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Thursday, 1 December 1983
Page: 3139

Dr HARRY EDWARDS(10.18) —The three Bills before the House, the Industrial Research and Development Incentives Amendment Bill, the Australian Industry Development Corporation Amendment Bill and the Management and Investment Companies Bill have a variety of purposes but they share in common the aim to promote high, advanced or new technology industrial development in Australia, particularly new so-called sunrise industries, that is, new science and skill based industries. The most important of the three measures is the Management and Investment Companies Bill. Later I will have more to say about the first two measures but I will start with the Management and Investment Companies Bill. The Minister for Science and Technology (Mr Barry Jones) in the opening sentence of his second reading speech said:

This Bill proposes to promote the establishment and development of a private sector venture capital market in Australia.

He continued:

The Bill provides for the establishment of management and investment companies (MICs). The Government will encourage investors to participate in these management and investment companies by providing a 100 per cent tax deduction in the year in which the capital is subscribed.

I repeat for the benefit of the House the opening statement of the Minister. He said:

This Bill proposes to promote the establishment and development of a private sector venture capital market in Australia.

This will be by means of the 100 per cent tax deduction. Since the dearth, the virtual absence, of venture capital has been arguably the major proximate obstacle to the development of new high technology business in Australia, the importance of this measure is clear. The first paragraph of the explanatory memorandum of the Bill, which was prepared under the aegis of the Minister, states:

The purpose of the Management and Investment Companies Bill is to encourage the formation and development of Australian businesses which utilize innovative technology, have the potential for rapid growth, are skill intensive, export oriented, internationally competitive and are significant generators of employment in Australia.

Those objectives and this Bill have the support of the Opposition. If it were still the practice, as it used to be, to have a clause explicitly setting out the objective of the Bill, that opening paragraph of the explanatory memorandum which I have just read would undoubtedly be the objective of the Bill. In the event, that purpose is embodied in clause 29 (6) (f) of the Bill which, via the provisions of clause 29 (7), becomes a sort of override clause in the definition of the nature of an eligible high technology business in this context. I will return later to the general framework of the Bill. Eligible businesses are defined in clause 29 (6). Paragraphs (a) to (e) refer to a variety of characteristics which were proposed by the Espie report. But even if some of those characteristics do not apply, a business is eligible provided, according to clause 29 (6) (f), it is a business that:

(i) utilizes innovative technology;

(ii) is export oriented;

(iii) is internationally competitive;

(iv) has the potential for rapid growth; and

(v) has the potential for creating significant skilled employment in Australia. In that sense the opening statement of the explanatory memorandum is given effect in the Bill. I am pleased to see that the Bill is framed in that way. To inject a personal note, I have been associated with a new high technology enterprise in my electorate which could not yet satisfy paragraph (d) as to a 20 per cent growth in sales because the product has yet to come on to the market. But when it does come on to the market I am confident the rate will be not 20 per cent but 100 per cent per annum or even higher. So, as paragraph (f) provides, the enterprise has 'the potential' for rapid growth-and certainly the enterprise utilises innovative technology, is export oriented, is potentially internationally competitive and has the potential to create significant employment. Unfortunately, this measure is too late for that enterprise. The entrepreneur inventor, in order to arrange venture capital, got in debt up to his neck, even I suspect succeeded, where many would fail, in mortgaging his mother-in-law's house as well as his own. With no certainty about where the next meal was coming from, it was necessary to conclude a deal with an overseas based company. So unfortunately much of the action accordingly has been lost to Australia. I think that case underlines the importance of a measure of this nature.

I think it is important to say something about the background of this measure. It had its origins in a reference by the former Minister for Science and Technology, the Hon. David Thomson, in March 1981 to Sir Ian McLennan, the then President of the Australian Academy of Technological Sciences. Sir Ian was asked to institute steps to inquire into ways of assisting, particularly financing, high technology industrial development. The High Technology Financing Committee of the Australian Academy of Technological Sciences was appointed, headed by Sir Frank Espie of Conzinc Riotinto of Australia Ltd. That Committee presented its final report, which I have in my hand, to the House in April 1983. This measure implements in very close detail the recommendations of that report. It is building on an initiative by the Hon. David Thomson who was a member of the previous Government. I pay tribute to him in that matter. I also congratulate the Government for following through and implementing the measure.

In broad outline the purpose of the measure is to provide this tax deduction as a means of encouraging the supply of venture capital. It does endeavour to set up a mechanism with a view to limiting the total amount of money which attracts the deduction and hence the cost to the Government, and also to minimise exploiting the proposal for tax avoidance purposes. The mechanism involves a procedure to establish a board, primarily of businessmen, to licence management and investment companies, hence the title of the Bill-the Management and Investment Companies Bill. Investment in these companies will attract the tax deduction. These companies, in turn, will seek out and invest in eligible, small , often high technology and potentially high growth companies-as a guideline a growth rate of greater than 20 per cent is envisaged. That, in outline, is the shape of the scheme. I stress in passing that the emphasis on management as well as investment is envisaged because not only would the MICs provide finance but also they must possess adequate management, technological and marketing skill to provide that sort of assistance to small fledgling companies.

