The Australian Consensus Centre: what are the costs and benefits to UWA?

The University of Western Australia’s Winthrop Hall. UWA

This column is usually focused on the role of entrepreneurship, innovation and small business in the Australian and global economy. However, I am devoting this article to a discussion over the costs and benefits of the plan to establish the Australian Consensus Centre (ACC) at the University of Western Australia (UWA). This is in the spirit of academic freedom and is a reflection of a senior UWA academic staff member who cares deeply about the reputation of my institution.

Since Lenore Taylor’s article in The Guardian on Friday 17 April, of the federal government’s plan to grant $4 million to UWA to establish the ACC, the issue has generated significant national and international media attention. It has also evoked a strong and largely negative reaction from the UWA staff and students. This is principally driven by its association with the controversial climate science sceptic Dr Bjorn Lomborg.

Every day that passes appears to generate a new twist or turn to this story and generally raises more questions than answers. Dr Lomborg visited UWA in March 2015 and gave a lecture at the Business School. However, despite a low-key announcement on 2 April, there was little discussion about the ACC with the staff. Even within the UWA Business School. The connection with the federal government was also held in confidence until The Guardian report later that month.

Of particular concern is whether the benefits that UWA might accrue from hosting this centre outweigh the costs.

Dr Bjorn Lomborg the academic

The central character is this story is Dr Lomborg a 50 year old Dane who founded the Copenhagen Consensus Centre (CCC) and who will play a critical role in the UWA ACC. While his background is widely published in other media, it is worthwhile summarising the story of Lomborg and the creation of the CCC as it provides an important context for understanding the proposed new centre at UWA.

Lomborg graduated with a Master of Arts in Political Science from the University of Aarhus in 1991, and a PhD in political science from the University of Copenhagen in 1994. His academic career comprises a period as an Assistant Professor (1994-1996) and then Associate Professor (1997-2005) at the University of Aarhus, where he taught statistics within the Political Science Department.

His early academic career saw his research focus on game theory. Between 1991 and 2001 Dr Lomborg published about 20 papers, most of which were outside the peer reviewed journals. They include a book chapter on game theory and the iterated prisoner’s dilemma published in 1994, and a peer-reviewed article in the American Sociological Review published in 1996 titled “Nucleus and Shield: The evolution of social structure in the iterated prisoner’s dilemma”. This latter paper has been attributed with 141 citations since its publication and remains Lomborg’s most highly cited work in the peer reviewed literature.

This track record in the peer reviewed scientific literature is unexceptional. It has led Professor Sarah Dunlop Head of the School of Animal Biology and Head of Experimental and Regenerative Neurosciences at UWA to question how he could be appointed as an Adjunct Professor at the university. In a letter to the Vice Chancellor Professor Dunlop suggested that Lomborg had only 28 publications with 55 citations with one paper (Nucleus and Shield) accounting for 84% of the total. She suggested that his “H-Index” (a measure of the number of citations a paper or author has received over their life time) was a paltry “3”.

Citations metrics are an important measure of an academic researcher’s performance and are used as a factor when considering appointments and promotions. However, the collection and scoring of citation metrics is made complex by the way it is collected and reported. As an article in conservationbytes.com explains, depending on which database is used the citations increase. Further, since 2001 Lomborg has mainly published books, many of which are best sellers and these are generally very heavily cited.

However, these books remain outside the realm of the double-blind peer-reviewed literature, which remains the gold standard for academic currency. So Dr Lomborg who at best might have an H-index of “4” is not a research academic from the perspective of conventional science. Instead he is a prolific author in the mainstream media with a very large number of articles published in leading newspapers including The Economist, The Washington Post, Wall Street Journal, The Times, The Guardian and Scientific American.

Dr Lomborg the sceptical environmentalist

In the late 1990s Lomborg shifted his focus away from game theory and onto politics and then the environment. He published another book chapter in 1997 titled “Simulating multiparty systems”. However, it was his foray into environmental issues where he made his mark. According to a review of Lomborg’s work by Jeron van den Bergh, published in the Journal of Integrative Environmental Sciences in 2010, the shift to environmental policy commenced in February 1997.

At that time Lomborg was in Los Angeles where he allegedly read a magazine interview with American economist Julian Simon. It was Simon’s claim that his own analysis of the publicly available statistics found that the “doomsday” claims of climate science were incorrect. This captured Lomborg’s interest and he sought to use his knowledge of statistics to replicate Simon’s work.

He reportedly set up a study group with his students and claims to have found that Simon was correct. In 1998 he published a series of articles in the Danish newspaper Politiken outlining his findings, which triggered a major debate across all forms of media. By 1998 he had published a book in Danish Verdens Sande Tilstand (The True State of the World), summarising his claims. It was positioned as a counter to the World Watch Institute’s annual report on “The State of the World”.

In response the Danish Ecological Council (an independent advisory committee on environmental matters) organised a counter publication to Lomborg’s work. They commissioned experts with no association to environmental organisations and the work Fremtidens Pris (The Price of the Future) was published in 1999. This book drew together 18 authors from a range of academic disciplines. They were critical of Lomborg’s work across areas such as biology, environmental science and social science.

This battle with the scientific establishment led to Lomborg publishing his best-selling book The Skeptical Environmentalist in 2001. This was essentially an English version of Verdens Sande Tilstand with a series of amendments including an expanded chapter dealing with global warming.

He has subsequently published several other books such as Global crises, global solutions (2004) and Cool It: the skeptical environmentalists’ guide to global warming (2007). These publications have given Lomborg the international profile that he now has and propelled him from a relatively obscure Danish academic in game theory, to a global celebrity.

Is Lomborg a scientist or a polemicist?

