23 September 2008

AIIA summary of Cutler Report

At an AIIA sponsored event on Thursday last week, Dr Terry Cutler delivered the Pearcey Oration on venturousaustralia – his recently submitted Review of the National Innovation System. The presentation accompanied two panel discussions, one of which I participated in, examining the review, its implications for the ICT industry and wider issues relating to the role of ICT in innovation.

There is now a narrow window in which to provide feedback to government in order to influence the forthcoming White Paper; this feedback is due by September 30. Dr Cutler emphasised the importance of feedback from our industry. AIIA will certainly be responding to the various recommendations and potential implications for the ICT industry, and I strongly encourage you to forward your input both to AIIA and to government. Details are at the end of this email.

Major themes of the report
Venturousaustralia provides a well-researched scorecard that shows Australia slipping dangerously behind international competition in the innovation stakes. In his Pearcey Oration, Dr Cutler said, “this is a depressing scorecard, and one that should serve as a wake-up call.” He also acknowledged the importance of ICT to the future of Australian innovation, asserting that “it would be a singularly unfortunate moment to ignore the crucial role of information and communications technology as one of the key drivers of innovation and productivity.”

Overall, venturousaustralia is a very welcome review and something that contains a number of potentially positive benefits for the ICT sector in the long term. It treats innovation as a holistic system that encompasses many areas of the economy and community – recognition that’s not been made so comprehensively before. Generally AIIA supports the major recommendations as beneficial to our industry.

The themes of cultural change, human capital and education reforms resonate strongly with the issues that face the ICT sector. In particular the R&D tax credit recommendations are very strong – along with the treatment of IP issues, these provide Australia with a much needed opportunity to make up some of the gap with global competition for R&D investment. Extending the R&D tax credit SME turnover threshold from $5K to $50K is a particularly welcome proposal, with companies who participated in Thursday’s discussion estimating substantively increased rates of return.

Collaboration, openness and sharing across all levels of government, the private sector and non-government organisations are also key themes in the report, and provide the basis for Dr Cutler’s argument that a cultural shift is required to ensure the competitive future of Australian innovation.

The role of ICT in the National Innovation System
AIIA strongly believes that the ICT industry’s greatest value is in the contribution it makes as an integral part of every sector of the economy and community. Most media commentary along with industry representatives present on the day, however, expressed disappointment at the lack of specific calls to action that directly relate to our industry and to a degree AIIA shares these concerns.

The release of this report prompts some interesting questions for the Australian technology sector: venturousaustralia makes little reference to the place of the ICT industry in the innovation system, identifies no specific requirements for funding or R&D within the sector in its own right, and does not highlight the ICT industry as an essential ingredient of innovation that is being overlooked in the current environment.

This is despite the fact that ICT has in the past been well recognised as a key driver of innovation in the wider economy, following DCITA studies – well known within the industry if not the wider public – that demonstrate ICT is the main technological driver of productivity growth in Australia, and that technological innovations had become the main drivers of long-term productivity growth.

What, then, can we take away from the release of this review, and what are the next steps for us as an industry?

SME programs
The report proposes a strong range of SME proposals, broadly covering taxation issues, industry programs and related procurement measures. Replacing the existing R&D tax concessions with an across-the-board tax credit scheme in order to raise the level of R&D business expenditure is a good initiative, and the introduction of a Competitive Innovation Grants Program may go some way towards filling the gap left by the disappointing axing of the Commercial Ready scheme.

SMEs will benefit from better access to what is currently a fragmented range of information – for example expansion of the COMET program and the extension of Enterprise Connect to provide innovation advice as well as business review and advisory services through a funded voucher scheme.

Our key challenge as an industry is to ensure that these recommendations are translated into tangible programs as a priority. AIIA is well placed to get involved in shaping and operating some of these targeted SME programs. Lower rating of in-kind contributions in CRC proposals, however, may be a matter for concern – they may have attractive innovation proposals, but at an early stage SMEs are unlikely to have the funds to contribute.

Multinational Corporation implications
Multinationals stand to benefit from enhanced international engagement through proposals to open current programs to international partners and participants. Business expenditure on R&D undertaken in Australia will be eligible for 40% tax credit, and will no longer be dependent on IP being Australian owned. This will be welcomed by the global ICT industry and recognises that skills, capabilities and markets are global – but that Australia can benefit from the R&D activity conducted locally.

In general, it is pleasing to see a greater recognition of the need for a global innovation environment – along with tax and skills measures that reflect this requirement.

Tax Reform
Tax Reform measures provide for a range of simpler and more predicable outcomes that will be welcomed in the current business environment. In addition to changing the R&D tax concession from a deduction to a credit to raise level of business expenditure, the refundable tax credit of 50% for SMEs and the extension of the definition of ‘small firm’ from under $5M to under $50M is very positive.

These initiatives will need to be read in the context of the broader business taxation reforms being considered as part of the Henry Review.

IP Law Reform
Venturousaustralia makes a range of common-sense proposals in the area of IP Law Reform. The report suggests increasing the threshold for ‘inventive step’ in patent law, which would allow greater exploration of innovation ideas by lowering the risk of litigation. And it proposes greater involvement of practitioners in IP policy reform. This will help ensure that policy is practically informed, not made in a vacuum and resulting in unintended effects

Where practicable, content funded by the government is proposed to be made freely available over the internet as part of the global commons. It is not clear how this might affect IP ownership created by IT companies – AIIA certainly doesn’t want a return to a ‘we pay, we own’ approach on the part of government, and it is important that government is not in the business of commercialisation. The supplier is best placed to innovate.

Government Procurement
The report also recognises the significant influence of the Australian Government as a major purchaser by making a number of recommendations on procurement. These include participation in risk sharing, demanding innovation in purchased services and working more closely with States and Territories through a Small Business Innovation Contracting program based on the US Small Business Innovation Research initiative. This model would earmark a percentage of all agencies’ R&D expenditure for small to medium business. For the ICT industry, this will be an interesting point of intersect with the eagerly awaited Gershon Review.

Governance

Better coordination of innovation governance bodies will help the industry engage more effectively with national stakeholders, as well as helping Australia engage more successfully internationally, better along its innovation programs and focus more clearly on national challenges such as climate change.

Proposals to support this include a National Innovation Council (with the Prime Minister as Chair) supported by Office of Innovation and an advocate for Government Innovation to promote innovation in the public sector.
ICT industry policy is spread across a wide range of portfolios and it is important that an industry that is at the forefront of innovation and well represented in policy formulation.

