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Finance and Public Administration Legislation Committee
28/09/2021

DAVIS, Dr Ryan, President, Australian Society for Medical Research [by video link]

JOHNSTONE, Dr Daniel, Executive Director, Australian Society for Medical Research [by video link]

MULLINS, Mr Greg, Head of Policy, Research Australia [by video link]

Committee met at 09:00

CHAIR ( Senator Chandler ): I declare open this hearing of the Senate Finance and Public Administration Legislation Committee into the provisions of the Investment Funds Legislation Amendment Bill 2021. These are public proceedings, and a Hansard transcript is being made. We're also streaming live via the web, and the stream can be found at www.aph.gov.au.

I remind all witnesses that in giving evidence to the committee they are predicted by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee, and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. In addition, if the committee has reason to believe that evidence about to be given may reflect adversely on a person, the committee may also direct that the evidence be heard in private session. The committee prefers all evidence to be given in public, but under the Senate's resolution witnesses have the right to be heard in private session. It is important that witnesses give the committee notice if they intend to give to give evidence in camera.

If a witness object to answering a question, the witness should state the ground upon which the objection is taken, and the committee will determine whether it will insist on an answer, having regard to the ground that is claimed. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may, of course, also be made at any other time.

I now welcome representatives from the Australian Society for Medical Research and from Research Australia. Information on parliamentary privilege and the protection of witnesses in giving evidence to Senate committees has been provided to you. Do you have any comments to make on the capacity in which you appear?

Dr Johnstone : I'm a past president of the Australian Society for Medical Research.

CHAIR: Thank you very much. I will now invite you to make short opening statements. At the conclusion of your remarks I will invite members of the committee to ask questions. I will go first to the Australian Society for Medical Research.

Dr Davis : Thank you, Chair and senators. Thank you for the opportunity to discuss the Investment Funds Legislation Amendment Bill 2021, in particular amendments proposed to schedule 3 relating to the Medical Research Future Fund Act 2015.

The ASMR has represented the health and medical research sector and researchers within it for the last 60 years. In addition to our direct membership we have reach to over 100,000 stakeholders in Australian health and medical research. The society has a long history of evidence based advocacy to empower research for a healthy and equitable Australia.

Health and medical research in Australia largely draws from two critical funding sources: the Medical Research Endowment Account, which supports the National Health and Medical Research Council's people and project grant schemes, and the Medical Research Future Fund, which has a focus on translating and commercialising medical research and innovations. Established in 2015, the MRFF's aim is to transform health and medical research and innovation to improve lives, build the economy and contribute to health system sustainability. To this end the MRFF will find funding in perpetuity to support health and medical research and researchers in delivering health, wellbeing and economic benefits for all Australians. The ASMR feels that a number of the proposed amendments in schedule 3 of the bill will jeopardise that intent.

On review of the other relevant submissions to this enquiry, we note that there is general consensus in support of the proposed new investment mandate to align with other Future Fund managed funds and for extending the duration of the MRFF strategy and priorities. However, there is also consensus on a number of issues of concern, including capping annual disbursements, removing protections around maintaining the nominal MRFF credits and enabling state and territory governments to access MRFF grant funding.

On these issues, the ASMR recommends the following: (1) instead of an upper cap on annual disbursements, a guaranteed minimum annual disbursement be established consistent with the intentions of the MRFF at inception; (2) the current legislation protecting the nominal credits in perpetuity be retained; and (3) strict funding and disbursement rules be defined specifically for state and territory governments. We make these recommendations so that the function of the MRFF continues to align with the statement of purpose on the MRFF website in that it provides an ongoing funding stream for medical research and medical innovation into the future, with credits to the MRFF preserved in perpetuity, and the capital of the MRFF is invested with the earnings used to make grants of financial assistance for medical research and medical innovation over the long term.

CHAIR: Thank you, Dr Davis. Mr Mullins, from Research Australia?

Mr Mullins : Thank you, Chair and senators. Research Australia are pleased to have this opportunity to address the committee. We are the national peak body representing the entire health and medical research pipeline from the laboratory through to the patient and the marketplace. Our membership is drawn from across this whole pipeline, including all stages of research and research organisations, from universities to medical research institutes, patient groups, charities raising funds for research and multinational corporations.

The focus of our submission to the inquiry is the Medical Research Future Fund. While we're supportive of the proposal to change the timing of the MRFF strategy and priorities, our focus is on the amendments relating to the investments and disbursements from the MRFF.