Dr Lomborg is often described as an environmental scientist or an economist, and has received a range of awards and accolades from media organisations such as Foreign Policy, The Guardian and Businessweek, as well as the World Economic Forum. However, his work on climate science has generated fierce opposition from the majority of the scientific community, as well as support from many in economics, the social sciences, and business.

Although he does not deny the existence of anthropogenic climate change, Lomborg plays down its likely impacts on the planet. His book The Skeptical Environmentalist invoked attempts to stop its publication by Cambridge University Press, and then at least three formal complaints to the Danish Committees on Scientific Dishonesty (DCSD) in 2002. A detailed account of this matter is outlined in van den Bergh’s article.

The DCSD conducted a detailed investigation and gave Lomborg the right of reply to many scientists who accused his book of scientific dishonesty. The committee concluded that the book was “deemed clearly contrary to the standards of good scientific practice”. However, they did not find him guilty of committing scientific dishonesty because they did not consider him to be a scientist. As van den Bergh explains:

“The DCSD decided that The Skeptical Environmentalist was ‘deemed to fall within the concept of scientific dishonesty’, because the book was based on a systematically biased choice of data. However, the DCSD did not feel able to judge that Lomborg had misled his readers deliberately or with gross negligence, because of his lack of scientific expertise on the themes treated in the book.”

So the conclusion drawn by the DCSD was not that Lomborg’s book was credible science, or in fact “scientifically honest”, but simply that Lomborg was not a scientist and knew too little about science to be able to know that he was being dishonest.

For most academics this would have been a crushing blow, but Lomborg actually prospered from the exercise. He was supported by a counter-reaction from a large number of Danish social scientists who challenged the DCSD’s ruling. Lomborg filed a complaint to the Danish Ministry of Science, Technology and Innovation (DMSTI) against the DCSD (over which it was responsible). The Ministry deferred the matter back to the DCSD, which rendered the case against Lomborg invalid.

According to van den Berg the DCSD decision to invalidate its previous ruling was based on the argument that it had not found Lomborg acted with “intent or gross negligence”, and therefore found no reason to reopen the case. However, while it offered Lomborg a way to vindicate himself, it also ignored the DCSD’s earlier claim that Lomborg was lacking in any scientific expertise.

The reactions from the scientific community to Lomborg’s books have remained strong and largely negative. For example, in 2002 the Scientific American published an editorial in which a number of leading scientists were asked to comment on what Lomborg had said about their fields. They encompassed climate science, energy, population growth and biodiversity. A common conclusion was that Lomborg had selectively “cherry picked” the data to support his arguments.

A review of The Skeptical Environmentalist by Andrew Aulisi was published in the Quarterly Review of Biology in 2003. This is a relatively objective analysis of the book, in which Aulisi found a number of positives. However, he raised numerous concerns. These include: “…the emergence of a pattern of careless and selective use of statistics”, and the attacks that Lomborg makes on the established scientific community in relation to global warming, and the risk of extinction of many species. According to Aulisi:

“The Skeptical Environmentalist slants its coverage of climate science disproportionately in favour of skeptics, incorrectly assesses the design of climate models, overlooks key factors in estimates of greenhouse gas effects, uncritically accepts speculative theories on warming, and is generally deeply flawed and biased”.

Many other scientists have responded to Lomborg’s work pointing out the flaws in his methodology and selective use of data. For example, van den Bergh summarises a long list of criticisms covering methodological bias, conceptual and theoretical weaknesses, selective use of data, errors of fact, inappropriate data analysis and use of statistics and referencing. Many simply accuse his work of being “polemic” rather than “scientific”.

In 2005 Luis Bini and four colleagues published a paper in the journal Conservation Biology. They critically examined Lomborg’s claims that climate change was not having as negative an impact on biodiversity as many scientists believe. They undertook a major review of the scientific literature and drew the conclusion that Lomborg was wrong in his optimistic outlook.

His work was also vigorously criticised by writer Howard Friel in the book “The Lomborg Deception”. Friel argued that many of Lomborg’s supporting citations used in his books were actually saying the opposite of what was being claimed. This matter was reviewed by Sharon Begley in a Newsweek article published in 2010. It provides a critical analysis of Friel’s work and the response from Lomborg.

I provide this background on Lomborg’s academic work because this controversy surrounding his claims against climate science lies at the heart of the political brouhaha surrounding the UWA ACC. It is also a major reason why Dr Lomborg has been able to build such a high international profile.

As many reviewers of his work suggest, Lomborg is more a polemicist than a scientist. It is an important distinction and while there is no problem in someone being a polemicist they should not be confused with scientists or serious academic researchers.

Climate science politics and the rise of the “Consensus Centre”

Undoubtedly the controversy surrounding Lomborg’s scepticism helped his career. Science and politics are uncomfortable bedfellows. The debate surrounding climate change and the appropriate policy responses to its challenge have polarised the community and become a major platform for political ideology. Lomborg has successfully positioned himself into this arena as a concerned environmentalist who refuses to be panicked by the doomsday scenarios predicted by the majority of scientists. Instead he offers an apparently objective view in which economics not science is the key to addressing global problems.

This is an appealing argument for those who wish to deny climate change, or at least downplay its possible impacts. It has been a major reason why Lomborg has been able to build his profile and establish the “Consensus Centre”. Once more a bit of historical perspective is required.

In 2002 Lomborg was appointed, by the newly elected conservative government of Anders Fogh Rasmussen, to head up Denmark’s new Environmental Assessment Institute (EAI). This appointment was made on the basis of Lomborg’s high profile as a climate science sceptic following the publication of The Skeptical Environmentalist the year before. Although appointed to the EAI for 5 years he resigned as Director in 2004 remaining on as a part-time consultant. His time as Director of the EAI was allegedly not without its controversy, and some of the research produced from the institute was reportedly criticised due to flaws in methodology and recommendations.