Industry themes
There are a number of industry-wide themes in the report and two in particular that are worth mentioning here. The first is that Australia should establish a National Information Strategy to optimise the flow of information in the Australian economy. The aim is to provide auditable transparency in the flow of private market information and maximise the availability of government information to users. The second relates to greater use of and experimentation with web 2.0 technology by government. Both of these recommendations would open up clear opportunities across the ICT sector.

Summary and next steps
In summary, what I would say is that if our industry was operating as we would all like it to be – delivering its peak potential in an ideal environment – then this report would be just what the doctor ordered. While there is a degree recognition of the importance of our industry in the review (and certainly in Dr Cutler’s speech), there is not enough in this report to address the structural issues that prevent ICT from realising its full potential in the support of a dynamic innovation system in this country.

Unless the workforce issues faced by the ICT industry are resolved, and unless the innovation ecosystem for our industry becomes more globally competitive, then there is a risk that we will be unable to realise the vision outlined in Dr Cutler’s review.

It is not the mandate of the Cutler Review per se to ‘fix’ the problems we face as an industry. However, it is very important that the technology industry identifies the issues that are of most importance to our sector and its contribution to national innovation, and that we ensure these are an ongoing priority for the government in the short term. It is likely that the government does not have immediate access to the funds to meet the full recommendations of the report, and that a phased report will be required.

Government has invited input by 30 September through the departmental website. We need to ensure that the ICT industry’s voice is heard so that recommendations arising from this report that are essential to our industry are recognised as clear short-term priorities.

Your contributions are a key part of this process. You do not need to be an expert in the detail of the report, simply ‘tell your story,’ and provide feedback on the issues that affect you on the ground as a business both operating in the ICT sector and contributing to innovation in Australia. AIIA will prioritise key requests – what are yours?

In Dr Cutler’s words, a “venturous Australia needs a venturous ICT industry – enterprising, bold, and brave enough to mix it with the best.” This is our opportunity, and I strongly urge all members to consider the implications of the report and contribute to the White Paper process. I believe that individual approaches will be highly valued in addition to a group submission, particularly given the relatively low number of total submissions made by the ICT sector to the initial review.

If you are contributing, please provide a copy to AIIA through AIIA Government Relations General Manager Bridget Larsen, as we will make an overarching submission close to the final date to reinforce your views.

Ian Birks
Chief Executive Officer Australian Information Industry Association

22 September 2008

Technology innovation and the digital age

Beyond the laboratory


I vividly recall sitting in a negotiation room a few years ago, representing a corporate client in the middle stages of large technology outsourcing negotiations.

Like a hangover from an old legal drama in which mere numbers instantly intimated power, the room had been stereotypically (but rather unproductively) stacked. On my side of the table sat two commercial managers, three engineers and one in-house legal counsel. They were all well-practised at looking appropriately stern and influential, as though competing tenderers were poised to burst through the doors on cue.

Valiantly, the supplier had responded in kind, offering two project directors, one engineer and a sales manager. For the last three months, it had also insisted on fielding a ‘deal co-ordinator’. I never did work out what he actually did.

The more meetings we had the less productive they were, as topics seemed to expand eternally to fill the time available. For my clients, an intensive schedule of negotiations was a way of demonstrating heroic persistence to their broader procurement team and chief information officer. Negotiations represented engagement and activity. Unfortunately, I was the only one who had become acutely conscious that activity didn’t necessarily mean progress. I began to suspect both teams had simply found a brilliant way of avoiding any real work and were now loath to stray from a good thing.

The topic set for that morning was technology innovation. It had originally been listed in my client’s request for proposal as a ‘critical requirement’ and a bland placeholder had hence ridden along furtively in the draft services contract for some 6 months now. It had happily survived numerous exchanges of the draft without much regard. Today, we were forced to look at – and perhaps for the first time think intelligently about – the unhelpful pointer staring up at us. It simply read:

“[Innovation: The customer would like to discuss this critical requirement in detail further with the supplier]”.

In keeping with the practice we had adopted for all other negotiation sessions, I welcomed the supplier team to the table and invited our client’s lead commercial manager to begin with a general statement of the customer’s requirements. He began talking, emphasising the importance of “all forms of technology and non-technology innovation” to his company, stressing the rapid development of IT infrastructure in Australia and relaying some research pointing to an exponential increase in clients’ technology expectations.

He had spoken passionately for a good ten minutes when the room began to realise he hadn’t actually said anything particularly meaningful. He realised it too. When he finally wrapped up, the question from the other side of the table was painfully predictable (and slightly patronising):

“Look, we sound like we’re on the same page. I don’t think we can disagree with anything you’ve said. But with all due respect, I’m still no clearer as to what you actually expect from us in terms of innovation – or how you propose to measure us in relation to it.”

Trapped like a nervous rabbit, my client immediately glanced towards me, not missing a beat.

“Yes, I was getting to that. At the end of the day we figure that defining the supplier’s obligations is really a legal matter, so I’ll leave it to our lawyer to explain what we mean.”

Needless to say, we went nowhere that day.

As interesting as philosophical debates about business and commercial innovation may be from a theoretical perspective, they are susceptible to being fairly existential. Talk of innovation for its own sake is of limited utility, if unsupported by a clear definition of how or in what form it is intended to manifest. There is arguably no single definition of business innovation – it takes its meaning from the context of the very services in respect of which that innovation is sought.

It is vital that we try to enliven seemingly intriguing theories through intelligent applications. Truly successful commercial technology innovations should have a clear business or service outcome – for example, they may measurably enhance the consumer experience, improve the quality of a supplier’s products and services, give birth to new and more efficient forms of communication or contribute to a collective sum of knowledge that others can build upon in a discernible and synergistic way.

Today, the advent and acceptance of digital media and communications, new forms of content distribution and convergent technologies afford businesses a fascinating range of opportunities which, only a decade ago, was pure fantasy. For many, the digital age has now become synonymous with the intersection between science and commerce. While there are few industries that have not been impacted by the digital phenomenon, to fully and successfully exploit it demands intelligence and creativity, combined with a strong sense of the practical – what will work, versus what won’t; and what is interesting versus what is useful.

As we think increasingly deeply about innovation, the ultimate goal should always be kept in mind. Traditionally, creativity has been the mark of the dreamer and application the skill of the pragmatist. Assuming the two can be aligned – or at least develop some measure of co-operation – business will have finally identified a powerful combination.

16 September 2008

Funding innovation

Overview
The Cutler Report considers the funding gap between idea and commercialisation – the idea that many small and medium-sized firms lack necessary capital to test new concepts, are unable to attract third party investors due to risk and lack the cash to take advantage of existing tax-based incentives. It asserts that government can play a role in bridging this gap – through direct funding, increasing the pool of available private sector capital and linking enterprises with available sources of funding – and proposes a limited number of complementary programs to do this.

