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Wednesday, 1 November 2000
Page: 21818

Mr MARTYN EVANS (11:42 AM) —This is a very important measure before the parliament, not only because of the particular terms of the Australian Research Council Bill 2000 itself and the associated measure but also because of what it represents in terms of the future of this country—the economic future of this country and in many ways the social future of this country as well.

At the Innovation Summit earlier this year, the Prime Minister asked Australians, and in particular those who are interested in technology and innovation and who were present at that important summit, to judge his government on its record. Well, we have done that, and I have to tell you it is an appalling record. The problem is that over the term of the Howard government private sector R&D expenditure, business investment on R&D, has fallen dramatically for the first time in several decades. The reality is that under this government we have seen a sustained fall in business investment in R&D the likes of which we have not seen before in this country. During the 13 years of Labor administration, there was indeed when we came to office a low base for R&D expenditure by business, and over a period of time the previous government was able to build on that base through a variety of incentives and innovative platforms to encourage industry and business generally to invest in research and development in this country. Over a significant period of time, the level of that investment was significantly increased, to the point where we were actually at a competitive level with OECD and European nations with whom we might like to compare ourselves.

I will not say that, by the time the previous government left office, the level that we had reached was one with which I would be satisfied. Indeed, a lot more work remained to be done. I am sure that, had the government then remained in office, further increases in investment would have been necessary to ensure the future of this country. However, the reality of what has happened since that time—in the five or so years of the Howard government—is a startling turnaround in the way in which the graph is trending. Under the previous government, the business investment and R&D graph trended upwards. Under the Howard government, there has been a precipitant downturn in that level of investment, and it has continued its inexorable downward path ever since this government took office. That might be a coincidence. It might be just an unfortunate historical period that has occurred at this particular point in time. However, I would have to say as a scientist—my background is in science—that the evidence for the hypothesis of it being a mere coincidence is certainly not very strong. The evidence for the alternative hypothesis and explanation—that it is the policies of this government which have caused that downturn—is very strong, because one of the first acts of this government in coming to office was to dramatically cut the R&D tax concession. It also abolished the syndication tax concession which allowed those companies that were cash-rich and were subject to taxation to share their position with companies that were ideas-rich but cash flow poor. The syndicates which were formed were demonised by the present Treasurer as being nothing short of tax rorts.

I am sure that there were some individual situations where the appropriate taxation was not being paid and where the scheme was being exploited. Indeed, I am sure that is the case with most taxation incentive schemes. However, rather than attempt to fix that scheme, rather than attempt to repair the damage and restore the workability of the scheme, the government chose not only to abolish it but to abolish it in a way which led the public and the business community to think that this government was very much opposed to investment in R&D and, in particular, to syndication. So the government took the opportunity not only to abolish the scheme and to dramatically cut the R&D tax concession in the income tax area but also to demonise the very basis of R&D tax concessions. This has had the obvious effect, with the dramatic downturn in business investment in R&D now clearly on the public record. Prime Minister, the public will judge you on that record and it will be a harsh judgment.

The judgment in relation to private sector R&D is very clear, and I will go into more detail about that shortly. But we also need to consider the public sector R&D. Australia has always had a very proud record of public sector commitment to research and development, whether it was through long-standing organisations of great public credibility like the CSIRO or other public sector science institutions like AIMS and ANSTO or whether it was through the university sector. One of the primary objectives of the university sector, apart from teaching, has been the investigation and research of matters of interest to academics, research which in many cases ultimately benefited the community at large. The return on academic research, and investment in that research, is very substantial. There are indications from the United States that the rate of return on academic research is anything from 10 to 40 per cent, and the social rate of return can often be in the hundreds of per cent. So academic research, far from simply being an academic matter, is obviously very easily translated into economic gains for the country as a whole and certainly into social gains for the community. That kind of investment is rarely made by private sector firms. It carries a high level of risk, there is a high initial cost and the payback period is quite long—it can often be many years before that research is turned into practical, everyday applications which yield a profit for a company. So it is very difficult to expect business to invest in that high-return but long-term research with those high initial levels of risk. That is something which the public sector has always borne the responsibility for and always will, just as it must bear the responsibility for the public-good research which is done into matters for which there is no clear economic return. A case in point would be Antarctic research or perhaps, in the early days, climate sector research—now, of course, we are seeing a very clear economic consequence for climate sector research. Indeed, our understanding of the Antarctic may well turn out to be quite crucial in many issues of climate change and fisheries research, and that would lead us to be ultimately very grateful for the public sector investment in public-good R&D.

