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Tuesday, 11 April 2000
Page: 15720


Mr SERCOMBE (8:54 PM) —It is not at all surprising that the opposition substantially supports this Pooled Development Funds Amendment Bill 1999 because, after all, it was the Keating government that established the Pooled Development Funds Scheme back in 1992 with the aim of assisting small and medium enterprises to gain access to venture capital funds as part of the necessity in our economy for investment in creative and innovative activity. It is because this program is substantially a legacy of the former government that we support measures designed to further improve its operation and make its operation more relevant to the immediate circumstances that we face.

The bill allows PDFs to reduce their share capital and make a return to shareholders. It allows PDFs to acquire non-transferable share options in, or make loans to, a company in which the PDF has an investment. It requires companies in which PDFs have invested to follow the same investment rules that apply to PDFs. It exempts widely held superannuation funds from ownership restrictions and allows PDFs to merge all reasonable proposals in the current climate to ensure the sort of flexibility and the updating of the scheme for the current circumstances.

As other speakers have indicated, the bill allows some discussion about the context in which venture capital is important. The bill deals with capital markets, the venture capital components of which are very much a crucial component—a crucial ingredient in Australia's capacity to be a substantial player in the emerging world that is often referred to, perhaps with a bit of journalistic licence, as `the new economy'—the economy of information technology companies, biotechnology companies and other companies aligned with the emerging needs of the 21st century.

The stakes, indeed, are very high for Australia as a modern economy in ensuring that we get our fair share of this emerging new economy, with its highly skilled people and higher incomes. The effects of the perceptions of change within the economy and the far-reaching implications are illustrated by an article in today's Melbourne Age. In the business section, an article headed `Technology key to depressed $A, says US analyst' says:

Influential US economist David Hale believes the dollar is suffering because Australia is being judged as an `old economy' by international investors ...

Once again, allowing for all the hyperbole and the simplification of the circumstances of Australia in the context of a globalised economy that that sort of comment reflects, nonetheless I guess it does indicate the far-reaching implications of needing to ensure that Australia is well placed. Another example of the importance of the new economy, to use that cliche, is the fact that—and I do not know whether stock market fluctuations have affected these figures or not; perhaps they have in the short term—in the US two new economy companies, Intel and Microsoft, have a capitalisation higher than that of the combined capitalisation, in a market sense, of General Motors, Ford, Boeing, Kodak, Sears Roebuck, Caterpillar and Kellog combined. That just shows the scale and the significance to our emerging globalised economy of these information technology and related companies and why Australia and our capital markets need to be structured in a way that reacts to that. Even in small economies such as Israel's, for example, we see the phenomenally successful building, over the last four or five years, of an indigenous information technology base. Those are the sorts of models and the sorts of examples that Australia—if it is to be successful, competitive, and have the high incomes that our position comparatively in the world requires—needs to emulate.

Australia has a most successful base for this sort of future. We are regarded—and I think correctly—as one of the most sophisticated users of technology in the world. Australians have indicated traditionally a willingness to pick up new and innovative technology quickly and adapt to it. Another statistic: Australia with about 0.3 per cent of the world's population nonetheless generates 2½ per cent of the world's research. So the base is there—in terms of the attitudes of our community and in terms of the research output of Australians—to be a successful economy in the new paradigm in which we find ourselves. But we need focus. We need government leadership to provide that sort of community focus. The position there is, frankly, not as optimistic as some of the earlier facts I have indicated. The Goldsworthy report, which this government commissioned, and a recent report by the Australian Academy of Technological Sciences and Engineering for the Australian Research Council make the claim that `Australia's information technology research capacity is declining'. That I think is a most alarming assessment by two reputable inquiries.