Government funding
According to the Report, government can play a very direct role in bridging the funding gap, and the Report proposes a limited number of specific programs which range from direct support (eg, repayable grants) to indirect support (eg, funding costs of business advice / implementation or acquisition of information).

In terms of government grants, the Report proposes the establishment of a Competitive Innovation Grants program to assist firms with limited access to capital in proof-of-concept and development stages. The program would target projects falling within specific identified national innovation priorities. Businesses would be required to repay grants from earnings on commercial success.

The Report also noted that there is currently a lack of support in terms of building innovation performance and capability in firms, and for services firms. The Report recommends the expansion of the Enterprise Connect program (which allows firms to obtain a business review at no cost and matching funding in order to implement changes identified by the review) to these areas. In our view, one area that it would be interesting to explore further in these business reviews is the extent to which ESOPs could help to attract, retain and motivate talent within the firm. Such schemes are widely recognised to play an important part in innovation but are not yet in wide use in Australia, partly due to tax considerations (which may soon change) but more importantly due to Corporations Act disclosure requirements, which greatly limit a firm’s ability to incentivise employees through share or option schemes.

The Report also considered ways in which the government could encourage collaboration, which it viewed as critical for Australia, and considered in detail the recent Report on the Review of Cooperative Research Centres (Collaborating to a purpose), which concluded that government should assist firms to access knowledge generated by research providers. To this end, the Report proposes an innovation vouchers scheme, similar to schemes which have been successfully implemented in Europe. Each voucher would be worth a set amount of money, to be used to fund collaboration between small and medium-sized enterprises and a public sector research organisation.

Attracting private sector funding
The Report also considers ways in which it can assist small and medium-sized businesses to attract private sector funding. It considered this from two angles:
  • “individualised” assistance, pursuant to which individual businesses get help to attract private capital, and
  • more macro policies, which help increase the availability of venture financing generally.

In terms of the first type of assistance, the Report supported the extension of the COMET program, due to end in 2010-11, under which arms-length private sector business advisors assist companies ready to take an idea to market to identify the services they need to attract growth capital. This assistance has enabled firms to get funding from third party groups such as business angels.

On a more macro level, the Report also explored the state of the venture capital industry in Australia. It noted that the Australian venture capital market was growing, but was still small compared to other developing private equity markets, and venture capital investment is being directed away from the very early stage towards (less risky) early expansion stage.

As an aside, the Report highlighted the lack of information in relation to the venture industry in Australia. We wonder whether this lack of information was the driving force behind the dearth of comment on the success (or lack thereof) of the Venture Capital Limited Partnership program in attracting foreign investment in Australian venture capital – as this was arguably the most publicised effort by the Australian government to attract foreign venture capital ever and involved a major overhaul of Australian tax laws. (While the Report commented favourably on the aims of the Early Stage Venture Capital Limited Partnership program, we acknowledge it is too early in the life of that program to make any assessment as to its effectiveness – but data collection will be key to making this determination.) There are many well publicised criticisms of both of these programs, and it will be important to know the extent to which their shortcomings have impacted their effectiveness in growing the venture capital industry in Australia.

The Report’s recommendations in relation to the venture industry are aimed at narrowing the funding gap by increasing the pool of venture funds available for very early stage companies. The Report notes the success of the Innovation Investment Fund program (pursuant to which the government provides $20 million for funds managed by first time fund managers, provided they obtain matching funds and adhere to specified investment guidelines).

The Report also favourably recommends the continuation of the Pre-Seed Fund program (established to assist commercialisation out of public sector research organisations), but notes that the much-criticised $1 million cap on investments, which has left enterprises stranded squarely in the middle of the funding gap, should be replaced with a $1 million cap on first tranche investment.

The Report notes that angel investing is extremely important for early stage enterprises, and queries whether there is scope to expand tax incentives for other investor vehicles (like the Early Stage Venture Capital Limited Partnership program) to angel investors.

Finally, the Report comments favourably on the benefits of attracting overseas venture capital firms to Australia, both to increase the pool of funding for early stage ventures and to serve as a base for further developing local talent.

Recommendations
In summary, the Report recommends:
  • establishing a grant program, which would aim to provide funding to firms in the high risk, proof-of-concept and development stages, focusing on specifically identified national innovation priorities, with grants to be repayable from later earnings;
  • expanding the Enterprise Connect program and expanding and extending the COMET program;
  • the establishment of a voucher system, to enable small and medium-sized firms to access public sector research better;
  • attracting international venture capital funds to Australia (with a short-term goal of attracting a US venture capital firm to Australia), to increase the pool of funding available for venture capital and to further develop the skills base;
  • improving data collection, in order to evaluate better the impact of government support;
  • extending the Innovation Investment Fund program and the Pre-Seed Fund program (in the case of the latter, replacing the $1 million cap with a $1 million first tranche cap);
  • further reviewing support to be provided to angel investors, including tax incentives and modest facilitating grants.

Venturous Australia – Building Strength in Innovation

The report "Venturous Australia – Building Strength in Innovation" authored by a review panel headed by Dr Terry Cutler (and hence also referred to as the Cutler Report) was released on 10 September 2008. You can click on the following links to read Dr Cutler's summary of his Report, and his Pearcey Oration - Not waving, but drowning delivered at the 2008 Pearcey Medal gala dinner.

In a series of posts in this blog we will focus on what we consider to be the major themes arising out of the Report.

We invite you to consider our review and commentary on the themes of the Report and to join in a debate by posting comments setting out your views or questions about the Report or the broader innovation issues it may affect. We want this to be a site that allows for interaction and a development of ideas and responses. The usual blogging protocols and etiquette will apply.

Government contracting and procurement

Overview
Much of the Cutler Report is devoted to exploring the structure and order of internal Government frameworks within a national innovation system. This includes recommendations as to the extension of business innovation and knowledge sharing programs, additional support for the growth of human capital and the establishment of a National Innovation Council, supported by a consistent National Information Strategy, to co-ordinate innovation priorities and measure performance.


These are wide-ranging and are consistent with the Report’s emphasis on how Government can assist in improving not only traditional scientific and research innovation, but also non-technical business and service innovation.

However, the Report also makes interesting observations and recommendations regarding how a more innovation-conscious Government should itself behave as a customer and consumer of services in the context of its own procurement practices. Potentially, these recommendations would affect purchasing agencies of Government entities and a range of businesses that supply products or services to them.

