20 October 2012

Surplus Stupidity Puts Australia’s Future at Risk

LEGO Mr FreezeAustralian politicians would gouge out their own eyes, and cut off their own arms, if they thought it would get them re-elected.  Of course it will not – that would just be stupid.  Almost as stupid as, say, jeopardising Australian research and innovation activities in pursuit of a symbolic budget surplus.  So, of course, that would never happen either, would it?

Except that it did happen, and it is still happening.

Last month there were a few, relatively low key, reports that the Australian government had frozen payouts of a broad range of research and commercialisation grants.  The unannounced freeze apparently commenced on 30 August 2012, with the affected programs including those operated by the Australian Research Council (ARC), the National Health and Medical Research Council (NHMRC), Commercialisation Australia and the Clean Technology Investment Program.

Australian Life Scientist reported the halt in payments, quoting a spokesperson for the Industry and Innovation Minister Greg Combet who stated that the freeze was a ‘normal part of the Budget process’.  However, such freezes have not occurred regularly in previous years.

It appears that the freeze may have been Mr Combet’s immediate response to a directive issued to all cabinet ministers at the end of August that they must review all grants not yet made or contracted in order to curb expenditure.  Obviously such reviews take time, so a halt in payments – at least temporarily – would be an inevitable consequence of such a directive.

Having not announced that there is a freeze on innovation funding, the government has also, not surprisingly, failed to given any indication of when it might end.  However, there were some signs of a thaw the in the past week, with A$652 million in long-awaited funding for medical research finally being allocated by the NHMRC.  While this is clearly good news for those in the medical research sector, the declaration by Australian Life Scientist that ‘the freeze is over’ may yet prove premature.

IMPACT ON RESEARCH

We are probably not the only ones to have noticed that this sudden breakthrough just happened to occur shortly after the Australian National University based Nobel Prize winning scientist Brian Schmidt spoke out, calling freezing investment a ‘draconian measure … that would indicate poor planning’, and stating that ‘this is the type of act that makes young people - the future Nobel Prize winners, but also the future innovators of this country - leave the country and go and do their work other places.’

Indeed, there seems to have been some increase in interest in the issue in recent days.  It was reported on Wednesday that Greens Senator Lee Rhiannon told a Senate Estimates committee that Australia could lose a generation of researchers as a result of the uncertainty resulting from delays in payments of grants, and threat of cuts to innovation programs.  Research Minister Chris Evans countered that her claims were ‘just plain wrong’, and that ‘no-one apart from [Senator Rhiannon] is suggesting that it is playing out in that way’.

Actually, Mr Evans, you are the one who is wrong, because there are a number of other people who are suggesting precisely the same possible outcome as Senator Rhiannon.  Nobel Prize winning professor Brian Schmidt, for one – but there are others.

Over a month ago, Douglas Hilton, Director of the Walter and Eliza Hall Institute, stated his view that ‘there’s a risk some programs will be cut or delayed’, and that even a small delay in funding can be devastating for jobs, considering that this is how around 70% of funding is typically spent.  He also noted that:

The community and some in the government think these are grants for a boffin to write a book. What they don’t realise is these grants are directly related to jobs. It’s not pocket money to allow us to pursue our hobbies.

Professor Hilton had previously stated, in a piece co-written with the University of Melbourne’s Deputy Vice-Chancellor Research, James McCluskey, that:

The decision could affect research funding and could mean the loss of up to a thousand highly skilled research jobs in Victoria alone. Even if funding was interrupted only briefly while the economy recovered, the impact of pulling the plug would be like tripping up in an Olympic event. Most researchers depend on these grants for their salaries, with enough uncertainty in winning them in the first place, that not even being given a chance to compete for funding will see an elite workforce lost to the nation.

IMPACT ON R&D AND SMALL BUSINESS

The broad funding pause is not just about research funding.  It also affects commercialisation support provided to innovative small-to medium enterprises (SMEs).

In early September, Commercialisation Australia chief executive Doron Ben-Meier told SmartCompany that while the organisation was still operating as usual, no new grants were being written.  Mr Ben-Meier confirmed that ‘there is a temporary pause while they review all of the grant programs,’ and that ‘it's not intended to be a long-term solution. But the program is not on hold, this only applies with regard to the writing of new grants.’

SmartCompany also quoted GrantReady managing director Adrian Spencer, who noted that surprise announcements and sudden changes to programs create great uncertainty for businesses, recalling that ‘A lot of potential applicants walked away from government assistance when this happened before … it sent a ripple through the whole innovation community that benefits from this program.’

Just this week, with new grants from Commercialisation Australia still on hold, Melbourne-based entrepreneurs Michael Cameron and Bernie Tschirren, founders of startup Rome2Rio, expressed similar sentiments based on their own experience.  As reported by The Age, they had applied for a matching funds grant to continue development of their online travel planning service, but now say the company's plans are in limbo because of the funding freeze.  Cameron convincingly makes the case for the impact uncertainty can have on decision-making by a small business, saying:

…they had committed the equivalent of two full-time staff members for a month to prepare the grant application.

"Of course that was over a span of several months, going through the first, then second stage of application - with various redrafts.

"It really makes you sit down and think: 'OK, I've spent a lot of time on this application, if it all comes to nothing that was a lot of wasted time,'" said Cameron. "So there's definitely a cost-benefit trade-off you're making in your mind when you apply for these grants.

