healthy economy and capital markets which are particularly important in the current international financial turbulence and secondly to ensure our innovation and taxation policy frameworks recognise the risk that venture capitalists take and the benefits of that risk in promoting productivity and innovation.

Recent analysis suggests that factors such as competitive tax regimes are particular drivers of venture capital.

The Government can truly enhance the private equity and venture capital environment by focusing on the fundamentals of good economic policy.

The Government is committed to an efficient and robust innovation framework. Innovation and economic growth are underpinned by sound economic policies. These span a range of inter-related policy areas, including fiscal and monetary policies…competitive markets… education…intellectual property… and tax.

The Government has commissioned an independent review of Australia’s innovation system. This review is being led by Dr Terry Cutler, a Director of the CSIRO and Chair of the Advisory Board for the Centre for Excellence for Creative Industries.

One of the key aims of the review is to examine the bewildering array of government innovation and industry assistance programs.

As my Parliamentary colleague Senator Carr, the Minister for Innovation, Industry, Science and Research, said when he announced the review:

“At last count there were 169 programs in Australia, across all levels of government, aimed at supporting innovation.”

Clearly, we can do a better job of building an integrated and truly national innovation system.

The Rudd Government will work with the States and Territories to streamline these programs… reduce fragmentation… and improve their effectiveness.

The Panel has been tasked with identifying gaps and weaknesses in the innovation system and developing proposals to address them.

As I said earlier, a healthy venture capital sector is vital to the strength of the Australian economy. Venture capitalists take risks—they invest in things which may or may not produce them a return—and the tax system should recognise this.

The Panel will also consider the appropriateness, effectiveness and efficiency of the R&D Tax Concession Scheme in promoting innovation and make recommendations to improve innovation outcomes. The R&D Tax Concession is the main incentive for R&D; it is broad-based, market driven and not industry specific, with businesses deciding the scope and timing of their expenditure.

The Cutler Review is considering the appropriateness and effectiveness of all the innovation

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support programs, including the venture capital limited partnership program — or VCLP — and the early stage venture capital limited partnership program introduced last year.

As Shadow Assistant Treasurer I supported that legislation last year.

The changes included the introduction of an early stage venture capital limited partnership — or ESVCLP — vehicle, which has the objective of encouraging investments in start-up enterprises. It provides flow-through taxation treatment to the partners, who are also exempt from income tax on profits and gains made from eligible investments. The aim of the tax concessions is to provide equity capital for a relatively high-risk and expanding business that finds it difficult to attract investment through normal commercial mechanisms.

TLAB 2 2007 relaxed the eligibility requirements for the concessional treatment of foreign residents investing in venture capital limited partnerships or VCLPs. It also introduced the ‘early stage venture capital limited partnership’ or ESVCLP which will progressively replace the existing pooled development funds. It is clear that the venture capital regime introduced by the former Government in 2002 was not working properly and failed to boost the venture capital industry by an acceptable amount but to their credit the former Government announced changes in TLAB 2 that bring our arrangements more in line with international jurisdictions.

However, the restriction on VCLPs that target investees must have less than $250 million in assets—a restriction generally not imposed in other jurisdictions - was maintained.

The ESVCLPs also have restrictions. The maximum size of the fund administered by an ESVCLP is $100 million. They will not be able to invest in investee entities having total assets exceeding $50 million; and once the total assets of the entity invested in by an

ESVCLP exceed $250 million, the vehicle must divest itself of that entity.

In the course of the debate on that legislation I moved a second reading amendment in opposition calling for some changes to increase the threshold at which ESVCLPs must divest themselves of an organisation and to increase the amount of time allowed for an ESVCLP to divest itself of that interest.

I said that Labor would look at this in Government and we are. ESVCLPs and VCLPs are being closely looked at as part of the Cutler review initiated by Kim Carr which will be released soon.

The Cutler review will build on steps the Government has already taken such as the establishment of the Enterprise Connect Innovation Centres.

Funded at $251 million over five years, the Enterprise Connect Innovation Centres will connect businesses with new ideas and new technology, and provide a range of services to small and medium businesses.

These services include business reviews, in which a business planner would review the operations of a small business, benchmarking them against best practice, and providing advice on possible improvements such as new product development strategies.

Intensive technical assistance would help businesses to find and adapt the latest research, technology and organisational knowledge to improve products and efficiency.

The Enterprise Connect Innovation Centres would also provide access to prototyping and testing facilities, which would otherwise be unavailable to many small businesses.

Other services would include ongoing support and mentoring… industry intelligence and

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innovation networking opportunities…and helping businesses cut through red tape.

Conclusion

As I said in my opening remarks, venture capital is important in promoting innovation and productivity growth.

For too long, public policy has been built on the premise that because of the commodity boom there is no urgency to reform. Just as we rode on the sheep’s back in the 1950s and did not embrace the need for reform, we have ridden on the coal mines back in the 1990s and have not embraced the need to drive productivity increases.

We’ve not assessed the barriers to Australia competing in industries that provide opportunities for growth. This is not about picking winners, its about knocking down the barriers to our industries competing successfully.

Take the financial sector for example, an industry in which we have enormous potential but export a fraction of its services.

Other opportunities are there, you know them - biotech etc.

And productivity is at the heart of our agenda - investment in infrastructure, dependant on worlds best broadband, an education revolution all designed to boost our productivity.

Venture capital plays a vital role in promoting productivity and investment in new value added industries. I look forward to working with AVCAL and everyone in this room to maximise the effectiveness of this rule.

Once again, thank you for inviting me to talk to you today.

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