How has this government treated public sector R&D? Although it has maintained a public face of a positive response to public sector R&D, I am afraid the reality of its treatment of those public institutions has been far from good. We have seen the CSIRO put under significant pressure in relation to property sales. We have seen the efficiency dividend extended from just administration to include the laboratories and scientific work as well. We have seen IT outsourcing, which is now moving towards the science agencies—agencies which include the CSIRO, the Bureau of Meteorology and other significant science agencies. We are now seeing their budgets cut in anticipation of savings that this government alleges will accrue from IT outsourcing, which, on all evidence that I have seen, is likely to end up costing those agencies more and delivering a lower standard of service. So this government is, by a somewhat devious mechanism, by the backdoor route, taking funds from our public sector science agencies and diverting those back into general revenue.

We have seen cuts to the universities over a period of time which probably now amount to about $1 billion. We have seen the underlying level of scientific infrastructure in our universities greatly undermined by the cuts to universities then being translated by the university administration into underinvestment in long-term research, underinvestment in the infrastructure which maintains a lot of scientific research and underinvestment in the equipment which scientists need in order to undertake their work. Scientists in a university can now wait something like 18 months to secure a new form of electron microscope, for example—an investment which needs to be made quickly if this country is to realise the kinds of scientific benefits from that equipment which it needs to achieve in order to stay competitive.

Lately we have seen the impact of the GST on research grants. That has impacted on research grants in several ways. The government has used the device of taking money up front from research grants to compensate for the savings which institutions will allegedly make on the GST. The government has reduced those grants by a percentage—I believe three per cent or thereabouts—on the understanding that institutions will make savings because of the GST. Of course, most of those institutions were exempt from sales tax in the first place. Many of the costs are spent on salaries, and they do not make the kinds of savings which the government implies they will make from the GST.

We have also seen the recent debacle of the GST and its potential implication on grants from overseas. Many of our best scientists receive grants from overseas institutions like the National Institutes of Health in United States or the Wellcome Trust in the United Kingdom. Often those grants are quite substantial because Australian scientists are very competitive in terms of their scientific output. The science here is also very competitive because of the low level of our dollar, although that is probably declining somewhat too much at the moment for many of our scientists who may need to purchase equipment from overseas and to travel overseas to stay abreast of the latest developments and to confer with their colleagues. The government has very much left open the question of whether the GST is applicable to those grants. Recently, I asked the Minister for Health and Aged Care a question on notice in this place. He replied in ambiguous terms, but my interpretation of the answer is that GST is payable on these overseas based grants. Indeed, the Minister for Aged Care, when acting for the minister for health in the estimates debates, also implied that GST is payable on these grants, but that, if one had a local agent, one could claim some of that GST back.

The National Institutes of Health in the US government and the Wellcome Trust in the United Kingdom are not going to let that worry them. They will simply make the payment and it will be up to our scientists to bear the cost of that. Many of our universities are uncertain about the way in which the GST will impact on those overseas sourced grants and the government has not yet acted to clear up that matter, although I do understand that the tax department has recently issued some kind of determination, the force of which I am not too sure, which implies that in fact GST is not payable now on those grants. This is a serious issue which the government needs to clear up.

Why is this sustained attack by the Howard government on science, technology and innovation of such importance to our country? That is because it is very clear from all of the evidence from the United States, and indeed from work undertaken in this country, that innovation, science and research and development account for approximately 50 per cent of the wealth generated in Western countries since World War II. Fifty per cent of the jobs and the wealth in this country and the countries with which we compare ourselves—the United States, Canada and those of Western Europe—have been generated by the investment in technology and research and development over the last 50 years. That is a very substantial figure. Quite clearly, that figure and proportion are likely to grow in the future as science and technology assume an even greater part of our lives and become an even more important part of industry and commerce.

Why can we not simply buy this investment from overseas? After all, countries like the United States spent massively on R&D. Why can we not simply pick up the investment which they have made, buy that on the market and adapt that technology to Australia? That is a Treasury solution, that is a Department of Finance and Administration solution, but it is not a solution which works in the real world. The reality is that technology diffusion—and OECD studies prove this quite conclusively—depends on geographical proximity. Unless people are in close geographical proximity, then the diffusion of technology from the labs and universities out into the industry and commerce of your country does not work. People must be able to confer readily, either in person or by telephone. Indeed, the people in those labs or in the research institutions must be able to go out into the community, with spin-off companies, in an entrepreneurial way and establish themselves in the immediate vicinity and, while still drawing on the resources of those laboratories or research institutions, develop their commercial idea on the spot. That is the way technology diffusion works.