However, Lomborg used this time to devise his “consensus” project, designed to draw together some of the world’s leading economists to discuss and rank in priority order “the 10 greatest problems facing humanity today”. This was to be called “The Copenhagen Consensus” and was the beginning of Lomborg’s transition into the CCC.

Despite concerns over the project voiced by the board of the EAI, apparently leading to the resignation of five out of seven Directors, “The Copenhagen Consensus” conference was held in May 2004. It took place over five days with funding from the Danish Government and The Economist newspaper. A report on the results of this first “consensus” reveals that it assembled “eight of the world’s most distinguished economists” who examined ten global challenges and 30 proposals commissioned in advance from selected experts. The task for the distinguished panel of economists was to assume they had $50 billion of government money to allocate, and to undertake a cost-benefit analysis ranking each project in order of priority for funding.

The outcome of the first “consensus” created a negative reaction from many within the environment movement. This was because it placed the control of HIV/AIDS, the provision of micro nutrients, trade liberalisation and control of malaria in the top four places. By contrast action on climate change via carbon taxes and the Kyoto Protocol were considered “bad” and ranked at the bottom.

In 2006 Lomborg established the CCC and with Danish government support staged two more conferences. The second “consensus” conference was held in May 2008. It focused on how to spend $75 billion to advance global welfare. The third “consensus” conference was held in May 2012 and followed a similar pattern to the first two. In each case 30 project proposals were commissioned in response to 10 major issues. They were reviewed and given to a panel of distinguished economists who had around three days to assess and rank the projects as they allocated the nominal money. As with the first “consensus” the second and third saw spending on vitamin and zinc supplements to children, infectious disease control, or global trade as being of more importance than climate change mitigation.

In 2011 the centre-left government of Prime Minister Helle Thorning-Schmidt took power in Denmark and the following year funding for the CCC was withdrawn. Faced with this loss of government funding Lomborg moved to the United States where he had registered the CCC as a not-for-profit organisation in 2008.

The birth of the UWA ACC

Now Lomborg has apparently found a new home for the CCC in Australia. The generous provision of $4 million to get the new centre established at UWA appears to have been driven by the Prime Minister Tony Abbott. According to the Sydney Morning Herald the Prime Minister, who praised Lomborg’s work on climate science in his 2009 book Battlelines, commenced plans to fund the CCC in the middle of 2014. It has been reported that the Australian Catholic University (ACU) was initially approached with a view to putting it into their Canberra campus. However, UWA was finally selected from “a range of other locations”.

This suggests that UWA was not the first choice for the ACC, nor was it the only institution that might have been approached. The official line from UWA has been that it was approached by the Abbott government to house the centre, which was a contradiction to the press release from the federal Education Minister Christopher Pyne.

The establishment of the ACC within UWA remains shrouded in a cloak of confidentiality. It seems that the process of negotiations between the university and the federal government took place over several months going back to late 2014. On 2 April 2015 the university announced the establishment of the ACC in their University News stating that the centre would focus on three major projects over four years. However, it made no mention of the federal government’s funding.

The first project the ACC will look at is UN post-2015 agenda (something already started by the CCC in their “Post 2015 consensus”). The third will aim to set global priorities for development aid and help guide the way that Australia distributes its foreign aid budget. This is also something Lomborg has a head start on, having been appointed to the Department of Foreign Affairs and Trade (DFAT) as an adviser on “aid innovation”.

However, the second project titled “the Australian Prosperity Consensus” will, according to the UWA website:

…focus on determining which policies will help keep Australia prosperous in a generation’s time. It will generate economic evidence on efficiency across a wide range of Australia’s greatest challenges, including infrastructure, education, health, environment, governance, innovation and immigration. Its results will support a more informed national debate on Australia’s priorities.

This is perhaps the most contentious for Australian domestic politics as the project will potentially place the ACC into the centre of party political debates of the future of government spending. It will also do so during the run up to the next federal election.

Given the row that has erupted over the Intergenerational Report and the role played by Dr Karl Kruszelnicki, UWA will need to be mindful of the risk associated with seeking to mix science with politics.

What are the financial costs and benefits to UWA of the ACC?

In relation to the financial costs and benefits it is known that the federal government has granted UWA $4 million over four years to help set up the ACC. While this seems like a large sum it is unlikely to be sufficient to do the job. UWA secured the money against a funding proposal prepared by the UWA Business School and a contract has now been signed. What this contract requires from UWA has not been publicly disclosed, but the university has declared that it is not providing any cash support for the ACC or its projects, and that a target of the cash or in-kind support of around $13 million has been set. However it also states:

UWA is not providing cash support for the ACC or its projects. The ACC will always operate within its means and will only undertake additional work beyond the Australia Consensus programme funded by the Australian Government if external funding is forthcoming.

The centre will be located within the UWA Business School and co-located within the existing Centre for Social Impact (CSI), the Business School’s only research centre. The university has announced that the ACC will be staffed by a Centre Director, a Research Project Manager and “media, communications and events personnel”. This staffing formula reflects the nature of the ACC as an entity largely focused on the staging of “consensus” conference events rather than research for academic purposes.

It is unclear how much the salary bill for these ACC staff will be, or whether they will be redeployed from within UWA or new hires. Given my own experience of running centres at UWA and Curtin University, it is likely that the overhead cost for the ACC would be somewhere between $300,000 and $500,000 per year accounting for salaries, on-costs, office equipment, travel and associated operating costs.

UWA generally applies a 35% infrastructure charge to any grants received and so it is reasonable to assume that this will apply to the $4 million provided by the government. This would see $1.4 million shaved off by the university for “infrastructure” leaving the ACC with $2.6 million over four years. The ACC would be left with around $650,000 per annum to run itself. This seems sufficient to cover the centre’s overhead costs (depending on what the salary bill is), but insufficient to do the work that is expected of it.