While known for contracting in a notoriously rigid and risk averse manner, the Report recommends that going forward, Government should recognise its role as an active participant in facilitating innovation by:
  • as a major and significant customer, demanding and prioritising the importance of innovation in products and services purchased by it;
  • becoming open to risk-sharing arrangements in relation to the innovation components of significant procurements;
  • creatively exploring and fostering more innovative approaches to Government procurement, including through the use of forward purchase commitments; and
  • working with state and territory governments to implement a pilot small business innovation contracting program, similar to that implemented in the United States, designed to strengthen the growth of highly innovative firms and businesses.
Innovative procurement
The Report acknowledges that public sector procurements are typically highly specific and driven by an identified need to obtain a particular service or product at the lowest possible cost. This is a perfectly understandable and normal commercial imperative. However, because of the possible size and scale of its procurements relative to the overall market, Government enjoys a unique position and opportunity to stimulate innovation through its procurement attitude and processes.

It is recommended that Government should not simply assess its procurements like any other commercial corporation, but also have regard to the innovation components offered by various suppliers when evaluating competing tender offers. This might even justify Government paying a premium to secure an innovation component as part of its contracted products and services, notwithstanding that the benefit of that component may derive generally to the broader economy rather than immediately to the relevant Government entity. The Report’s reasoning is that if a supplier is offering innovation as part of its product or service components, it is likely that the innovation will be of benefit to local industry. Due to its unique position, Government should therefore be prepared to “internalise the local spillover when evaluating competing tender offers”, notwithstanding that this might have an immediate cost impact.

Government is also in a unique position to provoke suppliers into thinking of innovation as a critical part of its proposals - to a degree which might not otherwise occur to suppliers - by emphasising the importance of new and novel solutions in its selection process. As such, suppliers will come to accept that demonstrating innovation is an important part of obtaining government outsourcing business.

Risk sharing and procurement models
Contracting with Government is often difficult due to a generally limited risk appetite and a rigorous and stringent approach to accepting legal, commercial and technology exposure. In its capacity as a customer, Government often faces large suppliers with polar opposite preferences and views as to risk allocation. Equally, suppliers are often frustrated by the apparent unwillingness of Government entities to concede what they see as normal and commercially acceptable positions and an extreme public sector attitude towards the allocation of risk.

Increasingly, Government recommendations appear to be recommending a more moderate approach in relation to supplier capping and liability (for example, in the
Guide to limiting supplier liability in ICT contracts with Australian Government agencies released by the Minister for Communications, Information Technology and the Arts in 2006). However, the experience of contracting with Government generally remains a difficult one. The Report acknowledges that numerous submissions have remarked on “a prescriptive government response on procurement with little scope for innovation”, which “appears to be driven by an extreme aversion to bearing risk”. One submission to the Report authors reported research into Government client attitudes as being that “innovation increases risk and should be avoided at all costs unless it cannot be avoided because of otherwise unachievable timing or cost objectives”.

The Report also suggests other reasons for the current attitude of Government, including:
  • senior procurement officers being improperly equipped with technical and commercial knowledge required to buy and use engineering services, resulting instead in a heavy dependence on legalistic tendering and contractual frameworks; and
  • a reluctance of public sector decision-makers to risk their reputation on unknown or less significant suppliers and a natural bias toward ‘safe’ choices such as large multinational corporations.
The recommendation is that Government change not only its attitude to procurement but also its tendering processes, to permit a degree of experimentation and innovation. This includes incorporating sufficient flexibility into Government purchasing arrangements to permit novel approaches to be pursued where the result might be a better outcome or lower costs. One example given in the Report is the use in the United Kingdom of advance purchase commitments to afford suppliers greater scope, incentive and flexibility to develop and offer innovative solutions.

While not explored in the Report in any detail (apart from the comment that Governments should become more open to the sharing of risk), creative and contingent pricing mechanisms can also afford Government an invaluable opportunity to drive supplier innovation. A typical procurement model demands a particular scope of work from a supplier in exchange for agreed payments. As difficult as innovation may sometimes be to quantify and prospectively commit to, suppliers may be willing to accept more non-traditional items within their scope of work if the consequence of failing to achieve those items manifests as a price flex, or a reduced incentive payment, as opposed to resulting in a contractual breach.

Supporting programs
There are, of course, more structured ways in which Government can mandate that its agencies tangibly support innovation in procurement. The Report cites the
US Small Business Innovation Research (SBIR) scheme which requires US Government research agencies with research and development budgets in excess of US $100m to dedicate 2.5% of that budget to assisting research and development by small business where the potential for commercialisation and public benefit exists. Eleven US federal departments participate in the SBIR scheme, which is administered by the US Small Business Administration Office of Technology.

Though not specifically mentioned in the Report, the Office of Technology also administers the
Small Business Technology Transfer (STTR) Program. Five US federal departments participate in the STTR program, awarding US $2 billion to small high-technology businesses. This is a research and development-focused program aimed at expanding public-private sector partnership through joint venture opportunities between small business and premier non-profit research institutions.
The Report notes that the SBIR scheme is well regarded by many as best practice and notes its implementation in many jurisdictions beyond the United States. It recommends that Australia would benefit from implementing a similar scheme.


The scheme has three phases:
  • an initial phase of assistance to determine the technical merit and feasibility of commercialisation of the proposed R&D effort and the quality of performance of the relevant small business;
  • a second phase of R&D assistance based on initial phase success and a further assessment of scientific and technical merit and commercial potential; and
  • a third phase, in which the small business pursues the commercialisation objectives of the prior phases with non-scheme funds.

Notably, such a scheme already exists in Australia in relation to Defence procurement. While more limited in scope than the SBIR scheme, the Report notes it as generally well regarded. The scheme aims to award 20% of annual Defence procurement budget to small-to-medium Australian businesses.

The Report recommends that a broad program similar to the SBIR scheme would enhance Australia’s national innovation system and promote a more problem-solving and learning culture within the public sector. Of course, the success of such scheme on a global scale would ultimately depend on the extent to which such scheme initiatives can be aligned across all states and territories and the degree to which Government is prepared to embrace more creative and innovative procurement models.

Innovative people and education

The importance of human capital
The Cutler Report devotes a large amount of space to the issues surrounding the importance of “human capital” – that is the skills and attitudes of the people who work within organisations.


High quality human capital – essentially well-educated and highly skilled people – are essential to the development of an innovative society. As the Report notes:

“A highly‑skilled workforce is essential not only for the generation and application of new knowledge, but also to use and adapt the knowledge produced elsewhere.” (p45)

The actual role of education
The Report argues that the development of high quality human capital:

“requires attention at all levels of education: from early childhood education and schooling, through vocational education and training and higher education, and into the workplace”.