Research Australia has been following the MRFF since it was first announced on budget night in May 2014. The proposal for a perpetual fund with $20 billion in capital from which the earnings could be used to fund health and medical research was welcomed by the sector. Expectations of $1 billion per annum available for health and medical research didn't seem outlandish at the time. After all, that requires a net annual return of five per cent per annum, which seemed quite achievable. It wasn't until the investment mandate was issued after the legislation was passed that it became clear that these projections were in doubt.

In a low interest and low inflation environment, the investment objective of RBA cash rate plus 1½ to two per cent per annum was not conducive to strong investment returns. The way the annual disbursements were calculated, with a heavy emphasis on protecting the capital at all times and of making provision for future expenses, has only further restricted the funding available from the MRFF.

Research Australia believes that the proposed legislative changes will allow the MRFF to be invested more aggressively, with the objective of maintaining the capital of the mid- to long-term rather more protecting it against short-term fluctuations. This should achieve the objective of increasing the funds available for health and medical research.

We are confident the Future Fund's board of guardians can invest the MRFF's capital in a way that will achieve the dual objectives of a higher return and protecting the capital in the longer term. We also welcome the proposal to determine the amounts to be distributed up to five years in advance. Health and medical research is a long-term prospect, and the degree of certainty this measure provides about the amount of funding available is welcome.

Our only concern is that, while the current legislation makes it clear that the MRFF is a perpetual fund, the amendments remove these provisions. The Department of Finance has stated in its submission that this is necessary to allow the government to issue new investment mandates for the MRFF, with a higher benchmark rate of return. It's stated that this will increase expected earnings and support the perpetual funding objective.

Research Australia doesn't believe the principle of maintaining the capital in the long term is a barrier to a more aggressive investment mandate. Our emphasis is on the long term, accepting that there could be one or more years in which the capital might actually fall. We don't believe this should prevent the MRFF from achieving the investment returns the government is seeking.

CHAIR: Thank you very much, Mr Mullins. Senator Ayres, I'm going to give the call to you.

Senator AYRES: Thank you, Chair. Good morning, everybody. I have a few questions for these witnesses. Firstly—and I would be happy for anyone on the panel to answer—I want to ask about the National Audit Office report on the fund. Do you agree with the conclusions of the report that say that essentially there is no evidence of how the design of the 10-year plan was influenced by the MRFF strategy and the MRFF priorities? Do you basically agree with the Audit Office's assessment?

Mr Mullins : I'm happy to take that question. That was certainly our assessment. When we looked at it, it was not clear how the strategy and priorities had influenced the 10-year plan. It is certainly possible to infer some influence there, but the direct links certainly aren't clear in any of the documentation that we have seen or the way that it's reported.

Senator AYRES: I think the Audit Office went on to recommend three things: that there should be a process to identify, assess and manage risks at the theme or initiative level of the 10-year plan; that grants be reported in the way they are classified in the relevant grant opportunity guidelines; and that performance measures in reporting be improved. Do witnesses agree that there are issues in terms of transparency and accountability in the way that funds are disbursed?

Dr Davis : I think there are definitely issues. These issues have been raised consistently through the sector and were also recognise by the NHMRC back in 2018. There are certainly issues around the 10-year mission recipients and how much was actually given to them as well.

Senator AYRES: Can anybody name a similar fund overseas where funding decisions are made by the minister rather than independent experts?

Dr Davis : I believe that this is fairly unique to this fund.

Senator AYRES: Mr Mullins?

Mr Mullins : I think the issue is the degree to which the minister is required to act on advice. Even in the NHMRC Act, it is the minister who makes the decision, but there is a requirement there that they act on the recommendation of the CEO. That's not a provision that exists with the MRFF. There's a requirement to take advice but not to the same extent.

Senator AYRES: So it's possible to envisage a formal step. But it's the whole architecture and the lack of transparency. Does the proposed bill address any of these concerns in any meaningful way?

Mr Mullins : No, this bill does not address those concerns. I don't think that was the intention of it, to be honest. I understand that the department have agreed to accept all of the recommendations that were made in the audit report and that they are acting on those at the moment.

Senator AYRES: But that's the challenge here, isn't it—that the audit report doesn't go as far as addressing these more fundamental problems that you are raising? I don't criticise the audit report—they have a narrow remit—but the audit report itself doesn't go as far as addressing the concerns of the sector, does it—these broader sorts of policy and architecture concerns, if I can put them that way?

Dr Davis : I think the recommendations that came out of that report were not satisfactory to cover those issues.

Senator AYRES: What administrative changes would you like to see?

Dr Davis : I think it was suggested by the chair of the AMRAB that the MRFF should be overseen by an organisation, such as the NHMRC, with established reporting and independence. Certainly the ASMR has been advocating for that since the beginning. When we offered evidence at the Senate enquiry into the MRFF Act in 2015, that was a recommendation that we made.