In a review of the CCC’s work published in June 2013 on the website of the UK charities organisation Giving What We Can it was disclosed that a “consensus” process would cost an estimated $2 million:

“This research is expected to cost around $0.8m, and is already largely funded .The associated promotional activities will cost up to a further $1.2m, and will ensure this research is read and taken seriously by the people who most need to hear about it.”

This suggests that a “consensus” project of the type planned for the ACC will potentially need around $2 million with most of it going to publicity. The current plan for the ACC is that it will host the next “consensus” conference in Perth in 2016. This fits with the pattern of “consensus” events that Lomborg holds every four years. However, these are typically held in May so that would give the ACC only about 12 months to organise a global conference and raise the necessary money to host it.

There is also the question of what – if any – financial return the ACC will need to provide to Dr Lomborg. The appointment of Lomborg as an Adjunct Professor to UWA carries no salary and the university has made it clear that he will not be appointed as a member of staff. However, Lomborg is understood to draw large consulting fees from the CCC.

According to Graham Readfearn, the financial arrangements for Lomborg’s CCC in the United States include payments to Lomborg of around US $975,454 over the period 2012-2013. This money was out of a total fund raising pool of about US $4.3 million that the not-for-profit centre raised over the period 2008 to 2012 with about half that money being received in the final year.

When asked by The Guardian on Friday 24 April if it was necessary to have Dr Lomborg involved with the ACC, Vice Chancellor Paul Johnson said that the deal was, “predicated on having a working relationship with the Copenhagen Consensus Centre but he is president of that centre, so I would say yes”. This suggests that the intellectual property rights associated with the CCC’s “consensus” methodology vests with Lomborg. It is worth asking how much the ACC will need to pay the CCC and Lomborg for the rights to use it.

So there are questions over the financial cost-benefit of the ACC to UWA. Even if UWA is not obliged to put in any of its own money, the ACC will still need to raise more than the $4 million offered by the government if it is to do its work. How much the full operating costs will be, how money will be allocated and the sources of any donations remain unclear. Critics will certainly pay close attention to funds sourced to donors with alleged political or commercial interests. Particularly to those who have publicly expressed opposition or scepticism to climate science.

What are the reputation costs and benefits to UWA of the ACC?

Aside from the financial risk there is the more complex but potentially more important issue of reputation. In 2012 UWA prided itself on securing a foothold in the bottom of the Top 100 leading world universities. In 2014 UWA was ranked 88th in the world according to the Shanghi Jao Tong University’s Academic Ranking of World Universities (ARWU). These international ranking systems are measured across a wide range of indicators, but one of the key measures are citations in peer-reviewed journals.

The argument advanced by UWA in support of the establishment of the ACC is that the centre will attract the Nobel Laureates who form the expert review panel that attends the “consensus” conference for about five days. It also highlights the commissioning of at least 30 research papers that will be selected for these experts to assess and rank. They point to the methodology of the “consensus” process and suggest that the research will be “published and made available in the public domain”.

However, the ACC is not a research centre as the term is normally understood by universities. Based on the available information relating to the operation of the CCC it is essentially an event management organisation for Lomborg’s “consensus” process. The media has already started to call it a “think tank” and both government and UWA media statements have made it clear that the centre will be providing policy advice.

Professor John Quiggin, who is an Economist and Australian Research Council Laureate Fellow, has raised concerns over the methodology used by the “consensus” process. He accepts that the authors of the research papers commissioned for the project and the expert panellists approached their work “in a serious and fair minded way”. However, he is critical of the selection of the projects, the choice of reviewers and the inherent difficulties of trading off something as complex as climate change against the need to fight the spread of AIDS.

The real problems, though, were not with the choice of panel members but with the assessment procedure, which was clearly designed to fit Lomborg’s original example of a choice between spending on climate change and on clean drinking water.

The approach adopted was to assume a budget of $50 billion, and then seek to allocate it to those projects which would yield the largest benefit for a given cost. As Jeffrey Sachs points out, this approach is fine for evaluating discrete, project-based interventions, such as improvements in drinking water quality. But with a small budget and an insistence on easily quantified costs and benefits, it is naturally biased against bolder initiatives such as broad-based improvements in health and education.

Quiggin accused the “consensus” process of being a “political stunt”, “designed in every detail, to produce a predetermined outcome”. While this may not be accepted by all it seems difficult for the ACC to avoid the suggestion that it is a political “think tank” funded by the government to assist it with policy development as it enters the final year of its current three-year term.

Will the ACC produce a research dividend that will help UWA enhance its global ranking? To do so it would need to generate peer-reviewed journal papers able to secure high citations. It is my understanding that the centre is not expected to generate such research in a direct way. Any peer reviewing is undertaken by commissioned researchers engaged in the “consensus” process and publication is not via journals but via books and the media. At least that is how the CCC appears to operate.

There is already a call from some UWA academics and the Student Guild to not proceed with the ACC on the basis that it will “tarnish their reputations” as a place for serious research. However, other voices are calling for tolerance and the avoidance of trying to shut down debate and discussion within the university. Those who oppose Lomborg over his controversial stance on climate science will oppose the ACC. One example is Brendan May, writing in eco-business.com who suggested that:

“UWA now risks becoming an irrelevant press office touting fake academic credentials to support Abbott’s reckless and mad climate stance”.

However, others such as UWA Winthrop Professor David Pannell, Director of the Centre for Environmental Economics and Policy (CEEP) welcome the ACC. In his personal blog pannelldiscussions he suggests that much of the criticism of Lomborg’s work is unconvincing and even causes him to “laugh out loud”. He expresses his relief that UWA has not been “scared off” by the controversy.

So is it really worth the effort?