In relation to shortcomings in our current education systems and how they could better provide for high quality people who can either (or both of) innovate or adapt quickly to innovation, the Report emphasises the need to ensure an ongoing commitment to high quality teachers. It argues that:

“high quality teaching is a key driver of student performance and better student results means more innovation”. (p51)

Although it does not substantiate the link between teacher quality and innovation, it seems a difficult one to argue with, and most people will agree that good teachers are critical to the overall performance of an education system.

A decline in education?
The Report notes that despite this, there is evidence that the “academic aptitude” of Australian teachers has fallen in recent years. It quotes two main factors to explain this phenomenon:
  • a decline in the average salary of teachers, relative to all university graduates; and
  • the unwillingness or inability of education systems to offer merit‑based pay, as other professions do, to allow high-performing teaches to earn substantially more than the average.
The Report considers that such a pay system must appear unattractive to young university graduates and is acting as a disincentive to the best people considering teaching as a profession. If their skills cannot be recognised appropriately (as they would be in other professions) why should they consider teaching a viable long term career?

Without wanting to get involved in the politics that such a discussion inevitably generates, these appear to be sensible observations. At a time when almost all professions recognise the benefit of merit‑based remuneration systems, the rigidity of the pay scales of the teaching profession are not as attractive as they should be.

…and its link to a “hidden” decline in productivity?
In assessing Australia’s productivity and innovation, the Report notes that after strong productivity growth in the 1990s, there has been significantly slower growth since 2003. This has been masked by the huge increase in Australia’s terms of trade (the commodities boom).

The Report argues that the “productivity success” of the 1990s can be partly attributed to “the successful adaptation of new technology and new processes [that] are made possible by the strong rise in educational achievements that has occurred in the previous decades.” [p13]

In particular, the Report notes the increase in the number of school students (particularly girls) going through to Year 12 and then into tertiary education in the 1970s and 1980s, who then entered the workforce in the 1990s and were implementing the “innovation surge” of those decades.

Since then, however, investment in education has declined and relative proficiencies in literacy and mathematics have slowed.

This, combined with a relative decline in research investment, has resulted in a slowing of innovation at a time when we will need such skills more than ever.

Some positives
Not that it is all gloomy. The Report notes that many enterprises are investing in on‑the‑job training and are actively working on increasing the skills of their people and that there is strong recognition at all levels that our education systems must be adapted to meet the need for innovation. The current government has placed education reform at the centre of its overall reform agenda.

The role of immigration
The Report also notes the importance and contribution of skilled immigrants to national innovation and productivity. The Report calls for better alignment between immigration policies and innovation policy to allow Australia better access to the global talent pool. In particular, the Report recommends that:

“human capital should carry equal or more weight than economic capital and individual migration assessments” (Recommendation 5.2)


Intellectual property

Overview
One of the most interesting features of the Cutler Report for lawyers, legislators and owners of inventions and innovative processes is its discussion in relation to the relationship between intellectual property (IP) protection regimes and incentives to innovation.
Broadly, the Report observes that:

  • the current Australian system of IP protection, while originally devised to encourage the development of new IP which would not otherwise exist, has now instilled monopoly rights in rights owners and hampers incentives to future innovation;
  • in particular, the ease with which software and business method patents are granted, the ambiguity of their definition and an increasingly relaxed application of the ‘inventiveness’ requirement has created uncertainty regarding the delineation of competing rights;
  • philosophically, IP should be determined as a feature of economic rather than legal policy. As such, lawyers and the regulatory framework should offer an important and supportive (but not necessarily predominant) role; and
  • the rising cost of enforcing IP rights through the current system of litigation represents an inefficient form of dispute resolution and favours litigants with large financial resources. To mitigate this, a system of ‘appellate double jeopardy’ should be adopted as a disincentive to excessive appeals brought by well-funded organisations.

Balancing rights and incentives
The Report notes that left to its own devices, the free market does not generate ideal incentives for information and knowledge innovation. This is certainly true. If there were an absence of IP rights, the ease of duplication, copying and leveraging of fresh ideas and business applications by others, including competitors – especially in the current technological and digital age – would be troublesome. At best, they would offer a developer of IP-rich innovation questionable returns on its investment and poor incentives to development.

In response to a need to generate such incentives, protective legal rights such as copyright and patents emerged. As a general theory, these concepts represented a way of protecting and rewarding innovative investment while preserving incentives for further development.
While the Report acknowledges that an imperfect system of incentivisation is preferable to none, it suggests that the current system has now instilled monopoly rights in IP owners, which rights are being widely used for defensive purposes and “generally allow [IP owners] to price [their IP] above the marginal costs of its provision, which is often near zero”.

The Report observes that the current system fails to recognise the importance of the cumulative development of IP – that is, the principle that for innovation to occur most efficiently, various bodies of work must be allowed to leverage and build upon each other.

As such, the Report proposes that it is critical to now rebalance the protective rights of IP owners with the need to preserve opportunities for, and remove the obstacles to, future innovation.


Software and Business Method Patents
The Report observes that the ease with which protective IP rights can be obtained has become a significant impediment to innovation. It notes that this is particularly the case in relation to patent rights, where:

  • ambiguity in relation to the definition and boundaries of patent rights is creating confusion vis-à-vis prior and competing claims;
  • judges have abandoned the traditional gatekeeping requirements of patent eligibility, leading to a general acceptance of items not historically considered patentable, such as software and business methods; and
  • the patent eligibility tests of non-obviousness and analogous use have been significantly relaxed to a point where they risk being meaningless.

A related concern is these developments have contributed to a ‘patent thicket’ in software, prompting large corporations to accumulate software patent pools which are largely then held for defensive purposes. It also observes that the more patents in a market, the grater the reluctance of new firms to enter that market and the greater the delays experienced in obtaining funding.

The Report indicates that the inventive steps required to qualify for patents should be restored to a considerable burden and the resulting patents better defined, to minimise litigation and maximise opportunities for forward innovation.

IP rights as a function of economic policy
Having regard to the US experience, the Report notes that software and business methods patents are “unusually liable” to litigation. A sub-category of the business method patent is the finance patent, which is essentially patent protection afforded to a method of finance. Software, business method and finance patents are all more frequently litigated than a conventional chemical patent. The suggestion is that the Australian experience may be even more concerning, considering the threshold level of invention for patent eligibility in Australia is lower than in other countries.

The Report notes that the Advisory Council on Intellectual Property is currently considering the issue of patentable subject matter, however queries the extent to which the simple removal of certain subject matters from patent eligibility can now address the current difficulties.

