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Monday, 11 September 2017
Page: 6881


Senator PATERSON (Victoria) (20:36): I too am very pleased to rise tonight to contribute to the debate on the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017. It is always a pleasure to follow my friend and learned colleague Senator Macdonald, who drew on his deep well of experience as a lawyer to make a very erudite contribution to this debate. I hope I don't cover too much of the same ground that he did, but it was such a valuable contribution, there is a risk it might happen.

There are four things I would like to do in this debate tonight—a couple of things initially to set up the bill, and then I'll talk about the bill. Firstly, I want to talk about why entrepreneurship and business innovation is important and why it's worthy of encouragement. Secondly, I want to talk a little bit about what the recent data shows about entrepreneurship in Australia, and there are some interesting facts and figures about the trends in rates of new business creation that are worth commenting on and observing. Thirdly, I want to address how we in government, in a very general sense of the word, can help this process and also how we can impede this process and the way we should avoid impeding this process. Finally, I will turn to the bill itself.

Firstly, I think it is generally assumed by anyone who has heard of the concept of entrepreneurship or business innovation that it's just a logical and good thing to support and a good thing that should happen. I think it is important that we understand why it's an important part of our economy and why government should want to see more of it and not less of it. It is important that we understand why government has a role in promoting it and what government's role is in promoting it.

There are obvious social benefits to entrepreneurship and business innovation. As citizens, we all benefit from new businesses which come into being that offer new ways of doing things, new products or services, new technology, more efficient ways of doing things and different ways of thinking about doing things. Standing here today in 2017, all of us have vastly more choices available to us in our lives as consumers than our parents ever did, and certainly more than our grandparents or great-grandparents ever did. One of the reasons that is the case is entrepreneurship and business innovation. People have come up with new ways and new ideas. They have tested those ideas. They have brought them to market, and we as consumers are the ultimate beneficiaries of that. There are lots of really good practical examples of that, and some of them are technological in nature. But some of them are not about technology and are just about better and more efficient processes in the ways of doing things. That is one of the reasons why we live in a more prosperous economy than anyone before us and why we enjoy the fruits of that prosperity today. It is something we should be grateful for. That is obvious in and of itself, in terms of the benefits we have as individual citizens. But it is also important to reflect on why entrepreneurship is important to economic theory and why it's important to economic growth. It turns out that entrepreneurship plays a very central role in driving economic growth. Societies or nations which have higher rates of entrepreneurship also have higher rates of growth and are more materially prosperous, and that is a really positive thing.

Logically, this makes some intuitive sense. A small new business, which is a start-up, entering into the market for the first time, is often going to try and do things differently to the way that existing players in a sector might, particularly large existing players, because it has really powerful incentives to do so. If the new business wants to enter into a market where there are existing players, in order to compete they will have to do things in a different way. Otherwise, they run the very great risk that they will just be replicating what an existing business does, they will likely be no more efficient than the existing business in doing it and they will find it very difficult to compete. Particularly if the existing business has, over time, accrued market power or market dominance, it would be very difficult for a new business to enter the market and compete. A new, innovative start-up business has the incentive to experiment and to try things differently and not just do things the same way that existing players in the market do, and so we find that often they are more willing to be innovative and experiment and do things in different ways. Those ideas do not always succeed; in fact, often they fail, and that is part of the process of creative destruction that occurs in our economy: people take risks and they fail, but often we learn a great deal from that failure and we are the beneficiaries of it.

I'm not saying that large existing businesses don't do innovation. There are a lot of really good examples of large businesses in Australia that are very innovative, that do push the boundaries with technology, that do try new ways of doing things and that have a good internal culture of floating and trying new ideas. But there's something in the very nature of a small, new start-up business that means that they are more nimble and that they are forced to explore new and different ways of doing things, and that leads to entrepreneurship. Sometimes they happen upon a really good idea and a really different way of doing things which completely reshapes the industry that they are in, and the existing larger players have to adapt to it and follow. That is a really positive part of our free-market economy and part of the capitalist economy.

I should point out that this entrepreneurship and innovation doesn't only occur for the benefit of profit-seeking, although that is certainly a very powerful motivator and, in my view, a very worthy motivator of entrepreneurship. But many entrepreneurs start out because they want to solve a social problem or an environmental problem, or they want to cater to a need in their community that isn't being met by either government or existing corporate players. So there are lots of positive reasons why government should have an interest in promoting entrepreneurship.