Prior to the announcement of this centre in The Guardian article of 17 April I had little knowledge of Dr Lomborg or his “consensus” process. My journey of discovery over the past week has left me with a lot of unanswered questions. I am frustrated that there was not more consultation with university staff and students, and concerned that so much information has had to come from the media rather than the university.

Those with whom I have spoken, including some who were more closely associated with the ACC in its planning, have suggested that it will boost the financial resources of the UWA Business School, and enhance its research activity. However, I remain yet to be convinced of these outcomes.

There is no doubt that Dr Lomborg has built a successful career with his “contrarian” views on climate science. His “consensus” process is also a business model that has given him the opportunity to win support from some of the world’s most rich and powerful.

In my view Dr Lomborg is neither a scientist nor an economist. He is more an entrepreneur who has used the talents of a gifted polemicist to secure resources and garner attention. His “consensus” process is not without merit and seems like a useful model for securing government and media attention. It may also generate some potentially useful policy outcomes.

The defenders of the ACC initiative argue that it is appropriate for a university to remain open to contrarian views and embrace robust debate rather than trying to shut it down. I agree with this and note that academic discourse is too often lacking in arguments and counter arguments these days. Further, if UWA wishes to establish what appears to be a political “think tank” and an event organiser rather than a conventional research centre that is entirely up to it.

However, in doing so the university should ensure that it has consulted with its Senate, staff, students and alumni and secured their consensus for such an initiative. It should also undertake a rigorous cost-benefit analysis considering both financial and reputation risks. Based on the available evidence this does not appear to have occurred in relation to the ACC. The “consensus” centre currently lacks consensus support from these key stakeholders and that is the problem.

Addendum

Thanks to all of you who have taken the time to read my rather long article and post comments. Since its publication I have received a lot of emails thanking me for the article. Two are worthwhile sharing here. The first of these comes from David Lessman, Communications Manager for the Copenhagen Consensus Centre. His email reads:


Dear Professor Mazzarol,

I saw your overview article in The Conversation. I wondered if it wouldn’t be appropriate to link not just to the critiques of Dr. Lomborg but also to provide his responses:

1) Dr. Lomborg’s answer to Scientific American

2) Dr. Lomborg’s answer to Friel

3) Dr. Lomborg’s full book to answer “Godheden Pris”, and here an English excerpt.

All the best, David


I also received another email from Richard Eckersley, a former Fellow at the National Centre for Epidemiology and Population Health at the Australian University. His email reads:


Thanks for the thorough and balanced piece in TC and the UWA CCC, Tim.

The attached essay review of ‘The skeptical environmentalist’, published in Global Change and Human Health, might interest you. While most of the focus of debate about Lomborg has been on climate change and other environmental issues, my review looked especially at the sociocultural aspects of the book.

Feel free to pass it around.

Regards

Richard Eckersley


Disclosure

Tim Mazzarol receives funding from the Australian Research Council

Entrepreneurial ecosystems and the role of regulation and infrastructure

entrepreneurial ecosystem

This is the second article on the topic of entrepreneurial ecosystems that build on a series of white papers developed by the Small Enterprise Association of Australia and New Zealand Ltd (SEAANZ). The first was published here in “The Conversation” in December 2014 and addressed the issues of what an entrepreneurial ecosystem is, and what role government policy can play in helping to foster their emergence and growth.

He we look at the second White Paper, which focuses on the role of regulation, infrastructure and financing. However, in this article I will examine the first two of these issues and devote a later article to financing.

The motivation for this work was the G20 Summit hosted by Australia last year. In particular the special G20 SME conference that was held at the Victorian Parliament House on 20 June 2014. That meeting was convened by the Australian Minister for Small Business Bruce Billson; and organised by the Australian Treasury, Australian Chamber of Commerce and Industry, the ANZ Bank, Australian Bankers’ Association and the Organisation for Economic Co-operation and Development (OECD).

The role of regulation in entrepreneurial ecosystems

As explained in the first article in this series, an entrepreneurial ecosystem is a conceptualisation of an environment in which the right combinations of elements help to foster economic growth through enterprise and innovation. One of these elements is the regulatory framework in which this entrepreneurial activity is able to take place.

The following diagram illustrates the main regulatory issues that impact on a business throughout its lifecycle. It commences with how easy it is to start-up a new business venture and also how easily the new owners can employ workers. Other key issues relate to the compliance costs of securing premises and having all the necessary utilities and licences secured.

Regulations impacting the business throughout its lifecycle World Bank (2013)

In many cases local, state and federal government regulations can impact here. The other major issues relate to getting financing, paying taxes and other fees and charges, plus how well the legal system protects small business owners and shareholders, and deals with insolvency.

Government regulation encompasses many things but the World Economic Forum (WEF) has suggested that there are at least three key issues likely to impact on an entrepreneurial ecosystem. These are the ease of doing business, promoting “business friendly” legislation and policies and taxation policy, particularly for small to medium enterprises (SMEs).

Ease of doing business

The first of these issues – “ease of doing business” – is related to what is popularly termed “red tape”, or the amount of compliance costs and bureaucratic encumbrances placed on businesses. A useful global guide to this is the World Bank’s “Doing Business” study that compares 189 nations against a set of measures of how easy or hard it is to do business there.

Some of the key criteria used are the ease of starting up a new business, securing construction permits, registering property, getting electricity connected, paying taxes and trading across borders. At a global level New Zealand is the easiest country in the world in which to start-up a new business, ranking first out of 189 nations. Australia, by comparison was ranked 4th in the world with Singapore just ahead in 3rd place.

As shown in the diagram below, Australia and New Zealand rank quite well in comparison with the OECD average across most indicators of ease of doing business. However, they are generally well behind Singapore, which in 2014 was ranked number 1 out of all countries surveyed by the World Bank.

