Response—Industry Commission draft report on research and development

On 20 February 1995, the Australian Academy of Science submitted the following response to the Industry Commission draft report on research and development.

The Academy welcomes the conclusion of the draft report of the importance of research and development (R&D) as a major source of innovation and an important contribution to economic growth. The report provides an excellent analysis of current thinking on R&D and innovation and supports the 'new growth theory' with its emphasis on R&D and knowledge as central to economic growth. It indicates that the concept of the production of new knowledge which can be used repeatedly in different applications is at 'the heart of new growth theory'. The report rightly supports the importance of human capital in the R&D process and in the generation and exploitation of new knowledge. But the analysis of Australia's innovation system and the report's recommendations for the major players in Australian R&D fail to capitalise on its excellent analysis of R&D and innovation. The importance of spillover of R&D and the networking of researchers receives scant consideration, and the recommendations for CSIRO in particular seem more appropriate to the outdated linear model of R&D.

The report recognises the essential role of Government in R&D, particularly in the support of basic research and the provision of incentives to stimulate the level of R&D in the private sector.


The report correctly identifies basic research as a main role for university research, but it is appropriate for universities also to perform some applied research. The balance between pure basic research, strategic basic research and applied research will be influenced by funding.

Although the report argues that universities are well placed to evaluate their own research conducted in support of teaching and the development of research skills, the recommendations show a further shift away from operating grants to institutions to the funding of institutions and projects on a selective basis.

The roles of university research as a cultural activity, for the advancement of knowledge and to enable active membership of the world research community, are given far less importance in the report than the role of research in supporting the teaching and research training functions of universities.

The Academy considers that the final report of the Commission should attach more importance than the draft report to the role of university research in the advancement of knowledge and to underpin technological innovation.

Particularly in the unified system, not all that is taught in universities requires active research. The Academy reiterates its view that the funding of basic research in universities should be determined primarily on the basis of excellence. It strongly favours the system of peer assessment.

Although the Academy supports a significant increase in funding for the Australian Research Council (ARC) and an increased role, particularly in research policy formulation, it is opposed to an over-centralisation of power for research funding in the ARC, and emphasises the need to maintain a plurality of funding. The Academy strongly supports statutory independence for the ARC as recommended by the Commission. The Academy considers that the ARC should be well placed to determine the factors to be taken into account in assessing the research quantum, and advise the Government, but it should not be responsible for the distribution of the research quantum. The Academy agrees with the Commission's recommendations that the ARC should be responsible for the distribution of research funds among disciplines. Quality, determined by peer assessment should be the main criterion in the distribution.

Infrastructure funding to the universities should be distributed by the methods offered in the Academy's submission to the enquiry.

The Academy agrees with the Commission's view that it is appropriate to leave an assessment of research in the ANU Institute of Advanced Studies to the review committee established by the ARC and the ANU.


The Academy agrees with the Commission's view that the main role of CSIRO is the performance of research which has direct value to industry and the community, but lacks sufficient private returns to be performed or sponsored by a firm. The Academy interprets this as mainly strategic research. Government-funded strategic research is a well developed feature of the Australian innovation system. The role of CSIRO in performing strategic research received favourable comment by a UK House of Lords Select Committee on Science and Technology in the late 1970's. It saw the low amount of strategic research in the UK as a deficiency in their R&D system. But the role of CSIRO must allow a component of applied research and contract research with private firms and for spillovers in both directions of the CSIRO-industry link. There must also be networking between the public and private sectors. The Commission's report emphasises the complexity of R&D and innovation, and the need for the interconnection of the elements of R&D. But these concepts are not carried through to the recommendations for CSIRO, which seem more consistent with the linear model of R&D.

The Academy disagrees with the view that the customers of CSIRO research are predominantly the Government as implied by the recommendation that Government increase substantially the extent to which it commissions CSIRO to do public good research. Government departments are not the true customers of CSIRO research nor are they set up to represent users. The recommendations revisit Rothschild which is widely regarded in the UK as a failure. The Commission's draft report lacks an assessment of the merits and track record, including cost-benefit assessments, of the performance of CSIRO research compared with research that is either directly funded by departments of state in other countries or commissioned by departments of state on behalf of industry.

