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Speech to the Australian Private Equity and Venture Capitlal Association, Gold Coast.



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Speech

Speech by The Hon Lindsay Tanner MP Minister for Finance and Deregulation

Gold Coast

Thursday 1 October 2009

Good afternoon everyone.

It’s great to see such a large turnout here today. I have no doubt that the last 18 months has been an extremely challenging one for many people in the Venture Capital industry so I think it’s fantastic that you can come together like this, debrief on recent events and look forward to what the future holds.

I think it is very much testament to the robustness of the Australian economy that during a global recession the severity of this one, a conference such as this is so strongly attended (and held in such salubrious surrounds). Some of your equivalent associations around the world may not be in

such strong shape at present.

While Australia has performed relatively well during the global recession, the impact these global forces have had on our economy should not be underestimated.

The Government is doing all we can to uphold the shape of the economy, but what must be understood is that we are not going to return to the days of overflowing government coffers anytime soon.

I want to speak to you about this today; about how the global recession and the end of the mining boom has impacted on our economy and how in a fiscally constrained environment, we as a government, must direct effort towards activities that increase productivity.

I am sure you will all agree that to do that we must support innovation.

This week the Treasurer announced the final budget outcome for 2008-09, showing a modest fiscal improvement on the forecasts contained in this year’s budget. It was the latest in what has been a fairly consistent run of relatively positive economic data over the last few months.

It seems obvious but what people must remember is that the recent "strong" economic data is only in comparison with the events of the last 18 months, a global downturn worse than we have seen for 75 years.

The global financial crisis has had significant negative impacts on the Australian economy and while I am confident that our actions will bring us out of this period as strongly as possible, we cannot ignore its effects.

Australia’s economic growth slowed over the last year with 2008-09 recording a small rise of 0.6 per cent through the year, and 1 per cent in year-average terms. By comparison in 2007-08, real GDP grew by 2.4 per cent through the year, and 3.7 per cent in year average terms.

Australian Private Equity and Venture Capital Association

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As I am sure you are all aware, the economies of comparable countries around the world have fared significantly worse.

The G7 economies, for example, contracted by an average of 4.6 per cent in the year to the June quarter, with particularly large falls in the December and March quarters. This synchronised contraction in the world economy has impacted enormously on global trade and finance flows.

The prospects of economic recovery in Australia, a country which is very much a trading nation and a member of the global economy, are undoubtedly impacted by the muted recovery forecast for the world economy.

Our recovery is intimately linked with the performance of our major trading partners, the US, Europe and increasingly Asia. It is no secret that the continued growth of China has played a significant role in our relatively strong performance of late, as it will continue to play a key role in our economic growth in the future.

Some of the data that I think is of most value, and I think would be of interest to those looking to invest in business ventures, is the recent turnaround in both business and consumer confidence.

Business confidence as measured by the NAB monthly survey, has been positive since June and in August was at its highest since January 2005.

Similarly consumer sentiment, which is measured by the Westpac-Melbourne Institute survey, has been positive since June and currently sits well above its long term average.

The importance of these figures should not be overlooked. What they mean is that individuals, households and businesses are now significantly more willing to spend money than they were a few months ago. The resulting impact on jobs, on business investment, on the economy in general is massive.

With GDP growth in 2009-10 to be positive and stronger than the outlook at the last Budget, it is expected private sector activity, and in particular business investment will pick up this year and next.

There is no doubt, and I am sure I don’t need to explain this to anyone here today, that the global recession has had a major influence on business investment.

Facing weaker economic conditions and reduced demand, Australian businesses have been pulling back on a number of their investment activities while households have become notably more cautious in their expenditure.

Private business investment has recorded strong growth since 2002-03, with double digit growth over much of the period. In 2007-08, private business investment rose 15.4 per cent but slowed in the 2008-09 financial year to 6.8 per cent.

Remarkably, in this year’s March quarter business investment actually fell 6.2 per cent. This figure, representing a quarter just prior to when the majority of the Government’s stimulus packages began flowing into the community, is an indication of just how important our early and decisive action has been.

The small business and general business tax break for example assisted new machinery and equipment investment to rise by 5.7 per cent in the June quarter when the Treasury predicted that without the tax break, it would have shrunk by about 3 per cent.

Similarly, new engineering construction has risen by 5.2 per cent in the final quarter of 2009, showing our commitment to major infrastructure projects as a successful component of supporting the economy.

Of course, one of the major impacts of the global financial crisis on the industries represented here today has been the increased cost of and diminished supply of credit.

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Total business credit fell by close to 1 per cent in the year to July 2009, which in comparison with growth of more than 16 per cent over the previous year is a significant downturn.

Part of the reason for this has of course been the banks seeking to limit their significant exposures to large businesses, reduce their exposures to business sectors more vulnerable to the downturn, and tighten lending criteria more generally.

This is going to have some pretty obvious impacts on the businesses that each of you represent.