Doing Business - Complexity and Cost of Regulations World Bank (2013)

New Zealand generally out performs Australia on the “ease of doing business” indicators. In 2014 it ranked 3rd in the world after Singapore and Hong Kong. In an area like ease of starting up a new business, it was found to take only one step, half a day and cost little or nothing in fees to get this done in New Zealand.

By comparison the average across the OECD was 7 separate procedures, 25 days and costs of around 32% of the firm’s annual income. Australia’s performance on starting up a new business suggested that it took at least three separate procedures, around two and a half days and about 0.7% of annual income in fees.

Business friendly regulations and policies

However, the act of starting up the new business is perhaps of less importance than the ability of the new owners to secure power, water, building approvals and the necessary licences to undertake the operations required to run the business. Here the worst performing areas for Australia were the compliance cost of trading across borders, paying taxes and registering property. For New Zealand it was getting electricity supply connected.

According to the World Bank it was taking an average of 5 separate procedures, 75 days and a cost of around NZD $45,721.50 to get a new electricity connection made in the city of Auckland. In Australia this process was found to take the same number of procedures and days, although at a lower cost of AUD $5,152.90. By comparison Singapore was able to connect electricity in about 38 days at a cost approximately 40% of that charged in New Zealand.

Australia’s compliance costs for trading across borders were found to be worse than the OECD average. The World Bank study found that to secure export permits it was requiring Australian firms to complete at least five separate documents and for imports seven documents. The average cost per container shipped from Australia was around US $1,150, and US $1,170 per container for imports. This compared to US $440 per container in Singapore and US $870 (export) and US $$825 (import) for New Zealand.

The time taken to export or import goods to and from Australia was around 8 to 9 days. This compared to only four days for Singapore. All of this highlights the importance of ensuring that government regulations are efficient and do not impose unnecessary compliance burdens or costs on business.

What is needed is not the removal of any regulation or “red tape” on businesses, particularly small firms, but “smarter” regulations. As the SEAANZ White Paper argues:

While the cutting of ‘red tape’ is often used as a mantra by those seeking to lift the regulatory burden off the shoulders of SMEs, there are frequently few successful campaigns to cut red tape. This is because government regulation and compliance is typically put in place to protect the community, the workforce, consumers, the environment or other businesses. Some industries are more heavily regulated than others due to high potential for risk (e.g. air transport, construction, medical services and pharmaceuticals).

The World Bank suggests that business regulations should be streamlined, meaningful, adaptable, relevant and transparent. This forms the concept of “smart” regulations as shown in the following diagram.

SMART Regulations World Bank (2013)

In other words it is not a matter of making government and bureaucracy smaller so as to get it out of the way, but to ensure that it is more efficient, and more responsive to the needs of the public and industry. Streamlining local, state and national government policies to reduce duplication, and shifting engagement with government online via “one-stop-shop” portals is one way that this might be achieved.

Taxation policy

Of all the areas of government regulation and compliance that raise the most discussion it is taxation policy. Yet it is important to recognise that while nobody likes to pay tax, without a well-managed taxation system the viability of the nation state is in serious jeopardy. Key considerations for tax policy in entrepreneurial ecosystems are how equitable are the taxes, do they provide incentives for new businesses to form, and do they disadvantage small firms?

According to KPMG the average corporate taxation rate for Australia and New Zealand over the period 2009-2014 has been around 30% which compares to 25.6% for the OECD, 22% for the European Union, 40% for the United States and 17% for Singapore over the same time period. This suggests that while Australia and New Zealand company tax rates are not the highest in the world, they are generally higher than the OECD and EU average.

The World Bank’s analysis of taxation compliance found that Australian businesses were paying around 47% of annual profit in taxes and making an average of 11 separate payments. This included company income tax, superannuation guarantee levy, state payroll tax, worker’s compensation, fringe benefits tax (FBT), land tax, municipal tax, vehicle tax, fuel excise, GST and taxes on insurance contracts. It was also estimated that this taxation compliance was taking an average of 105 hours per year for businesses to complete.

By comparison, in New Zealand companies were making only 8 payments. These included company income tax, the employer paid Accident Compensation Corporation (ACC) levy, road user charges, interest tax, FBT, property tax, tax on cheque transactions, fuel tax, and GST (VAT). The average rate of company tax in New Zealand was estimated at 34.6% of annual profit, and it was taking around 152 hours per year to complete the compliance paperwork.

This compares to Singapore where only 5 taxes are paid each year and the time taken is estimated to be around 82 hours per annum. Overall, this suggests that countries such as Australia and New Zealand could improve their taxation systems with a view to reducing the amount of taxes that have to be paid, the rate of taxation and the time taken to complete the necessary paperwork.

It is particularly important to note that small businesses on average pay a much higher rate of company tax than their larger counterparts. This was a point raised by Dr Sergio Arzeni, Director of the OECD’s Centre for Entrepreneurship, SMEs and Local Development at the G20 SME Conference last year. He told the conference that while compliance costs or “red tape” hit small firms around 10 to 30 times more than larger firms, the rates of tax paid were also unequal.

For example, he stated that while the average rate of taxation paid by SMEs across the OECD was around 30%, that for large firms was between 2% and 5%. This suggests that government policy could do much more to ensure that large firms are paying their fair share of tax rather than leaving the burden to fall disproportionately on the small business sector.

The importance of infrastructure

In addition to regulation and taxation policy the vibrancy of an entrepreneurial ecosystem is also dependent on the quality of infrastructure available within a country or region. According to the WEF, the main infrastructure critical to the growth of these ecosystems are transport (e.g. road, rail, sea and air), telecommunications (particularly broadband access), and utilities (e.g. electricity, gas, water, sewerage).

There is little doubt that the ability for business to perform at a globally competitive level is contingent on the quality of this infrastructure. This is something I wrote about in another article in “The Conversation” back in 2012. That article pointed to Australia’s ranking of 20th out of 142 nations as measured by the WEF’s Global Competitiveness Report, which noted that our infrastructure was lagging behind world’s best practice.