I would like to turn now to what the recent data shows about entrepreneurship in Australia, because, although it's not overwhelmingly negative, there are certainly some sobering statistics that I think we should be mindful of in this debate. To assist me in doing that, I'm going to quote from the recent Productivity Commission report into business start-ups, Business set-up, transfer and closure, specifically from the second chapter: 'Recent trends in business set-up, transfer and closure'. It is the report on which this legislation is partly based—that is, the government's response to this report is this legislation. It's a very informative tool. To start with some basic facts, there are about 2.65 million businesses in Australia and the overwhelming majority of those, numerically, are small—97.6 per cent of them are small; 2.2 per cent of them are medium; and 0.2 per cent of them are large, according to some ABS statistics that the Productivity Commission has identified. When we are talking about business entries, it follows logically that most of the new businesses that are entering into the market are smaller businesses. It is pretty hard to enter the market as a big business, although from time to time, in some circumstances, that does occur, particularly if you have a significant amount of start-up capital behind you that allows you to enter the market. You will find that 99.3 per cent of business entries are in the 'small' category, which is above the existing representation of small businesses; 0.6 per cent of start-ups are in the 'medium-sized' category; and only 0.1 per cent are in the 'large' category. If you are a new business in the 'large' category, I would hazard a guess that you probably came about as the result of a merger, for example, of an existing business.

When we talk about business exits, which is an equally important piece of evidence when calculating entrepreneurship, the results are similar. Most businesses which leave the market, which have ceased operating, are also small. I guess this makes intuitive sense as well: if you have made it to being a medium-size business or a large size business, your prospects for longer term survival are strong. Of the business exits that take place each year, 99.1 per cent are in the small-business category, only 0.8 per cent are in the medium-size category and 0.1 per cent are in the large-size category. It should be said at the outset that businesses entering and exiting trading is a normal part of the economy. We certainly wouldn't want an economy where there were no businesses exiting, because some businesses do fail; that is just a part of a capitalist economy. We shouldn't necessarily seek to prevent businesses from failing. Certainly, if they're failing as a result of government policy, we have a great deal of interest in that, but, if they're failing because their business model didn't work or their business idea didn't work, it is not the role of government to intervene.

The number of businesses did increase in 2013-14. There was an uptick in that financial year, which was a really positive trend identified by the Productivity Commission. As a general observation, over the last decade the proportion of business entries has declined. What you can see—I can't show you, because it's a graph, but I will represent it—is a declining rate of entry of new businesses and a fairly flat rate of exit. What that effectively means is that there are fewer new businesses starting up and entering the economy. This is something that as a government and as a society we should be concerned about. As I mentioned before, the majority of those are small businesses.

It's also interesting to reflect on what the relationship is between rates of entrepreneurship or business entries minus business exits and the overall health of the economy. It would follow logically in some ways that, if the economy is growing, more businesses would be entering and, if the economy is weak, more businesses would be exiting. But that doesn't always hold; it's not always strictly true. There's not a direct relationship between those two things. Certainly, a prosperous, growing economy, generally speaking, is better for entrepreneurship and starting a new business, and a declining economy, you would think, is a difficult environment, but the overall trend of declining business entries that we've seen in recent years has occurred despite the fact that the economy has been growing, and that is worrying. Generally speaking, more businesses being created is a good thing, and you would hope that would in turn drive economic growth. It would logically flow that population growth would also facilitate new business entry. They're issues that the Productivity Commission has looked at.

I think it's worth comparing Australia to our international competitors to see how they're performing. I think it would be fair to say that we are about middle of the pack in terms of rates of entrepreneurship. There are countries that do it better than us and have higher rates than us. Particularly noticeable in recent years has been Israel, which is at a very high rate of entrepreneurship. Korea is another country with a very high rate of entrepreneurship. Generally speaking, around the world we have seen a holistic trend applying to all countries of declining business entry rates and declining entrepreneurship. This is not a problem which Australia is tackling in isolation. That points to the fact that it is not just a question of public policy and not just a question of what we here in government can do to help; there are wider cultural factors that are driving these things. What is it that causes people, in a cultural sense, to engage in entrepreneurial activity—to take risks and to start businesses?

I now turn to how we in government can help this process of entrepreneurship and business creation and also the risk that we impede and limit in that process. We do have a role to play here. Governments can, by putting good settings in place, really facilitate an environment where entrepreneurship is valued, where risk-taking is valued and where starting a new business is an easy thing to do. One of the best international comparisons is how many days it takes to register a business. In Australia, in a technical, legal sense, it's very easy. We're one of the quickest countries in the world in which to register a business. You can go to business.gov.au and get an ABN very quickly—in fact, you can get it in 24 hours. In some countries, that can take a month or six months, depending on the type of business you want to start and how you want to start it. In a technical sense, we do that quite well. We should always be very mindful in this place, particularly when we're considering new regulations in whatever area, that that is a barrier to entrepreneurship and new business creation.