Firstly, Australia may be realistically constrained to retain specific areas of technology within its patent system by virtue of its obligations under the Trade Related Aspects of Intellectual Property Rights (TRIPs) code and the Australia-United States Free Trade Agreement (AUSFTA). The Report acknowledges that there are, of course, creative measures that could be taken to restrain patent eligibility in a TRIPs-compliant way, such as introducing minimum development costs.

However, any such proposals would need to be conscious that they did not set the bar too high so as to discriminate against proposals that were truly innovative, but simply could not demonstrate a level of quantifiable investment in them.

A more fundamental problem however, is that IP policy is being managed as a legal issue instead of being correctly viewed as “most fundamentally an aspect of economic policy” (albeit one that operates through the legal system). The Report observes that copyright and patent policy is not currently determined by economic policy but dominated by IP practitioners and the beneficiaries of the IP system. Accordingly, it proposes that a shift is required, similar to that which occurred when trade practices policy ceased to fall within the purview of the Department of the Attorney General and subsequently became a Treasury matter.

In short, the Report recommends that economic considerations should prevail in determining IP policy, with lawyers and the regulatory framework assuming an important and supportive (but not necessarily predominant) role.

Enforcing IP rights

Enforcement, costs and litigation
The Report is critical of the current method of enforcing IP rights and suggests it is an inefficient way of resolving commercial disputes as to the nature and extent of such rights.

Noting the high and rising costs of enforcement, it proposes that modern litigation is ill-suited to resolving complex business disputes. Also, it observes that the litigant with greater financial resources enjoys (or at least, is often perceived as enjoying) a distinct advantage, irrespective of the actual merits of a case. The result is diminished confidence in the enforcement system itself.
While the Report endorses IP Australia’s submission that litigants should use litigation more selectively and responsibly, it predicts that such initiatives may have little impact on the behaviour of large corporations who deploy IP litigation strategically against smaller entities. As such, the Report recommends that legal procedure reflect some proportionality between legal costs and the amounts at issue in the relevant dispute.

While as a concept this is certainly desirable, some further thought will need to be given to how such controls are achieved in a tangible and practical sense. Indeed, the need for creative and more efficient forms of dispute resolution has been the subject of much debate and many law reform proposals. The Report appears to recognise this. While welcoming some initiatives currently underway, it acknowledges “a long history of modest outcomes from reviews of legal procedure”. In this context, it proposes that some radical experiments may be justified (such as the adoption of a European civil law-style system of case management), at least in some selected areas.

Appellate double jeopardy
In the interim, the Report recommends a simple procedural rule of ‘appellate double jeopardy’ be adopted to level the playing field between large and small firms in IP litigation. That is, each party in an IP-related dispute would enjoy the right to elect not to appeal the finding of a court of first instance, except where a prospective appellant fully funded the costs of both itself and its opponent. An election in favour of the rule would be binding on both parties and neither could appeal a first instance decision without meeting all their opponent’s costs.

The proposal is an interesting one. It is understandable, given the concern that large corporations have the resources and energy to pursue a claim until it secures its desired result, with little regard for the costs of litigation. A small business, however, needs to pick its battles carefully and apply a rigorous cost-benefit analysis to its involvement in lengthy litigation. A rule such as appellate double jeopardy would certainly assist (although not necessarily always succeed) in mitigating a large corporation’s propensity to fight to the death as a given matter of internal policy.

Unfortunately, the Report does not elaborate on how those costs would be determined and what would be the measure of costs that a party would be entitled to recover under this rule. Also, it is unclear whether the Report anticipates that this rule would extend to a party’s internal management costs, time and expense, which is often difficult to quantify yet one of the most significant differentials in litigation capacity between a large, well armed corporation and a small, thinly resourced business.

A further aspect that is not investigated is how this proposed rule would interact with the existing body of law regarding costs, particularly where an appellant is ultimately successful on appeal and the first instance decision is set aside. Intuitively, it sits contrary to the general legal principle (and its intuitive sense of fairness) that costs should follow the event. However, the Report’s position may be that the process of IP litigation is so in need of streamlining that the normal legal rules should be displaced and a successful appellant should still pay all costs of the appeal, as a matter of greater public policy.

Recommendations
The IP-related recommendations of the Report are:

  • a review of patent law to restore the inventive step requirement to a more considerable level and ensure that resulting patents are well defined, to minimise litigation and maximise future innovation opportunities;
  • renewed emphasis on IP policy as economic rather than legal policy, with professional practitioners and beneficiaries of the IP system involved in, but not necessarily determining, IP policy-making; and
  • a new system of appellate double jeopardy to rebalance the rights between large and small litigants and encourage a fairer system of dispute resolution in relation to complex IP-related business disputes.


While further detail would have been welcome in relation to the last of these, it is difficult to disagree that any of these recommendations reflect highly valued and desirable objectives. The real challenge will lie in determining their most effective form of implementation, so as to strike a proper balance between protecting rights owners while ensuring that sufficient incentives still exist for current and future innovation.

Knowledge and information

The central role of information
One of the central themes of the Cutler Report is the importance of information and the open flow of that information. As the Report notes:


“Innovation in the first decades of the 21st century is more open and pervasive characterised by skill in collaborating and making connections so that knowledge flows and grows and so becomes available to meet customer and community needs…”

The Report emphasises the need to ensure that both the public and private sector organisations, and the governing “rules of the game” in the relevant markets, allow for the open exchange of, and the expansion of knowledge and information essential to these organisations and markets.

A role for Government?
The Report sees a strong role for Government in this. As the Report states:

“Government can improve information flows and support innovation and economic efficiency by encouraging disclosure, assisting markets for reputation to develop and by ensuring that the information and other ‘content’ that they fund is freely available to maximise its use and the value that others can add to it.”

The concept of the cumulative value of knowledge is central to this theme. The more widely and freely knowledge is shared, the better the chances of innovative development coming from that information, as the greater the number of minds there are that are thinking about, sorting, rearranging, combining and adding to that store of knowledge.

The Report also recommends the establishment of a National Information Strategy to “optimise the flow of information in the Australian economy”.

The aim of this National Information Strategy would be to:
  • develop standards to maximise the flow of information in private market about product quality; and
  • maximise the flow of government-generated information research, or content for the benefit of users.

In addition, the Report recommends that the Australian Government should adopt international standards of open publishing, including by the use of creative commons licensing.

This would represent a major shift in thinking by Government and a positive one. Many of those who interact with Government are, however, likely to believe it when they see it.

Collaboration and knowledge development
For organisations, the Report stresses the need for internal systems that allow for, first and foremost, collaboration within the organisation and, importantly, between the organisation and its customers.