The latest Global Competitiveness Report ranks Australia in 22nd place and notes that the country’s position has been steadily worsening since 2009. Key areas of concern are labour market and wage setting “rigidities”, although it has excellent financial services, a sound banking system, excellent higher education and training sectors and the fourth lowest public debt-to-GDP ratio in the OECD. The report also points to concerns over Australia’s tax rates and regulations, government regulations efficiencies and infrastructure.

It scores Australia’s overall infrastructure in 35th place, which is behind New Zealand in 32nd the United States in 12th place, or Switzerland and Singapore in 1st and 2nd places respectively. Further, while the adoption rate of internet services is high, the internet bandwidth in the country is poor. Australia’s ranking in relation to international internet bandwidth (kb/s) per user is 39 out of 144 countries. This places us ahead of New Zealand (57th place), but well behind the majority of European Union (EU) states plus Hong Kong (ranked 2nd) and Singapore (ranked 4th).

It is critical to Australia’s long term economic growth and our ability to foster the next generation of globally focused, innovative and competitive industries to have world’s best practice infrastructure. Any failure by government to provide or facilitate such infrastructure will impede the emergence, growth and development of business.

This is particularly the case for high speed broadband services. The ability for young and growing small firms to remain competitive in the global economy is heavily dependent on their being able to access high speed broadband infrastructure. Increasing use of online services for e-commerce, e-business (e.g. supply chain management), e-tendering and e-marketing have made it imperative for SMEs to engage with the digital economy.

In the EU a target has been set for all Europeans to be able to access the internet with broadband speeds of more than 30 Mbps by 2020. The EU also plans to provide the majority of users with speeds of over 100 Mbps by the same date. This will be critical for SMEs engaging online business and marketing activities where a minimum requirement will be 100 Mbps for both uploading and downloading digital data.

Australia’s business community cannot afford to be left behind in relation to broadband infrastructure. It is a shame that the National Broadband Network (NBN) has been turned into a political issue rather than a significant investment for the future competitiveness of the national economy.

Key recommendations

The SEAANZ White Paper recommends that all government agencies and regulatory authorities should move towards a “digital by default” model of dealing with business online. Such online systems should also aim to achieve a “one-stop-shop” model for compliance issues. All efforts should also be made to achieve a “joined-up-government” approach, linking local, state and federal government agencies to reduce duplication and compliance costs.

Regulation of SMEs should be dealt with on “risked-based” model in which employees of regulatory authorities are empowered to adopt flexible and reasonable approaches to how they deal with small firms. This should follow an “educate and inform” approach, rather than treating all firms as posing the same threat. They should see their role as providing services not enforcement. This is consistent with the recommendations from the 2013 Productivity Commission Report into how regulators should deal with small business.

Conclusions

In order to foster a healthy and growing entrepreneurial economy it is necessary for government to ensure that they maintain efficient, effective, and easy to use services, and that compliance costs and regulations are managed intelligently. While regulation and taxation are necessary evils they should be designed to avoid unnecessary costs, inefficiency and duplication.

Infrastructure is also critical to business competitiveness. If road, rail, sea and air transportation systems are inefficient, congested or poorly maintained the net effect will be to strangle the ability of business to operate competitively. If telecommunications services, broadband, power and water infrastructure are unduly expensive, slow or ineffective, this will also impede the competitiveness of business.

If we take an ecosystem’s perspective, the ability of businesses to start-up, grow, employ people and generate economic growth, will be enhanced if the macro-conditions within their environment are appropriately configured. Poor infrastructure and excessive regulation and compliance costs will impede economic growth and stifle long term prosperity.

For more reading see:

Mazzarol, T. (2014) Growing and sustaining entrepreneurial ecosystems: The role of regulation, infrastructure and financing, White Paper WP02-2014, Small Enterprise Association of Australia and New Zealand (SEAANZ).

Note: Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand Ltd (SEAANZ). SEAANZ Ltd is a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises.

Entrepreneurial ecosystems and the role of government policy

Entrepreneurial ecosystem ongroup.wordpress.com

The final communique of the 2014 G20 Leaders’ Summit called for enhanced economic growth that could be achieved by the “promotion of competition, entrepreneurship and innovation”. There was also a call for strategies to reduce unemployment, particularly amongst youth, through the “encouragement of entrepreneurship”.

This desire to stimulate economic and job growth via the application of entrepreneurship and innovation has been a common theme in government policy since at least the 1970s. The origins of this interest can be traced back to the report produced by Professor David Birch of MIT “The Job Generation Process” that was published in 1979.

A key finding from this work was that job creation in the United States was not coming from large companies, but small independently owned businesses. It recommended that government policy should target indirect rather than direct strategies with a greater focus on the role of small firms.

Fostering the growth of entrepreneurial ecosystems

Over the past 35 years the level of government interest in entrepreneurship and small business development as potential solutions to flagging economic growth and rising unemployment has increased. It helped to spawn a new field of academic study and research.

This trend was boosted by the success the iconic “technopreneurs”. Technology entrepreneurs such as Steve Jobs of Apple, Bill Gates of Microsoft, Jeff Bezos of Amazon, or Larry Page and Sergey Brin of Google have become the “poster children” of the entrepreneurship movement.

One of the best known centres of high-tech entrepreneurial activity has been California’s Silicon Valley. Although it is not the only place in which innovation and enterprise have flourished, it has served as a role model for many governments seeking to stimulate economic growth.

Today “science” or “technology” parks can be found scattered around the world. They usually follow a similar format, with universities and R&D centres co-located with the park, and venture financiers hovering nearby looking for deals. Most have been supported by government policy.

