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In Conversation: Australia needs tax breaks for innovation

Tasmania’s alkaloid poppy industry was an Australian innovation success story - until it moved overseas. Glenn Schultes/Flickr, CC BY-NC-ND

In Conversation: Australia needs tax breaks for innovation

Tasmania’s alkaloid poppy industry was an Australian innovation success story - until it moved overseas. Glenn Schultes/Flickr, CC BY-NC-ND

Australian innovation has stagnated in the past 50 years, and could be reinvigorated by focusing on key areas, according to Donald Hector, President of the Royal Society of New South Wales in an interview for The Conversation.

Agriculture, mining and biotechnology all offer huge potential for further development with the right incentives, including tax breaks for research and development, and more secure funding.

With budget cuts looming for Australia’s national science and research body, it’s a good time to assess the best way to encourage innovation.

The Commonwealth Science Innovation and Research Organisation (CSIRO) is reportedly bracing for cuts up to A$150 million in this week’s federal budget, following 300 jobs announced to go next year, and 400 positions axed last year.

The recent federal Commission of Audit recommended greater oversight of CSIRO, and abolishing climate bodies such as the Climate Change Authority and the Clean Energy Finance Corporation.

I interviewed Hector on the state of innovation in Australia today, and how we might once again become a world leader.

Read the full interview transcript here

Peter Doherty: Thinking in terms of Australia’s future, how important is it for us to expand activity in the innovation/high technology sector?

Donald Hector: It’s critically important. If you look at countries that have been successful since the early days of the Industrial Revolution they’ve largely done so through having highly innovative industries that maximise utilisation of technology.

Peter Doherty: Do you think that an expanded high technology sector should focus solely on areas like IT, encryption, software development and so forth, or should we also be expanding niche manufacturing and both heavy and light engineering applications?

Donald Hector: ICT is very important because there are enormous business opportunities in the industry; it’s still very much in its infancy.

But it’s also important to be developing niche operations and manufacturing capability in areas where Australia has a natural strength. Biotechnology and pharmaceuticals are a good example of that.

We didn’t really do much in the way of pharmaceuticals manufacturing at all until about 1948. We then started to manufacture penicillin. Australia was only the second country in the world manufacturing penicillin commercially and was the first country to make it available for the general population.

We started making penicillin in 1948 and by the mid-50s we were one of the biggest penicillin producers in the world, if not the biggest. In 1950 the value of locally-produced pharmaceutical actives was £6.7 million and imports were £630,000. Over 90% of pharmaceutical actives used in Australia were manufactured in Australia.

Today the reverse is so. Over 90% of active pharmaceutical ingredients are imported, and the local content is largely limited to formulation and repackaging.

We’ve gone from being in a very dominant position and self-sufficient position to an absolute devastation of that industry.

But it need not be like that. [Biotherapy company] CSL made the transition from government-owned enterprise to a highly-successful publicly-owned company, and is now one of the biggest producers of blood products in the world.

Tasmanian Alkaloids, which was started in Tasmania by Abbot Laboratories in the 1950s to produce opium alkaloids, was sold to Johnson and Johnson – why did this not end up in Australian hands?

Peter Doherty: What could the universities do better, both in the sense of discovery and translating discovery for economic benefit?

Donald Hector: I’m rather of the view that universities are best suited to doing pure research, and from time to time really good stuff will come out of that. But I think you need research institutions that are not constrained by a heavy requirement to produce income out of their research.

That’s best left to private sector, and possibly government, and that’s why I think the CSIRO and ANSTO (Australian Nuclear Science and Technology Organisation) are so important.

They should be the commercial arms as was originally intended, and develop industrial research so that it puts Australia at the forefront of innovation.

Peter Doherty: What could CSIRO and other government research agencies like DSTO (Defence Science and Technology Organisation), ANSTO do better to promote greater economic activity?

Donald Hector: CSIRO and ANSTO, and particularly CSIRO, are much maligned. They’ve created very innovative inventions over the years, and have been responsible for some truly fantastic technological developments.

But we expect them to deliver success with every project, and research is not like that. We also expect them to do so on shoestring budgets. There’s nothing worse than funding a project that might be expected to cost $50 million and finding out that it needs twice that, and then saying that you don’t have the money to continue and killing the program.

I’m not suggesting that we should be trying to pick winners, nor am I suggesting that we should hesitate in killing off research programs that aren’t going to deliver. But you’ve got make sure that you focus your funding on areas that are likely to be a success, kill off the programs in the early stages when they look like they’re not going to succeed, and heavily fund the ones that show potential until they are successful, recognising that that usually takes a lot more money than you originally expected.

Peter Doherty: What are the barriers from the business side?

Donald Hector: What Australian companies, particularly the top 300 of the ASX, have historically done is to have very strong government lobby groups and the Australian governments, irrespective of their political persuasion, have been very heavily persuaded by them.

What I think that’s led to is a lack of entrepreneurship. We lack a mittelstand in Australia of the type they have in Germany. I think there are about three million often relatively small, family-owned companies in Germany that typically that have a few hundred employees and they’re world leaders in a niche area. They supply world marketplaces and the big German manufacturing sector. We’ve never developed that here because we’ve been to eager too look after the larger companies that feel that the Australian government owes them a living.

Peter Doherty: What can government do better? Are the tax settings right?

Donald Hector: I’m not sure that a general tax policy in terms of support for industry is a good idea. We certainly need research and development concessions. We need to have some public funding to encourage research and development expenditure, and we’ve got to recognise that issue and provide tax incentives to encourage it.

If you look at the US, a lot of the high-tech industries there have their origins in defence industry. It’s not uncommon to find engineering faculties in the US universities with hundreds of millions of dollars from government research funding for defence.

If Australia decided to be a much bigger player in agriculture and mining where we have some very clear internationally competitive industries, why aren’t we more fully integrated into those industries? Why aren’t we the manufacturers of agricultural and mining equipment as we were once?

Why was the government response to the car industry crisis not more visionary? We could have taken the several hundred millions of dollars of car industry subsidies and made that money available to a couple of the big earth-moving companies like Caterpillar and Komatsu to establish their global research and development and world-scale manufacturing facilities here.

I am of the view that you need government policy to encourage the development of those industries, but you have to do so in a way that will be internationally competitive and will lead to a globally-competitive industry for the long term.

Peter Doherty: What are you aiming to achieve by re-invigorating the Royal Society of NSW, and how do you see such long-established institutions functioning in modern Australia?

Donald Hector: We want the Royal Society of New South Wales to be true to its original charter of encouraging studies and investigations in science, art, literature and philosophy. The main aim behind that is to advance knowledge and encourage innovation and entrepreneurship to develop the resources of New South Wales and, more broadly, of Australia.

We see our role as providing a forum where we can bring together people who are interested in seeing those things happen and being a facilitator so that we can bring important issues to public attention and to influence policy. We want to provide a place for people to meet who are engaged in those areas of human knowledge, for them to exchange ideas and to learn from one another.