Senator AYRES: Just on another matter: has the importance of medical research declined significantly over the last 18 months?

Dr Davis : I would say definitely not. I would say it is more important than ever.

Senator AYRES: Has it become less important to do medical research over the last 18 months?

Dr Davis : No.

Senator AYRES: When the fund was announced the government said that, once it was fully capitalised, it would disburse $1 billion per annum in support to medical research; that's right, isn't it?

Dr Davis : Yes.

Senator AYRES: The budget papers said the MRFF will provide a sustained funding stream for medical research, with payments from the fund expected to reach around $1 billion a year from 2022-23. You all look too young to have been in leading positions in your organisations in 2014, but did your organisations support the fund on that basis in 2014 when the announcement was made?

Mr Mullins : That's very flattering of you! I was there on budget night, paying a lot of attention when the MRFF was announced. We certainly supported it. As I said in my opening statement, $20 billion at $1 billion per year is a five per cent net return. That seemed quite achievable; obviously it would depend on how the fund was invested. It was only when we saw the investment mandate and the way that the Future Fund Board of Guardians went around calculating the annual disbursements that it became clear that that wasn't going to be the case.

Senator AYRES: But it is fully capitalised now, isn't it? This argument that it's just about the investment mandate—it is fully capitalised now, sitting at about $22 billion.

Mr Mullins : Yes.

Senator AYRES: So, in your view, could the Morrison government actually affect delivery of the Abbott government's announcement? Could the fund effectively disburse $1 billion annually?

Dr Davis : I think it's shown in budget portfolio reports from Treasury that the return on investment, certainly in forward projections, is nearing $1 billion. Minus those administration fees for the Future Fund, it could certainly get close to $1 billion over the next few years. With a more aggressive investment mandate, which is part of this bill, we could see well in excess of $1 billion per year returned from investment in the MRFF.

Senator AYRES: When did you become aware that this billion-dollar commitment wasn't going to be met?

Dr Davis : It was apparent in forward projections that they were capping it at $650 million.

Senator AYRES: When was that?

Dr Davis : Around the 2019-20 budget portfolio.

Senator AYRES: So the change to a higher risk return strategy—I think you each had some discussion of this in your opening statements, but do you expect higher returns on that basis?

Mr Mullins : Yes.

Senator AYRES: Potentially, there are some years of negative returns as well, aren't there?

Mr Mullins : Potentially, there could be. That's why we're emphasising that, if it moved to a more aggressive investment strategy, you might see some years where it's negative and the capital might dip below $20 billion. But you would expect that, overall, the returns would be positive and that it would be able to maintain that capital. Part of the focus at the moment is that it has been invested very conservatively. More to the point, the Future Fund Board of Guardians have been very conservative; they are the ones responsible for determining how much is available each year at the moment, not the minister. This is the requirement under the act. They use an instrument for calculating that. They don't start with the investment returns; they start with their target investment return, and then adjust that to make allowances for funds that need to be kept to cover the next year's investment management fees et cetera. That's the basis they use for calculating the return. That's linked to the investment return, and a more aggressive investment strategy should provide more funds over time for the MRFF to disburse. But it is that instrument and the mechanism that the act currently provides that, in a sense, is causing the problem we're facing at the moment.

Senator AYRES: There's a big difference, isn't there? The commitment was: once fully capitalised, $1 billion per year. It's overcapitalised now. It's one thing to point to the fund's guardians, but the commitment from the government was: once fully capitalised, $1 billion per year. At $650 million—Mr Joyce might not be able to do this, but I can!—it is $350 million short of the government's commitment. What does that mean in terms of research programs that aren't being undertaken?

Dr Davis : Research in Australia is under severe stress. As you pointed out earlier, it's more important than ever right now. I think that shortfall of $350 million on the promise—if you look at an ASMR independent report through Deloitte Access Economics from 2014, based on $1 billion being dispersed each year and those initial calculations there was a $3.40 return for every dollar invested into the MRFF. That's considerable when you're talking about $350 million a year. Capping it at $650 million is a missed opportunity in that regard, and it goes against that initial promise.

I also think it doesn't make sense to cap something and then have a more aggressive investment mandate to return more funds from your investment if you're not then going to disburse them. Again, that's where the recommendations from a number of the submissions to this report suggest that a cap is not going to provide certainty to the sector for research funding. We would like to see more money into the sector to support the research going on, because we know that there are definite economic and health returns based on all the health and medical research carried out in Australia through the NHMRC; every dollar invested sees $3.20 returned. These are not insignificant returns on investment.