A recent article in the Quarterly Perspective put out by the Australian Stock Exchange and written by Trevor Cole, a professor of electrical engineering at Sydney University, asks whether Australia can ever produce its own Cisco Systems. An interesting little anecdote is told in that article about a Perth based organisation, the Broadband Telecommunications Cooperative Research Centre. The founders of that company left to create and join the Californian based start-up company Atmosphere Networks. This new technology based firm raised $US17 million in its first year to commercialise the Australian cooperative research centre research. The article says:

But surely the challenge is to create an environment in which the future research can be funded and then exploited locally with all the flow-on benefits that will produce. This will only ever occur if Australia spawns a myriad of start-up ventures from which the few major successes can grow—and behind every start-up venture there must be the suitably motivated, skilled and rewarded entrepreneur.

The point of that anecdote is that too often the story of Australia's outstanding research effort is that it is commercialised offshore. We need to ensure that the context is provided within Australia to ensure that that is not repeated as frequently as it is.

In the last year or so in the biotechnology area, for example, there was a venture capital forum held. The comments in that forum were also interesting. Speakers made the point that the imbalance between capital supply and demand forces companies to move offshore prematurely, forces them to public markets prematurely and may also force them to accept lower market valuations. Clearly there is an important role for government in ensuring that these sorts of issues are more adequately addressed in the context of the Australian capital market.

In the 10 March edition of the Business Review Weekly there is a story produced with perhaps, once again, journalistic licence, perhaps a trifle overstated. The story is entitled `How we missed the new economy' and it is subtitled `The reasons for Australia's failure to invest in the new economy lie deep within its style of capitalism'. The article in the BRW has a number of quotable quotes, but one is:

The Australian venture-capital market is relatively small. Sam Armstrong, an analyst at Macquarie Bank, says venture capital in 1997 was only 0.62% of gross domestic product (GDP), compared with 4.88% of GDP in Britain and 2.69% in the US. By 1999, the figure had risen to 0.99% of GDP in Australia but it is still low. In 1998, 78% of the funds came from local pension funds, compared with ... 10% in Britain and 38% in the US.

I referred to the journal that the Australian Stock Exchange puts out. In the same edition I referred to a moment ago there is another article entitled `How Australia can build high-technology companies', which is an interview with Roger Allen, who is a co-principal of the high-technology fund manager Allen and Buckeridge. Amongst other things, Mr Allen says in this article:

The primary source for Australian venture capital has to be Australian institutions. Australia has a huge build-up of superannuation fund money, with the compulsory fund contribution at 7 per cent of wages and salaries and escalating. There is $350 billion in funds now under management and growing to $600 billion in the early part of the new millennium. Unfortunately, very few superannuation funds have an asset allocation from their trustees to the category of private equities (in the U.S.A. it is called “alternative asset class”). Venture capital is just one sub-set of that asset class. In the U.S.A., it is quite typical for funds, or pension plans and endowments, to put 5 per cent of their total funds under management into private equities, and some of the funds go to double digits ...

He continues:

In Australia, the vast majority of superannuation funds don't put any money into private equity, and those that do so put up only small sums, less than 2 per cent of their funds under management. On average, we are well under 1 per cent (more like 0.3 per cent).

So the situation is that the Australian capital markets, frankly, need the sort of focus that at the end of the day only the national government can give them to ensure that as an economy we position ourselves for the extraordinary and exciting prospects that are offered by the `new economy'—information technology, biotechnology and related industries.

Against this background, what do we need to focus on? What should the government be doing? Initially we should be saying that the government should not be doing the sorts of things it is presently doing. In terms of research and development, the decision to reduce the concession from 150 per cent to 125 per cent has, frankly, been disastrous from the point of view of the sorts of investments in the sectors I have been referring to that the Australian economy requires.

Before the current government the level of business expenditure on research and development in 1995-96 was $4,343 million. By 1997-98 the level had fallen to $4,043 million, and in 1998-99 the level was expected to fall again to $3,650 million. This is, frankly, disastrous in terms of Australia's positioning to take advantage of the sorts of opportunities that a number of speakers have spoken about. Not happy with effectively cutting business expenditure on research and development by over a billion dollars per year, the government is planning to cause more damage by devaluing the R&D tax concession by failing to respond to the impact of cutting the corporate tax rate from 36 cents to 30 cents in the dollar. That further depreciates the value for businesses in making the decisions they need to make in allocating funds for these purposes.