The reluctance of finance provides to lend to ‘risky’ ventures and a subsequent lack of cheap finance have meant the value of private equity transactions has fallen away considerably since it spiked at $26 billion in 2006.

It is interesting to note though that the supply of credit appears to have remained firmer than some participants expected earlier in the year, particularly in the area of syndicated loans.

In addition, there has been recent strong growth in capital raisings through equity and corporate bonds, which has more than offset the reduction in bank credit. Corporate bond issuance for the six months to June 2009 is at its highest level in at least four years.

As I said earlier, some of the figures that have come out over the course of this year, figures that give us some indication of what could have happened to our economy, show just how important it was that that we acted decisively to mitigate the impacts of the global recession.

The Government’s response largely began in October last year when we announced that we would guarantee deposits and wholesale funding of authorised deposit-taking institutions.

This decision to provide guarantees was taken because of the developments in international wholesale funding markets that had restricted the ability of Australian financial institutions to access funding. I am sure that I don’t need to tell all of you the potentially serious implications for liquidity and lending activity that could have possibly stemmed from this.

The guarantees are designed to reassure Australian depositors and assist banks, credit unions and building societies to continue to access funding in domestic and international credit markets. They are also designed to ensure that Australian institutions are not placed at a commercial disadvantage in relation to their international competitors that have received similar government guarantees on their bank debt.

For many of you, that bank guarantee will have been of vital importance in working through the global downturn but of course, it was one component of a broader strategy in dealing with the global financial crisis

In October and again in February, we announced stimulus packages that provided millions of Australians with cash payments, increased our investment in infrastructure and provided tax breaks to businesses.

This stimulus packages were designed to fill the enormous space in our economy that the global recession, along with other factors such as the end of the mining boom, had left.

They were about getting money out the door to support jobs today, but at the same time provide the building blocks to boost our future productivity.

And in this year’s budget we continued the roll-out of our response to the global financial crisis with more investment in the infrastructure and the skills development that will drive future economic growth in this country.

It has been our job to support the economy and jobs through the major turbulence caused by this global recession, we did not see the alternative - to sit back and just let a global economic cyclone do as it will - as an alternative at all.

And to provide this support, it was entirely necessary to run temporary deficits.

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I can assure all of you that the Rudd Government has a strategy, and a strategy that we are absolutely committed to, that ensures the sustainability of the budget over the medium term and will bring the budget back to surplus.

This will require considerable fiscal discipline, but through out commitment to holding real growth in government spending to 2 per cent per year until the budget returns to surplus and to find ongoing savings, we have set targets that we as a Government will be judged by.

Our task is made more difficult by the fact that, like other advanced economies, we face a considerable economic and fiscal long-term challenge from the ageing of our population.

So, our challenge is in fact, three fold.

We must provide the stimulus to support the economy during the short term.

We must apply fiscal discipline to bring the budget back to surplus in the medium term.

And we must take action to deal with the changing demographics to ensure the long-term sustainability of the budget.

While I have mentioned our commitment to restrain government spending and to achieving savings in the budget, there is one other area on which the Government is resolutely focused - investing to increase productivity and productive capacity.

Last night in Melbourne, I gave the annual Richard Searby Oration. It is an event in which a speaker is invited to address the audience on, what the speaker believes to be, a topic of key importance to the Australian community.

I spoke on productivity.

I spoke about how after a period of complacency in Australia, it was absolutely vital that we lift our productivity performance. Vital, because improving our productivity is key to economic growth in this country.

I mention this speech, and my firm belief in the need for us to improve productivity in Australia, because of the role innovation can, and must play in driving productivity.

By the fact that you are attending this conference, I would assume that every one of you has a vested interest in supporting innovation; an interest the Rudd Government shares.

Innovation increases economic productivity by allowing us to work in smarter, faster and more efficient ways.

Importantly, it also can increase our social wellbeing.

And while this Government recognises the importance of innovation, it cannot fall to the Government alone to fund it.

As it should be in all areas of Government spending, our investment in innovation needs to be well targeted, evidence-based and weighed against competing fiscal demands. As the Minister for Finance I am acutely aware of these competing priorities.

For this reason among the Government’s first actions in 2008 were to both terminate poorly performing programs and undertake a review of Australia’s National Innovation System.

This review identified the areas of market failure and gaps in current government support for innovation. It also identified areas of overlap between state and Federal funding.

One of our key roles is to establish the basic architecture that supports innovation and economic productivity.

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We need a stable, efficient and equitable taxation system; a skilled and educated workforce; productivity-enhancing infrastructure including 21st century communications and transport networks; and importantly, we need public research infrastructure.

The Government allocated $3.1 billion in the 2009 - 10 Budget for public and private sector research and development over the next four years.

This is a significant figure when you consider that it will mean Australian Government investment in science and innovation will increase by close to 25 per cent between 2008-09 and 2009-10.