Senator AYRES: You can certainly demonstrate the economic dividend. I suppose it's harder to describe the consequences of research that's not undertaken. The counterfactual is pretty difficult for the sector to describe. If anything, the pandemic that we're grinding our way through now illustrates the long-term benefits of medical research. There are just so many lost opportunities in $350 million of annual funding, aren't there?

Dr Davis : Yes. I would consider it to be considerably more, based on the current capital of $22 billion. Particularly with the higher investment mandate indexing against indexation, you're talking anywhere from a six to 10 per cent return on investment; that's anywhere from $1½ billion to $2 billion a year. Capping it at $650 million leaves a considerable amount of money to either reinvest into the fund or disburse elsewhere. Capping it at $650 million means there is no potential for that increased return on investment to come back into the sector.

Mr Mullins : The cap at $650 million is, in a sense, a default position. The responsible ministers can vary that at any time. My expectation is that there is no political incentive for the ministers not to spend that money. There is great political capital in the MRFF and in making that money available. I would expect that where investment returns are made more money than would be allocated will be spent.

Senator AYRES: Beyond the rational expectation that an ordinary political actor would do the right thing, is there anything else that gives you that confidence that a future minister would do the right thing by Australians and by the sector? There is a very big gap between the default level and the commitment, isn't there?

Mr Mullins : I think it's just hard to imagine that any minister would want to leave more money in the pot for a future government to spend. The focus is going to be on making the most of that money now. I don't think there's an intention here to allow that funding to be held back, because really there's no reason for doing that and, as Ryan has said, there's great benefit in spending money for the community, both economically and health wise, so the more money that's available from the MRFF the better.

Senator AYRES: And it's not their money really, is it? It's money that's allocated for the purpose of medical research in the interests of Australians or of the sector and the industrial and economic capability that could be generated in terms of exports and improved medical care for Australians. I have one final question. I think you said that state governments and government departments aren't able to receive funding directly. Are you aware of any other fund that operates in the same way? What would you recommend in terms of changes to the fund's operations to deal with this problem?

Dr Davis : My understanding is that it is intended that state and territory governments are able to access the MRFF but there is a legislative caveat that precludes them from receiving that through the COAG Reform Fund. I believe that the amendment in this bill is to update that and allow access for those state and territory governments. We in some regards don't see the necessity for this, particularly because there's funding for health and medical research for state and territory governments coming through COAG or what is now national cabinet. They also have revenue streams that researchers don't have access to. What proportion of the MRFF is going to be available to those state and territory governments? What are the requirements for it? A number of submissions have pointed out that the AIHW has suggested that it's a bit of a black hole with state and territory governments in terms of how much is invested, what the returns on that are and what the impacts of those investments are.

Senator AYRES: So there's a risk that the contributions from the fund to state governments is offset against funding arrangements. Whether it's state government departments, universities or institutes during work, in effect there's a net reduction in the funding that is available.

Dr Davis : The wording of the amendment is that the state and territory governments become persons and they can access the MRFF funding on a competitive basis. I think it's unfair for a state or territory government to be competing with individual researchers or groups of researchers.

Senator AYRES: So a lower mandated return—$350 million lower than $1 billion—and state governments able to compete for the same funds necessarily mean that fewer funds are available for the sector. That's a summary of the effect of these changes. Notwithstanding Mr Mullins's optimism that a future minister might provide more, the constraints on the operation are a lower mandate and the sector not being the only person at the table competing for the funds.

Dr Davis : Yes. If you start carving it up, we need more certainty in the proportion that's going to be allocated to that, because if state and territory governments can access 50 per cent then that's a huge loss to the researchers who need that to maintain their research programs. That's not to say that state and territory governments shouldn't be integrated into this; that's just to say that, with a limited pot, adding another player into the system reduces that pot for everyone.

Senator AYRES: I don't have any further questions. I would just like to say thanks to the panel for that discussion.

CHAIR: Just following on from Senator Ayres's questions around striking this balance between obviously ensuring that the MRFF maintains a nominal value of $20 billion and on the other hand this question that the witnesses today have raised around the maximum disbursement or indeed the minimum, as witnesses I think are agreeing it should be. How would you propose that we maintain that nominal balance of the fund while at the same time effectively saying that that $$650 million becomes a disbursement minimum as opposed to a maximum?