We should remember that it is often the case that incumbent businesses, particularly large ones, in a perverse way benefit from regulation because it increases the barriers to entry. A small new business starting out in whichever sector, which has to contend with extensive and complex government regulation, is going to struggle to do so much more than a large existing business. That is obviously because, generally speaking, complying with government regulation is a fixed cost. If it's a fixed cost, then your incentive is to get as large as possible as quickly as possible so you can spread that fixed cost over as many customers and clients as possible. If you are a small business and you have to meet that same fixed cost that an existing large player has to meet, then you are going to find it very difficult. In a general sense, we should avoid, where absolutely possible, any red tape regulation that is unnecessary because it is a disincentive to starting a new business.

I want to refer to an article that demonstrates an even more concrete way that regulation has sometimes impeded innovation. In the interests of full disclosure, it was an article that I edited in my previous life as editor of the IPA Review at the Institute of Public Affairs, and it was written by Richard Allsop in the August edition of the magazine. Richard took us through the fascinating history of technological adoption in Australia, and there are some extraordinary examples of how, intended or unintended, governments delay the introduction of new technology and business start-ups. One particularly memorable example he gave was how delayed the introduction of FM radio was in Australia compared to the rest of the world. As Richard pointed out:

It was developed in the United States in the 1930s and was first used on an experimental basis in Australia in 1947. However, it was then effectively banned until 1974. So certain was everyone that the frequency and number of radio stations was set in concrete that Baby Boomers grew up listening to radios where the names of stations were printed on the radios. If the possibility of new AM stations was so unlikely, then FM seemed a world away.

Eventually, FM was allowed to be used by community classical music stations in Sydney and Melbourne, followed by an ABC station and finally, in 1980, by commercial radio. So, for more than 30 years, Australian radio listeners had been denied the opportunity to listen to music sounding better than it did on the traditional AM band.

There are lots of other examples like this—colour television is one, pay television is another—where government regulation actually prevented the introduction of new technology and new businesses. I think that the recent experience Australia has had with Uber versus taxi cartels is another pretty powerful example of where many other countries have had this service legalised far more quickly and for longer than Australia has, and Australian consumers are only now starting to benefit from it.

Finally, I want to turn to the bill that is before us—the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill. As Senator Macdonald very articulately outlined in his contribution to the debate, this is about encouraging a culture of entrepreneurship. This is about encouraging risk taking and saying that it is acceptable for a business to start and sometimes even fail. We certainly hope that all new business start-ups are a success, but we know the reality is that that's not going to be the case, and so we have to design laws which are fit for purpose and which allow that experimentation and failure to happen without it coming at too great a cost.

This bill amends the Corporations Act 2001 to improve our corporate insolvency system. No. 1, and most importantly, it will create a safe harbour for honest, diligent and competent company directors from personal liability for insolvent trading, if they are pursuing a restructure outside formal insolvency. Secondly, ipso facto clauses, which may allow the termination or variation of contracts based on a company's financial position or the commencement of certain insolvency proceedings, will become unenforceable during and after certain formal insolvency procedures. I think it's fair to say that our current insolvency laws put far too much focus on penalising and stigmatising failure.

As I mentioned, the Productivity Commission released their report in 2015, entitled Business Set-up, Transfer and Closure, which identified that Australia's broader insolvency regime generally works well but it could be enhanced by targeted reform. These insolvency reforms reflect two of those recommendations from the Productivity Commission.

The report identified that Australia's insolvent trading laws, combined with inherent uncertainty of determining the precise moment of insolvency, have been a driver behind companies entering into voluntary administration prematurely. Fear of personal liability deters angel investors from stepping in where they might otherwise help save a business. In response, the Productivity Commission recommended that a safe harbour defence for insolvent trading should be legislated. The report argued that:

… a properly constructed safe harbour defence is the best approach to both encourage good corporate governance and improve genuine opportunities for restructure.

The Productivity Commission also identified that the operation of ipso facto clauses can reduce the scope for a successful restructure or prevent the sale of a business as a going concern. Many countries restrict the use of such terms. Therefore, the Productivity Commission report recommended that insolvency related ipso facto clauses should be made unenforceable if the company is in voluntary administration or in the process of forming a scheme of arrangement.

Australia's insolvency system is often compared to the United States chapter 11 regime, and some people regard the chapter 11 regime in a positive way. In the US, if a company enters into a chapter 11 process, creditor rights are frozen and the court is then empowered to oversee the proceedings. In the Productivity Commission's view, in the Australian context increasing the role of the courts is unlikely to improve the speed and cost-effectiveness of external administration, and therefore the Productivity Commission doesn't recommend Australia going with the chapter 11 model, because it is potentially unwarranted and certainly undesirable.

Broadly, these measures are intended to encourage Australians to take risks, leave behind a fear of failure and be more innovative and ambitious. More often than not, as I said before, entrepreneurs will fail several times before they experience success, and they will generally learn very valuable lessons during that process. To help these entrepreneurs succeed requires a cultural shift. That is something that government can help with, and that is something that I think this bill goes some way to addressing. I commend it to the Senate.