Meanwhile, it seems that Commercialisation Australia is no longer discussing the issue with the media, instead directing queries to the Department of Industry and Innovation's spokesperson.
The impact is not only being felt in R&D and commercialisation funding.  SmartCompany has also revealed this week that small business support service program funding had been frozen under a Finance Department directive while applicants were strung along with assurances that ‘the assessment process is progressing’.

STUPID PROMISES, STUPID POLICY

So why is all this happening?  For a very simple-minded and short-sighted reason: the current Australian government wants to curry favour with the electorate by playing up its ‘fiscally responsible’ credentials, and keeping a promise to return the federal budget to surplus in the 2012-13 financial year, notwithstanding the changes in economic conditions since that promise was made.  The Australian economy has weathered the global economic downturn well – in good part due to the government’s stimulus package spending, which drove the budget into deficit in the first place – but it has persisted for longer than had been predicted, with Europe’s economic decline continuing, difficult circumstances remaining in the US, and China’s boom slowing.

The problem with the ‘budget surplus’ mantra is that it fails to recognise that there is nothing wrong with borrowing money, so long as the borrowings are invested wisely.  If you have to borrow to pay for your weekly grocery shopping, then you have a problem and you need to sit down and find some cuts in your domestic budget.  But if you are borrowing money to buy property as an investment, then the questions you need to be asking are quite different – such as can I afford the repayments? And will this investment deliver a greater return than the cost of borrowing?

IF NECESSARY, AUSTRALIA CAN AFFORD A DEFICIT

If Australia were to spend another couple of years in deficit, the country can unquestionably afford the additional repayments.  According to the World Economic Forum’s (WEF’s) 2012-13 Global Competitiveness Report, Australia’s gross general government debt, as a percentage of GDP, is 22.9%.  This places the country at number 30, out of 144, and compares favourably with China (25.8%, 35th), New Zealand (37%, 67th), the United Kingdom (82.5%, 127th), the USA (102.9%, 136th) and Japan (off the scale and in last place, at 229%), just to name a few.

As to whether the investment would deliver a sufficient return, this is harder to predict.  The is inevitably risk in investing in innovation.  But one thing is for sure – a failure to spend on innovation, which is the country’s future, will most certainly result in long-term loss.  That Australia should be investing in innovation, and that the country is well-placed to achieve great returns, is apparent by looking at the data for the WEF’s Innovation Pillar of its Global Competitiveness index.  Here is where Australia ranks (again, out of 144 countries) in each aspect of this pillar:
  1. Capacity for innovation – 32nd
  2. Quality of scientific research institutions – 7th
  3. Company spending on R&D – 30th
  4. University-industry collaboration in R&D – 13th
  5. Gov’t procurement of advanced tech products – 58th
  6. Availability of scientists and engineers – 53rd
  7. PCT patents, applications/million pop. – 20th
The highlights here are the quality of Australia’s research institutions (so the ‘engine’ is in good shape), and of the R&D collaborations between universities and industry.  Even patenting activity scrapes into the top 20 (though only on a per capita basis, which is actually not good enough). 

Yet Australia is letting itself down on innovation in areas that can clearly be assisted by solid government programs of investment.  Commercialisation Australia programs are designed to encourage spending on R&D, by providing management support and top-up funds.  And if the country wants more scientists and engineers and improved capacity for innovation, well then surely the thing to do is to create an environment in which innovative scientists and engineers can thrive and build world-class careers.

All of which is exactly what the frozen funding programs are designed to do.

CONCLUSION

If it were merely that the government was delaying payments of budgeted grant funds, that would be bad enough, but at least we could simply call for the halt to be reversed at the earliest possible opportunity.

But cuts remain on the cards, with the ABC reporting that:

[Research Minister] Senator [Chris] Evans says the Government's mid-year budget update will reveal which grant programs it will cut.

"The way to think about it is there's a pause/freeze in place," he said.

"The government will make a decision about each program and there will be an announcement about whether the program is fully funded, partially funded or not funded and it will be obvious to the world then."

Yes, but by ‘then’ it will be too late for the ‘world’ to do anything about it!

Prime Minister, Treasurer, ministers – stop being stupid and pandering to the lowest common denominator.  Put Australia’s future ahead of a short-term surplus, and spend more, not less, on effective innovation programs

4 comments:

Anthony Peterson said...

I recall a 40+ Billion dollar business plan getting funding. What was it again, a 7% expected return against a 10% long term weighted average cost of capital? That's a negative net present value, right? There's no shortage of modest folk with much to be modest about.

Patentology (Mark Summerfield) said...

Well, there is no shortage of examples of people making bad investments. (Facebook shares anyone?) But I'm not sure what that has to do with the subject of this article.

We are not talking here about investing billions (or, indeed, any more than a couple of million in any given case) in the expectation of a direct capital return. We are talking about how national research gets funded, and how we assist small businesses try to get innovative new products and services to market.

The long-term return is not cash, it's national capabilities (beyond digging stuff up), skills, jobs, economic growth... and cash, from the taxes all that activity generates!

vtwkang said...

I've been living in Australia since 2001, and in that time there always seems to have been an aggressive populism in Australian politics that I've never liked. I hardly find these developments surprising at all. Was it always this bad?

Patentology (Mark Summerfield) said...

No, it was not always like this. Nowadays, however, it seems that our politicians are motivated by a fear of losing power, driven by advisors, polls, spin doctors and the 24-hour news cycle. None of this appears to be a good thing for democracy, which should not be about just pandering to the most immediate and basest desires of the masses.

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