You only have to look at places like Silicon Valley and their close proximity to the major universities of California and areas like Stanford to see just why technology diffusion depends so critically on the close proximity of those people. It is not possible to buy that technology off the shelf. It is not possible to have a free ride on somebody else's investment in R&D. We have to undertake that work here in this country or we will not have our proportion of intellectual property which will be the mainstay of overseas trade in the years to come. The countries with which we compare ourselves—the United States, the UK, Canada and Finland, for example—have all very recently made substantial investments in research and development. Even in the right wing of the United States Congress, Newt Gingrich, with whom I would not normally find myself in broad agreement—

Mr Slipper —You're good friends.

Mr MARTYN EVANS —The parliamentary secretary assures me he is a good personal friend. I think Newt has one very redeeming feature. He supported strongly the investment in science and technology which the United States government, sponsored by President Clinton, chose to make in the last two presidential terms during the last eight years. He understood, as did the President and his colleagues in his political party, the importance of that investment in R&D. In all of the recent budgets of the United States over the last eight fiscal years you have seen massive injections of funding into organisations like the National Science Foundation, the National Institutes of Health and the universities. That is being repaid many times over in industrial and commercial development and in employment in high skill, high wage jobs for the next generation of Americans.

Canada has done the same thing. They have adopted a broader based principle, investing in their universities and academic research institutions across the board and ensuring that massive new numbers of well paid professorships as well as research grants were available to their scientists. They also will find that that significant investment pays them well. In the UK, a partnership between a private philanthropic trust, the Wellcome Trust, and Tony Blair's new government has seen massive increases in R&D expenditure as well. Unlike the position in Australia where Treasury and the Reserve Bank often take a dismal view of the benefits of the investment in R&D, whenever Alan Greenspan in the United States makes public appearances, he always takes care to attribute much of the economic growth and success of the United States to their massive investment in R&D.

So we are left confronted with the position in this country where, due to the neglect of this government in recent years, we have seen significant falls in our R&D. The reality is that our investment in this country has declined significantly. Australia's gross expenditure on research and development now ranks 12th of 17 reporting OECD nations at only 1.49 per cent of GDP, which is well behind those leaders in the countries I have mentioned, with Japan at 3.06 per cent, Finland at 2.9 per cent and the United States at 2.74 per cent. Where was Australia? Just under 1.5 per cent.

Australia experienced the largest drop in business investment in R&D between 1996 and 1999 of all 17 reporting OECD countries, with a drop of 0.16 per cent of GDP, which equates to nearly $1 billion. Australia was one of only four nations to record a drop relative to its GDP. Government expenditure on R&D, as I noted earlier, has fallen from 0.42 per cent of GDP in 1994-95 to only 0.35 per cent in 1998-99. So in all of the critical areas where it matters the most, this government has presided over a decline in our investment in R&D. In the ARC itself we currently see success rates that are below 20 per cent. We see average research grants which are well below the international averages in those countries with which we compare ourselves, and Australia often covers less of the indirect costs, the infrastructure costs and the expenses which those grantees actually face in administering their science grant.

The government did make some concession to medical research with a modest increase in the NHMRC grants in the previous budget, but they were doing that in the context of previous reductions in that budget. So the impact of it is not as much as we would otherwise have liked to see. In fact, if we look at some of the research which has been undertaken in relation to ARC grants, we note that in 1996, in constant dollars, research grants, including small and large grants, were at $130 million and by 2002 are projected to reach only $132 million. Basically that is a constant level of funding in an era when everyone else is massively increasing their funding level. The same is true of Australian postgraduate awards, which are actually projected to decline in constant dollars. For research scholarships again there is a decline in constant dollars. For international postgraduate research scholarships there was a constant $16.2 million throughout the period under investigation.

Again and again, whenever this government turns its budgetary attention to science and research, and whenever it turns its attention to education and higher education, we see a continuing decline and a sustained attack on one of the few things that would have underpinned our economic development in the 21st century. Clearly there are important areas of science and research and enabling technologies which this government must address. It deludes itself if it thinks its record is a good one. And it is a delusion which will, ultimately, be very costly for the Australian economy and the Australian people.