The criteria in respect of the licensing of the investment companies and the eligibility of small businesses are very broad. In this way the scheme gives effect to the tax deduction while minimising Government involvement and leaving to the private sector and the market place where it belongs, the picking of winners and losers in this area, the selecting of investments and the risk taking.

That in broad outline is the scheme. There is a provision in the form in which it comes before the House for the licensing board, established under the legislation, to certify eligible businesses prior to the MIC committing the investment. The Espie Committee provided for this to be done on request in terms of the board expressing 'a non-binding opinion.' This would hardly have been a satisfactory procedure if it had left the way open for the Commissioner of Taxation subsequently to judge that investments had been made in businesses which were not the target of the legislation, and from that for the tax deduction for the MIC to be disallowed. Consequently the Bill provides for the Board to certify, in effect in a binding way within the terms of the Bill, the eligible companies according to the very broad criteria laid down in clause 29, particularly in clause 29 (6) (f). I stress that this certificate is not-repeat not-an expression of opinion by the Board that the investment is a good one, a commercially viable one. That is a key point. Commercial judgment about the investments to be made, the selection of investments and the risk-taking, rests with the management and investment company. It rests in effect with the private sector, where it belongs.

There are a couple of other aspects of this Bill upon which I will touch briefly. The total amount that the Government envisages to be provided for licensed MICs is of the order of $40m. There is a provision that each should have a minimum of $5m. I think this implies that a rather limited number of such licences will be issued. A question arises as to how effectively an MIC could operate with capital of the order of $5m. It certainly would be necessary, if an adequate spread of risk is to be achieved, that something of the order of 10 or 15 investments would need to be made in eligible businesses. Out of 10 businesses, we are likely to get at most one or two that will be any sort of roaring success, and many of the others will be complete failures. I mention that point. I provide the answer to the Minister in case it does not occur readily to him: I suspect that it is a reasonable view that the Government, in this measure, is attempting to seed the development of this private venture capital market; then, of course, it is up to the MICs themselves to acquire other resources and to create the potential for an enlarged portfolio.

Mr Barry Jones —There is a symbolic element in it too.

Dr HARRY EDWARDS —Perhaps the Minister might comment further on that later. I think the only other point I would perhaps make is that the legislation came into the House only yesterday. It is not easy, therefore, to have fully absorbed the legal and accounting fine print, though of course, there will be an opportunity to comment in that respect in the other place. The one other aspect to which I wish to draw attention is this. I believe that, if there is not, there should be provision for capital payments to existing shareholders in eligible businesses. Supposing $1m goes into an eligible business where the founding entrepreneur finds himself mortgaged to the hilt, as is typically the case in these areas. Is it acceptable that, in respect of financing by an MIC, with the $1m injection, $100,000 or $200,000 be made as a capital payment to the founding entrepreneur to relieve him of his debt and the balance to go into the future development of the business? I only raise that matter as a query.

The final point I make is that this Bill requires complementary tax legislation . We have not seen the colour of that legislation as yet. I think it is pretty important that that legislation come along expeditiously from the point of view of those anxious to proceed to the establishment of management and investment companies. I can see problems in one particular area. Since gains from investment in this very risky area accrue in a significant way from the appreciation in the capital value of shares of a successful eligible business, in the event of the disposal of the shares how are such gains to be treated for tax purposes? I suggest only that the Minister reflect on that. As I have said, the Opposition supports this measure.

The second measure before the House is the Industrial Research and Development Incentives Amendment Bill, which also is designed to have an impact in this area . In fact, the Minister said in his second reading speech that it is:

. . . the Government's intention to use the Australian industrial research and development incentives scheme as its primary instrument in directing investment to the development of 'sunrise' industries.

I would have some reservations about the wisdom of that. Before going on to that , let me say that the principal provision in this amending Bill is to extend the ambit of the Industrial Research and Development Incentives Act to include research and development undertaken in relation to the production of computer software as an end product. Hitherto only computer software in the course of the development of a project or a process in manufacturing, mining or certain areas of construction have been eligible. The situation is, of course, that software- that is, the tape or package which embodies the program which instructs the computer, so to speak, as to what operation to perform-has burgeoned as an industry in itself. This represents a significant and necessary extension of the Act.

What concerns me about the Minister's statement that this should be the primary instrument for the development of so-called sunrise industries is the point that I have stressed in this House before and stress yet again; that is, that high, new or advanced technology is important not only in respect of the emergence of new industries producing high technology products as such but also in the upgrading, the revitalising, the renewing of existing industries. After all, for many years yet existing industries will be providing the bulk of employment in industry. That is an important area in terms of the potential impact of emerging high technology.