The organisation that will succeed in being innovative are those that will:

“shift to a more distributed, flexible pattern of operations as a move from ‘closed’ to ‘open’ innovation. In this model the innovation process has become increasingly complex. To innovate, firms must involve a greater number of players more closely and intensively to realise the commercial potential of their ideas. This newer openness allows for an increase in the amount of resources and information available to the firm and the opportunities to recombine previously disconnected ideas.”

The Report uses the example of services organisations that already have had to move towards this type of model and, even more tellingly, have had to engage with their customers in the ways in which they provide service. The result, concludes the Report, is that services firms are, on the whole, ahead of other sectors in innovation, quite simply because their customers demand it.

As the Report states:

"Services innovation is strongly driven by customisation, even in individualisation, where discerning customers are not passive, but are fully engaged in designing the services that they are purchasing. Close relationships with customers help services companies defend against imitators and low entry barriers.”

And further that:

“Services innovation brings to the fore non‑technical skills such as teamwork, co‑operation, negotiation and communication; together with new areas like social network analysis….”

In essence, innovative organisations are ones that have learned how to harness and develop the individual skills and experience of their people towards common goals. They also tend to be organisation that have actively promoted “distributed power” models of working, rather than centralised control. An agreed goal or objective is required, but following that, people should be given the freedom and incentives to “get on with it” and to come up with new and different ways of meeting their customers’ needs.

The central theme
If a single theme emerges from this discussion in the Report, it is the increasingly interactive nature of the innovation process. It is not the case any more that an organisation “innovates” and then its customers await and receive the benefit of that innovation. Customers and a wider community of interest play a much more active and interactive role in innovation. Suppliers and customers learn from each other, and customers – particularly services and technology customers – are demanding that their suppliers behave in this way.

There will always be tension in this model, between the need to “open source” this knowledge and information and the need, where relevant, to protect a proprietary development. But overall, markets are becoming increasingly intolerant of proprietary information and those organisations that persist with proprietary are likely to fall behind as they fail to take advantage of the benefits of the more collaborative model.

Research in Australia

Australia has fallen behind
The Cutler Report makes a number of bold statements about the state of research in Australia and they are not positive. It states that:

  • Australia is falling behind both developed and emerging economies in commitments to investment in research across universities, public research agencies (for example, CSIRO) and throughout government and private sector organisations that conduct publicly funded research.
  • There are both financial and structural deficiencies within the government research funding systems. That is, there are insufficient financial resources and a fragmentation of effort due to the existence of too many research agencies and in situations.
  • We therefore have too much money spent on duplicating infrastructure and expense and not enough on core research capability.

A change to funding models
The recommendations of the Report regarding research relate primarily to the way in which government should fund research and the ways in which publicly funded research agencies (PFRAs) should collaborate with each other and with other national and international research organisations. The development of centres of excellence and strengthening the ability of the PFRAs to achieve maximum research benefits from their funding are central to these recommendations.

However, the Report focuses on providing better resourcing of the existing research funding system and proposes only minor structural changes where it considers such changes appropriate.
In summary, the Report advocates:
  • The transition of and the funding mechanisms to an allocate mechanism based on full costs, the promotion of excellence and specialisation, and the matching of the best research students with the best researchers.
  • The restoration of public funding of research as a share of GDP to 1993/94 levels by 2010 at an estimated initial cost of $2.2 billion per annum. Over the longer term, funding for research as a percentage of GDP should match the leading economies of the OECD.
The role of universities
Interestingly, the Report also call for universities to be the producers of research and not investors in research. That is, universities should not have to cross‑subsidise research from fees which has the effect of lessening the amount universities have for teaching and other services.

In addition, the Report considers that universities should not, except in some cases, be involved in the commercialisation of their research. Where they are, they should do so in partnership with an appropriate commercial stakeholder.

Conclusion
The Report also acknowledges that there are other reviews and initiatives that are relevant to the issue of publicly funded research and that this will be an ongoing issue for Australia.

That said, the Report does highlight effectively that Australia has fallen behind in its spending on research and that this has resulted in a decline in our overall ability to innovate and reap the rewards of that innovation. In essence, we have clever and capable people involved in research, but the structures around them and the limited funding available are not providing the right environment for maximum benefit.

Tax reforms

Overview
The Cutler Report notes that tax has a strong effect on all kinds of economic behaviour, including innovation. In this respect the Report observes that in relation to incentives for business to fund R&D expenditure:

  • the link between the rate of company tax and economic growth is strong, and although Australia has cut its corporate tax rates, it has not done so as aggressively as other OECD countries so that its corporate tax rate is now above the OECD average;
  • the data surrounding the effectiveness of the R&D Tax Concession (consisting of the 125% R&D Tax Concession, the Tax Offset, the 175% Premium Concession, and the 175% International Premium Concession) (Concession) is poor;
  • despite the paucity of data, it appears the Concession does not do enough for firms in tax loss, which are often the most innovative – many start-up firms are too large to qualify for the Tax Offset, yet are not successful enough to access other aspects of the Concession for years (if at all);
  • the Concession is typically accounted for “below the line” (and so does not influence a range of business decisions);
  • the effective value of the Concession has decreased over time as the corporate tax rate has fallen; and
  • accordingly, the Report recommends that the Concession be replaced with a simplified tax credit, described in more detail below.

Corporate tax rate
The Report notes that there is a strong negative correlation between growth rates and corporate tax rates. Reductions in corporate tax help to stimulate foreign investment and, some studies have shown, increase entrepreneurialism. While Australia has lowered corporate tax rates, it has not done so as aggressively as other OECD countries, with the effect that Australia’s corporate tax rates are now above the OECD average.

The Report acknowledges that lowering the corporate tax rate will have a negative impact on revenue collection, but notes that there have been recent proposals for a revenue neutral reduction in the company tax rate funded by the abolition of dividend imputation, which evidence suggests are not fully valued by the market.

The Report states that appropriate forum for considering these issues is the Australia’s Future Tax System Review, chaired by Dr Ken Henry.

R&D Tax Concession
The Report notes that the Concession is the largest single government innovation outlay.

It notes that data relating to the success of the scheme is poor, and that analysis of what data is available is complicated by outside factors which likely played a large part in influencing R&D expenditure. For example, data shows that there have been upturns in business expenditure on R&D on introduction of the R&D Tax Concession in 1985, and a downturn when the concession rate was reduced from 150% to 125% in 1997. However, the growth may also have been driven by the need for Australian companies exposed to the international market in the 1980s to become more competitive, while the downturn may be explained by the abolition of the ability to syndicate rather than the reduction in the concession rate.