A key focus of this increased expenditure has been on support for public and scientific research infrastructure with the 2009-10 Budget including:

z More than $700 million to increase the capacity of Australia’s universities to develop the

ideas and technologies needed to build a more innovative Australia;

z More than $1 billion to expand and develop Australia’s knowledge in key areas such as

‘Space and Astronomy’, ‘Marine and Climate Science’ and the development of biotechnology and nanotechnology based industries;

In my own electorate of Melbourne, I have seen the importance of innovation hubs such as that in the Melbourne University precinct.

The research and commercial linkages that exist between the university, hospitals, research institutions and private companies such as CSL within that precinct have resulted in some world class innovations.

Of specific interest to those of you here today would be the support the Government is providing Australia’s business innovators.

In the last budget we committed an additional $414 million to support business innovation through initiatives such as:

z $196 million to establish the Commonwealth Commercialisation Institute to assist Australian

business translate their ideas into commercial reality; and

z $83 million as additional support to companies relying on early-stage venture capital funding

cope with the impact of the Global Financial Crisis.

In establishing this new suite of business innovation measures, we were very mindful of the need to improve on previous programs to ensure Government supports only additional research, development and commercialisation activity.

The Review of the National Innovation System conducted by Dr Terry Cutler found that across the Commonwealth and States there are already 221 separate programs which spend approximately $3.7 billion annually to supporting innovation in firms.

Most of the activity focuses on the early phases of the innovation chain - that is research and development - with about one quarter of expenditure supporting the later phases such as proof of concept and early stage commercialisation.

These gaps in the path from experimental development to commercialisation are sometimes referred to as the “Valley of Death” where new concepts fail before achieving commercial viability.

In a speculative area such as innovation, we would and should expect some ideas to fail.

That said the Commonwealth Commercialisation Institute is being established specifically to address the challenges faced by innovators as they seek to traverse the “Valley of Death” successfully.

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It will complement, not duplicate, existing State and Territory programs.

It will leverage, not displace, private investment.

It will focus on additionality. That is, supporting only those proposals which are viable but would not be supported otherwise.

As well as supporting the commercialisation of promising public sector research, the institute will assist innovative firms with strong growth potential, helping them take their ideas and technologies to market.

It will deliver hand-on support tailored to individual needs, including by providing access to experience business mentors, specialist commercialisation services and funding for proof-of-concept and early stage commercialisation activities

The CCI has been informed by the successes and failures of the past.

Two of the most well known Federal Government programs which operated in the later phases of the innovation value chain are the Commercial Ready Program and the Commercialising Emerging Technologies (COMET) program.

One of these has been a success and the other a failure.

The Commercial Ready program was discontinued in the 2008-09 Budget because a 2007 Productivity Commission Report found that there was robust evidence that it was supporting too many projects that would have proceeded without public support.

The Productivity Commission Report proposed that to be effective a program in this space needs a simpler set of guiding principles that address aspects such as:

z inducement contestability;

z avoidance of a risk;

z administrative and compliance efficiency; and

z accountability and transparency.

In contrast to Commercial Ready a recent April 2008 evaluation of the COMET program found it to be highly successful primarily because it focused on building the skills and knowledge of the individuals seeking to commercialise an innovation rather than require they already exist as Commercial Ready did.

Lessons from both these programs will be used by the Commonwealth Commercialisation Institute to ensure that its activities are directed to improving the chance of commercialisation of innovative Australian ideas.

The 2009/10 Budget also contained our commitment to replacing the current R&D Tax Concession with a Tax Credit, essentially doubling the level of support for innovative small businesses.

The tax credit will provide:

z A 45 per cent refundable tax credit for firms with a turnover of up to $20 million; and

z A 40 per cent non-refundable tax credit for all other firms.

The new scheme is more generous, simpler and more predictable.

It decouples R&D tax incentives from the corporate tax rate.

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And it is consistent with world’s best practice, creating a new system that will be familiar to overseas investors.

The package of changes we are introducing are intended to be revenue neutral.

To do this, the new arrangements will target R & D activity that is truly additional and provides large spillover benefits to other firms and the community at large.

The details of the tax credit, including eligible R & D activity, are currently being refined in close consultation with stakeholders, with it due to come into effect in the next financial year.

I understand that the Treasurer and the Minister for Innovation, Industry, Science and Research, Kim Carr have released a discussion paper that offers all stakeholders with the opportunity to make their voices heard.

I would urge you to take up that opportunity.

The R&D tax credit outcome is a good example of the challenges we as a Government face, and our strategy for tackling them.

We are resolutely committed to investing in initiatives that will drive Australia’s productivity growth, initiatives like the R&D tax credit that will support innovation, but we must do so in an environment that is far more fiscally constrained than what has been the case recently.

This means we must come up with innovative solutions of our own to ensure we get maximum value from every dollar of Government expenditure - a challenge the Rudd Government is meeting.

Media Contact: Website:

Nardia Dazkiw - 0418 144 690 www.financeminister.gov.au

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