If, for a moment, we move away from the private sector and look at the public sector, the position is similar. The Commonwealth has, under this government, been dramatically cutting back the outlays in the budget on the investments in science and technology that are required to sustain this sector in the Australian economy. In its first budget the Howard government cut $300 million from total Commonwealth support for science and innovation, which at that time was $3.9 billion. The government's current expenditure on R&D is not even back to the level it was at under the former Labor government. So the position is that both in the private sector and in the public sector the investments required for our future are not being made at the sorts of levels that comparable countries make them. We see other initiatives of the government that impact on our capacity to operate a successful new economy. The introduction of differential Higher Education Contribution Scheme payments for science and engineering courses at university is an example of a government initiative that will, frankly, negatively impact on this country's capacity to have the resources to pour into the vital areas of the economy to which I have referred. The lack of investment in telecommunications infrastructure to ensure that all Australians have the opportunity to be online and participate in e-commerce is another one. The government's priorities are, frankly, not appropriate and do not address the needs that are there.

One ought to contrast this with, for example, the experience in Britain where the national government has the vision that this country needs. The article I referred to in the ASX journal—`Will There Ever Be an Australian Cisco Systems?'—talks in glowing terms about the sort of vision that the British government is offering. The article says:

There is a vision for Britain, as enunciated by the prime minister, as an entrepreneurial society based on software, multimedia and biotechnology. The capacity of this vision to pervade government thinking is nowhere more clearly evident than in the 1998 Financial Statement and Budget Report of Her Majesty's Treasury itself. Its chapter 4 is entitled “Promoting Enterprise” and identifies that

The UK also needs to create—and sustain—more dynamic and innovative firms which can exploit technology, be at the forefront of design, and generate highly-skilled jobs which are the key to long-term prosperity. The UK has the raw material: a high quality science and engineering base, a record of creativity and innovation, and the proven record of many world class entrepreneurs. However, it does not produce such businesses in sufficient numbers or on a sufficient scale, and not enough grow to be global companies.

Having identified a problem unsettlingly close to Australia, the budget papers recognise that

The Government cannot itself improve the performance of industry or create dynamic new companies. But, in partnership with business, it can create the right framework for enterprise and investment. The Government is committed to removing the barriers that hold back investment and that discourage enterprising individuals from starting dynamic businesses that would allow British products and services to lead the world in the 21st Century.

At least the British government has identified the issues and is demonstrating the vision and the leadership required to place British industry in the forefront of the new economy. This government's vision is, frankly, not on the same scale. It is not there. The same article—`Will There Ever Be an Australian Cisco Systems?'—talks about the importance, in the British context, of recognising the linkages between universities and new technology based businesses. It refers to the creation of a £50 million sterling fund to help bridge the funding gap between good research and the sort of business that can then attract funds from existing venture capital and private sources; the sort of need that was illustrated by the move of a Perth based venture which had to go offshore, to California. In Britain, the sort of context, the sort of vision, required for Australian businesses of a similar sort is in place. Sadly, in Australia the government is failing to show the leadership required to ensure the long-term sustainable future of this country as a world-class, modern, global 21st century economy.

The Pooled Development Funds Scheme initiated by the Keating government was a small step towards ensuring that that sort of climate, that sort of context, was created. Whilst we welcome the modest and necessary flexibilities introduced in that scheme via the proposal in this bill, the Pooled Development Funds Amendment Bill 1999, nonetheless they do not go far enough. We need a sense of vision and a sense of commitment. We need a sense of leadership from the national government and a sense of partnership with the private sector to ensure that the settings are right. This government is singularly failing in that task.