What governments want is to replicate Silicon Valley and the formation and growth of what have been described as “entrepreneurial ecosystems”. However, despite significant investments by governments into such initiatives, their overall success rate is mixed.

So what are “entrepreneurial ecosystems” and what role can government policy play in their formation and growth? This was a question addressed by the first White Paper in a series produced by the Small Enterprise Association of Australia and New Zealand (SEAANZ). The purpose of these papers is to help enhance understanding of what entrepreneurial ecosystems are, and to generate a more informed debate about their role in the stimulation economic growth and job creation.

What is an entrepreneurial ecosystem?

The concept of the “entrepreneurial ecosystem” can be traced back to the study of industry clustering and the development of National Innovation Systems that took place in the 1990s. However, the term was being used by management writers during the mid-2000s to describe the conditions that helped to bring people together and foster economic prosperity and wealth creation.

In 2010 Professor Daniel Isenberg from Babson College published an article in the Harvard Business Review that helped to boost the awareness of the concept. The diagram below shows the nine major elements that are considered important to the generation of an entrepreneurial ecosystem. The focus of this first SEAANZ White Paper is on the role of government policy. Future White Papers will deal with the other eight elements.

Entrepreneurial Ecosystem Mazzarol 2014

Isenberg outlined several “prescriptions” for the creation of an entrepreneurial ecosystem.

The first prescription was to stop emulating Silicon Valley. Despite its success the Valley was formed by a unique set of circumstances and any attempt to replicate it in other places were unlikely to succeed. This led to a second prescription, which was to build the ecosystem on local conditions. Grow existing industries and build on their foundations, skills and capabilities rather than attempting to launch high-tech industries from scratch.

The third prescription was the importance of engaging the private sector from the start. Here the role of government is indirect and one of a facilitator not a manager. In trying to shape the growth of such ecosystems attention should be given to the support of firms with high growth potential that can help to generate a “big win” early on. This is the opportunity for local success stories to become role models for others.

However, care must be taken by governments not to try to pick winners or over engineer the system. High growth firms by nature are inherently risky and highly innovative firms are typically unique. As such there is no magic formula for their success. Helping such firms to succeed is more about removing obstacles to their growth such as anti-competitive cultures, unfair taxation on small firms, unnecessary “red tape” or lack of access to markets, skilled employees or investment capital.

In seeking to help stimulate entrepreneurial high growth firms it is important, according to Isenberg, to avoid flooding the system with too much “easy money”. This can take the form of government grants and venture capital funds that are too easily obtained.

What is important is to grow firms with strong root systems that can sustain their own growth as much as possible before seeking additional funding. Such firms should be financially sound; profitable and well managed, or their likely success rates will be low.

The focus should be on encouraging sustainable, growth oriented and innovative firms not simply fostering more start-ups. Starting a new business is the easy part, successfully growing it is the challenge.

What can government do to stimulate entrepreneurial ecosystems?

The challenge for government policy is to develop policies that work, but avoid the temptation to try to effect change via direct intervention. A 2014 study of entrepreneurial ecosystems undertaken by Colin Mason from the University of Glasgow and Ross Brown from the University of St Andrews for the OECD, developed a set of general principles for government policy in the relation to these ecosystems.

They contrast “traditional” versus “growth-oriented” policy approaches to enterprise development. The first of these approaches tends to focus on trying to grow the total number of firms via business start-up programs, venture capital financing and investment in R&D or technology transfer.

This is a “pick the winner model” and can also include business or technology incubators, grants, tax incentives and support programs. Such programs are essentially transactional in nature. It is not that they are of no value, but they cannot guarantee success via such direct intervention.

A “growth oriented” approach is more relational in nature. This focuses on the entrepreneurial leadership of these growth firms. It seeks to understand their networks and how to foster the expansion of such networks at the local, national and international level.

The most important thing is the strategic intent of the team running the business. Firms seeking to grow need to be given help in linking up with customers, suppliers and other “actors” within the ecosystem who can provide resources.

Government ministers can play a critical role in fostering enterprise and innovation. Their role is to direct the government departments and agencies to focus on the problem and develop effective policies.

A minister who has a good understanding of what entrepreneurial ecosystems are, how they form and the role and limitations of government policy is well-placed to generate more effective outcomes.

Key recommendations for government policy

In summary, key recommendations for government policy in the fostering of entrepreneurial ecosystems are:

  1. Make the formation of entrepreneurial activity a government priority - The formulation of effective policy for entrepreneurial ecosystems requires the active involvement of Government Ministers working with senior public servants who act as ‘institutional entrepreneurs’ to shape and empower policies and programs.

  2. Ensure that government policy is broadly focused - Policy should be developed that is holistic and encompasses all components of the ecosystem rather than seeking to ‘cherry pick’ areas of special interest.

  3. Allow for natural growth not top-down solutions - Build from existing industries that have formed naturally within the region or country rather than seeking to generate new industries from green field sites.

  4. Ensure all industry sectors are considered not just high-tech - Encourage growth across all industry sectors including low, mid and high-tech firms.

  5. Provide leadership but delegate responsibility and ownership - Adopt a ‘top-down’ and ‘bottom-up’ approach devolving responsibility to local and regional authorities.

  6. Develop policy that addresses the needs of both the business and its management team - Recognise that small business policy is ‘transactional’ while entrepreneurship policy is ‘relational’ in nature.

For more reading see:

Mazzarol, T. (2014) Growing and sustaining entrepreneurial ecosystems: What they are and the role of government policy, White Paper WP01-2014, Small Enterprise Association of Australia and New Zealand (SEAANZ).

Note: Tim Mazzarol is President of the Small Enterprise Association of Australia and New Zealand Ltd (SEAANZ). SEAANZ Ltd. is a not-for-profit organisation founded in 1987. It is dedicated to the advancement of research, education, policy and practice in small to medium enterprises.