It is common ground that the level of private sector expenditure on industrial research and development in Australia is too low. At about 0.24 per cent of gross domestic product it would be the lowest among advanced countries in the world. It is an agreed objective that a substantial rise in private industry research and development activity should be encouraged in Australia. The Australian industrial research and development incentives scheme-the AIRDIS, as it is called-which this Bill is amending, is indeed an instrument to that end. There are some very real constraints on industrial research and development in Australia. It is not a matter of chance that it is so low. One can cite the small scale of Australian industry, the generally very high cost of developing modern new products and processes, not to mention the cyclical factor of the low profitability of businesses in recent years. Those are quite fundamental factors contributing to the relatively speaking, very low level of industrial research and development in Australia.

That having been said, I come back to the assertion that it is a sound view that a substantial rise in this level should be encouraged and that a higher level of industrial research and development would nourish production and sales and, in turn, would be driven by market success, in both the areas to which I have referred. One is in the area of so-called sunrise industries-in the context , in effect, of matching the Australian national effort in science and research, which by and large stands high in international terms, with a corresponding effort to produce indigenous new technology. We often speak of science and technology or research and development as hyphenated; as if they were one thing. In fact, it is important to distinguish between science and research on the one hand and technology development on the other. In the area of science and research, Australia ranks high by any quantitative or qualitative measure. But we lag behind in the area of technology development carried through into production and sales in the market place. It is important that we match the Australian effort in science and research and innovative ideas with a corresponding effort to produce indigenous new technology and thence, new Australian industries.

But it is also important-the other area-to adopt in existing industry, state-of -the-art or more nearly state-of-the-art technology. Even if we succeed in matching the national scientific and research effort with a corresponding technology development effort, we will still, and we always will, be dependent on technology developed overseas as the principal source of new technology in Australia. After all, if we match our science effort of the order of 2 per cent of world science, the other 90-odd per cent will be done somewhere else. That is not just 'colonial dependence on overseas' or any other such pejorative term that some may choose to use. It is simply stating the fact that even if we do pull our weight in terms of our skill and resources a lot of new technology will still have to be derived from overseas. I believe that what is important in this area is that a lively research and development effort in an existing firm is highly correlated with the adoption of state-of-the-art, or more nearly so, technology in those companies to the benefit of the companies' international competitiveness and thence long term sustainable employment in Australia.

It is in that context that I go back to the Minister's statement in his second reading speech that the industrial research and development incentives scheme is to be the Government's primary investment instrument for the development of sunrise industries. If that statement were to mean some curtailment of support for industrial research and development in existing industries-the second area to which I have referred-that would lend added weight to the view which is advanced by the Australian Science and Technology Council and many other prestigious bodies that the industrial research and development incentives scheme needs, by way of a complement, another measure in the form of a tax-based incentive. The ASTEC proposal is that there should be a write-off premium for industrial research and development of the order of 50 per cent which would involve the same order of subsidy for industrial research and development as AIRDIS itself. Such a tax-based incentive would be more market oriented. It would avoid the inevitable delays and difficulties that arise with a centralised grants scheme such as the AIRDIS. It would facilitate business planning and decision-making and also encourage a greater private sector involvement with universities and other public sector research and development activities.

The third Bill in this area is the Australian Industry Development Corporation Amendment Bill on which my colleague the honourable member for Ryan (Mr Moore) will speak in more detail. That Bill contains a number of modifications which were largely the recommendations of the House of Representatives Standing Committee on Expenditure. But in particular, there is also the suggestion that the Australian Industry Development Corporation should become involved in this venture capital area. I do not know that the AIDC has had a very impressive financial record though it has been much improved in recent times. Its established role is in the raising and lending of sizable amounts in the medium and long term area. The venture capital area which is the early provision of equity capital at a very high risk in the early or start-up phases of a business is a very specialised function calling for an entrepreneurial approach and close knowledge of the technology market, for speed and personal involvement on the part of venture capitalists and also for that judgment which is developed in the private sphere from the necessity to select and nuture winners on which the investing company's very survival depends, as will hapen in the case of the MICs . In that particular aspect of the proposals I suggest the AIDC does not fit that mould too well.

I would like to conclude essentially on this note: Before that, in respect of the Management and Investment Companies Bill, I wonder why, in the list of industries for eligible businesses, something like mining equipment and processes is not included because I think that is an area closely related to one of our major industries where there could be a good deal of innovative activity. Mr Barry Jones-How would you go with $5m?

Dr HARRY EDWARDS —I am not referring to the development of mines. I am not talking about that.

Mr Barry Jones —How would you go with $5m?

Dr HARRY EDWARDS —That is one company only; we are talking about $40m all told. I mention the point only in passing. I conclude on this note: We have been discussing the management and investment companies, AIRDIS and the possible measure proposed by ASTEC for a write-off premium. None of these measures will succeed unless the overall climate of the economy is appropriate and unless we get the macroeconomic settings of the economy right and address other structural difficulties and rigidities in the Australian economy. I think that is the most important consideration.

Mr DEPUTY SPEAKER (Hon Les Johnson) —Order! The honourable member's time has expired.