It was noted that the nature of business investment in R&D had changed over time – in 1985 the prevailing model of business research centred around in-house corporate laboratories, but the prevailing model today is open innovation – which suggests that a review of tax incentives designed to stimulate R&D expenditure is timely.

Aside from the fall in the effective value of the Concession (which had been reduced by 3 times since 1985 as a result of a reduction in the concession rate and the lowering of the corporate tax rate), the Report questioned the success of the scheme in incentivising companies to spend more on R&D because eligibility criteria meant that many companies were not able to access any element of the scheme.

Companies in tax loss – which are most crucial to innovation – were particularly disadvantaged to the extent they were too large to access the Tax Offset, because anti-avoidance measures meant the natural attractiveness of tax losses to an acquirer often could not be exploited. The Report acknowledged that while such anti-avoidance measures are necessary, such measures have a dampening effect on investment in start-up companies.

Finally, the Report notes that even if eligibility criteria are met, it may not positively influence firms’ behaviour. The Concession is accounted for “below the line” and so does not factor sufficiently into decision-making, reducing the impact that the Concession can have on decisions relating to R&D expenditure. Further, delays in accessing the benefits have an adverse impact firms’ behaviour – paying benefits in the year post-expenditure may not be soon enough to positively influence behaviour.

Instead, the Report proposes:

  • a non-refundable tax credit of 40% to support all R&D activity undertaken in Australia; and
  • a refundable 50% tax credit for smaller firms (with a tenfold increase in what is considered a small firm – from $5 million to $50 million),
    which in each case apply to any research activity carried out in Australia, regardless of firm ownership.
A tax credit is accounted for “above the line” in firm budgets and so will have a more direct effect on firms’ decision-making. The simpler rules will also make it easier for firms’ to assess the impact of the credit, and take appropriate decisions.
The Report emphasises that tax-based entitlement measures are not suited to supporting large joint or collaborative projects and that additional programs more directly suited to these areas be maintained.

Scope of R&D activities
The Report notes that the scope of R&D supported by tax-based incentive schemes should be broadened beyond R&D entailing substantial technical risk. If it is impractical to do this with either the Concession or the tax credit, alternative programs should be developed. Specific recommendations include:

  • R&D on open source programs should qualify for the multiple sale test and potentially benefit from relaxed requirements in relation to the degree of “technical risk” required, since development of open source software generates clear spillovers for the rest of the community;
  • the ability of “whole of mine” and similar claims to access the Concession, or the proposed credit, should be constrained.
Recommendations
In summary, the Report calls for:

  • a return to a classical tax system with a lower corporate tax rate and the abolition of dividend imputation;
  • changing the incentive system from a tax deduction to a tax credit – specifically a 40% non-refundable credit available to large firms and a 50% refundable tax credit available to small firms, redefined to be firms with turnover under $50 million;
  • all R&D undertaken in Australia which meets relevant definitions be eligible for the tax credit;
  • further work should be undertaken to determine the feasibility of expanding the scope of R&D eligible for the tax credit; and
  • managing the timing of payment of the tax credit (but having regard to the likely benefit versus the administrative and compliance costs and the need to manage risk).

The role of government in innovation

Overview
Should government be involved in innovation? The Cutler Report addresses this question from a number of perspectives and concludes that there is a role in Australia for government to support and encourage innovation.

Government as an innovation customer
One perspective, which is dealt with in our discussion on government procurement, is to make government a technology and services customer that recognises, rewards and shares the risks associated with innovation. Most suppliers to government would probably welcome such a change in approach to procurement contracting, but are likely to believe it when they see it.

Reasons for further involvement
The issue of direct government oversight and involvement in innovation is more complex.

The Report sets out a theoretical case for a public innovation policy by looking at the nature of information and knowledge and how a market deals with those characteristics. The key characteristics of knowledge are said to be:
  • it is non‑rival – it can be reproduced many times without losing value;
  • it is cumulative – new knowledge builds on existing knowledge;
  • it is reproducible at negligible cost – particularly in the digital age;
  • it is only partly excludable – ideas can be used by others even if specific expressions of those ideas cannot (for example, copyright and patents)
    it is intangible – so it is difficult for financiers as it cannot be used a collateral;
  • its development produces uncertain benefits – investing in knowledge development (for example, education) does not lead to quantifiable benefits nor does it have quantifiable risks.

All of these characteristics mean that there can be difficulties when it comes to investing in knowledge. Even though most people recognise that there is value in knowledge, putting their own (or others’) money at risk to develop it is a very uncertain investment and one that does not meet the risk‑limiting investment strategies of many organisations

Supporting innovation
The Report then looks at whether government should “step in” to reduce or remove these risks so that private firms will invest, or at least have a better balance of incentives and risks, to make the investment feasible.
For example, the Report suggest that there are benefits to the wider economy and community from university research, and research carried out by public and private institutions. Therefore, the Report considers there is a case to be made for public support of these research efforts.
However, the Report also states that the designs of the principles for public support of innovation must be carefully considered. Such programs must:

  • set out a clear statement of objectives;
  • be certain about how the program will affect behaviour – will it cause the beneficiaries of the program to behave in a way that means the stated objectives will be met?
  • determine whether the program funding should be contestable;
  • determine its interactions and alignment with other policy objectives and be clear about how those policies will work together;
  • be clear as to the duration and how success or otherwise is measured;
  • understand the risks associated with the program;
  • be administratively as simple as possible and have low compliance costs;
  • must provide for full accountability and transparency;
  • ensure effective monitoring of development and reporting.

The Report considers that this can be done.

Governance
The Report recommends a new innovation governance model illustrated on page 155 of the Report in Figure 19.

In the model, several new government bodies are proposed:

  • the Prime Minister’s National Innovation Council (to replace the Prime Minister’s Science, Engineering and Innovation Council) to act as central co‑ordinator of a natural innovation system;
  • the Advocate for Government Innovation and Office of Innovation Assessment:
    - would be similar to Singapore’s Enterprise Challenge;
    - source of funds and expertise for conducting trials;
    - act as a forum for challenging government processes obstruct innovation;
    - provide project facilitation for obtaining relevant regulatory approvals;
    - reporting of knowledge;
    - establish national innovation awards;
  • Research Co‑ordination Council made up of major statutory research bodies and other key public sector research bodies to provide advice to the NIC;
  • Ministers for Innovation – Commonwealth and State levels;
  • Innovation Australia to be a single agency responsible for delivering innovation support for private sector firms.

Challenges
The challenges that these recommendation will face, if implemented, will be to provide better, more efficient government support and co‑ordination for innovation, while preventing adding yet more layers of compliance and red‑tape. This will be a considerable challenge.