Dr Davis : I think at present the balance of the MRFF is $22 billion. Again referring back to the 2014 report from the ASMR, it modelled a GFC-like crisis, which was negative 5.1 per cent. Based on that, there is a loss of $1.5 billion to the fund. That core business is maintained in that instance. I think with a more aggressive investment we are likely to see losses in the short term, potentially, but there's no guarantee. So the fund can potentially increase. I think setting a minimum of $650 million guarantees more certainty for the sector that there will be $650 million—and I'm just using that as a nominal figure—but any opportunity there to go up based on return on investment for a given year is possible. If you cap it at $650 million and there is much more money in the pot from that year then there is no possibility that that could be put back into the sector and it requires that level to be reviewed and reset. That can be done at any point in time. There are amendments in this bill to change that to a five-year review period, but it can be changed at any time within that. So, again, the point of setting a cap and reviewing it based on return on investment seems counterintuitive to setting a minimum and reviewing that disbursement level each year.

CHAIR: Whereas I put it to you that, if we want to ensure the perpetuity of the fund and ensure that it continues well into the future, having that cap in place is, to an extent, preserving that perpetual nature of the fund. So are we saying that it's more important for the fund to annually release money each year for medical research, recognising that if we set a floor on that then at some point in time the fund may peter out, or is it important that we ensure the fund exists into the future?

Mr Mullins : I certainly think it's the latter. As I say, from Research Australia's point of view, we understand that the amount of money available for health and medical research and medical innovation is ultimately dependent on the investment returns. We want to see that $20 billion maintained. We are not worried about short-term fluctuations if that is in the way of a more aggressive investment return. We are keen to see a more aggressive investment strategy and we accept that there needs to be some short-term volatility. Ultimately though, as we say, the amount available is dependent on the investment returns.

My take on the legislation at the moment is that the $650 million is a default position for five years. It provides some sort of certainty that that's what's going to be available. But there is the obligation there on responsible ministers to look at the amount, review it and have the opportunity of changing it at any time. It seems to me that that is a reasonable mechanism to have in place to ensure that we strike the right balance between maintaining the capital of the MRFF over the long term and also making funds available for disbursement.

CHAIR: More broadly, I'm interested in the perspective of the witnesses this morning on what role the MRFF has played in the health and medical research sector and what the impact has been on medical research in Australia. I know, Dr Davis, you made a comment about the significant returns both to the health industry and more broadly economically as well. I cannot remember the dollar figure you used, but for every dollar that is invested by the MRFF there was a $3-something return. So I'm just hoping to get some further views from witnesses on that point.

Dr Davis : That figure that for every dollar invested into the MRFF there was a $3.40 return was based on our 2014 report, which was obviously before the inception of the fund and based on all of the evidence at that point in time that $1 billion a year was to be disbursed and the capital was there, the investment mandates were there et cetera. I think that investment into health and medical research provides great outcomes, whether they be economic, health or social. A lot of those things are very difficult to quantify and, certainly, they require investigation. I think that every opportunity should be taken to disburse as much back into the research sector and, in the instance that it isn't, that is an opportunity missed to gain those benefits back. Capping it certainly stifles that.

I think we are overlooking the elephant in the room here, which, in many regards, is the fact that there is ministerial discretion to set these things, disburse the money et cetera but also unsecuring that corpus and allowing drawdown does actually allow, despite intentions, that to be carved up in any way possible. In the future, it may be drawn down considerably. So I think we do definitely need to secure the corpus of $20 billion in perpetuity and then on the matter of the investment mandate, again, increasing returns but capping those disbursements really doesn't make sense.

CHAIR: Mr Mullins, do you have any views on the broader role of the MRFF in supporting the health and medical research sector?

Mr Mullins : The Medical Research Future Fund has been of huge benefit not only to Australia's health and medical research and innovation sector but to the country as a whole with the things that it has been able to fund in the last three or four years, the funding that has been provided to support commercialisation and to build the skills and capabilities that we have needed in that area, the funding that it has provided to support translation of research into our health systems and to develop clinical trial networks which have supported research, which has provided evidence of new models of care which have improved our health system as well as delivering better outcomes for patients. I think all of these things have been of enormous benefit, and we certainly expect the MRFF to continue to deliver those and to do so even more than it has up to now, recognising that it's only in the last 12 months that the MRFF has actually achieved its full capital and that it's from here on that the real benefits of the MRFF are going to be evident. We are very keen to see the measures that have been put in place to ensure that in fact the MRFF is able to measure and capture the kinds of returns and benefits that it is providing and the work that the department is doing at the moment to put in place the mechanism and the frameworks for doing that. So there's no doubt the MRFF has been of huge benefit to Australia.

CHAIR: Thank you very much for that. As we don't have any further questions for you, we will send you off with our thanks for appearing today. I don't think any questions were taken on notice by you, but the due date for answers to questions on notice is Friday 1 October.