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