If departments are to fund specific projects and programs on the scale carried out by CSIRO, they would need to build yet another government bureaucracy, which would be further removed from the research practitioners who interact with the international scientific community and the Australian customers of the research.

CSIRO is much better placed to determine research priorities and allocate resources to projects and programs, provided there is good contact between CSIRO and the customers or potential customers of the research, including government departments.

The Commission's recommendation that CSIRO be given a base level of funding of only 10-20% of total government funding is strongly opposed by the Academy. The recommendation shows a considerable lack of understanding of the environment and infrastructure for the performance of high-quality strategic basic research and the need for CSIRO to be able to offer employment conditions which can attract and retain the very best researchers. This can not be achieved if 80-90% of the funds are provided by contract for projects, many of which are likely to be short-term. CSIRO has shown that it is capable of developing performance measures, and its management has the trust of the researchers.

The performance of a strategic research organisation of the reputation of CSIRO and its contribution to a successful innovation system in Australia is vitally dependent on the maintenance of a strong and healthy science base in the Organisation.

Funding of CSIRO from several Government departments will reduce the flexibility of the organisation and the Government to change research priorities in keeping with altered national needs and opportunities. There is the danger of a much reduced appropriation funding for CSIRO because of the diversion of resources to fund departmental initiatives unrelated to research needs.

The Academy indicated in its submission that the Government should enunciate an overall policy for R&D and set broad national priorities, aligned to national goals and priorities, but the selection of research programs and projects should be determined by researchers in consultation with users.

An appropriately structured CSIRO Board is far preferable to yet another layer determining CSIRO policy and priorities. There are too many layers already for the most efficient and effective operation of CSIRO and the morale of the creative scientists has declined.

The Academy considers that the Board of CSIRO should be restructured to be composed of executive directors as well as non-executive directors. This would be more appropriate for a research organisation than the present structure and provide for improved decision making by the Board and better communication and trust between the most senior research management and the non-executive directors. High technology companies have operated successfully over a long period with executive and non-executive directors. Subsidiary Boards could also be considered for the broad areas covered by CSIRO research e.g. agriculture, minerals, manufacturing and environmental research. This would mimic the structure of larger companies and their subsidiaries, and could lead to more effective management of CSIRO.

Human capital

The report lacks an understanding of the way high quality research is carried out and why Australian research institutions have international reputations. Human issues, such as career structure, continuity of employment and stability of research programs are critical for creative research and the retention of the best human capital. R&D will not be attractive to the best brains unless an appropriate climate is provided. Human resource issues in R&D in Australia are of great concern. There is a sense of embattlement among scientists, and some of the recommendations of this report, if implemented, would provide cause for more alarm. The Academy considers that human issues are vital to a strong innovation system.


The analysis of private sector R&D in the report does not provide answers to the low level of private sector R&D in Australia. In our submission to the enquiry, the Academy strongly supported the continuation of the 150% tax concession for private sector R&D.

The proposal to provide a grant to tax loss companies which is comparable to the tax concession is interesting and worthy of further investigation, but discretionary grants from GIRD have the advantage of fostering company - university interactions and should be continued.

Research associations have not been regarded as generally successful for manufacturing industry unless a compulsory levy can be imposed on all firms in a particular sector. Precompetitive research carried out in research association spills over from firms who are members to firms who chose not to pay the levy. Research associations can be effective in an area such a welding, which is a common technology in very many firms.

Syndicated research

Syndicated R&D arrangements were introduced by the government in 1987 to encourage institutional investors, such as financial institutions, which have no direct means of using the R&D results, to invest in R&D projects. Such arrangements enable the pooling of resources, financial and technical expertise and know-how, of various parties to undertake R&D projects which were too large or too risky for one company.

Most syndicated R&D arrangements in the market today are 'not at risk' arrangements, whereby the investors are not bearing the financial risk associated with their investment in R&D. These investors are guaranteed a minimum rate of return for their investment and as a result, are able to claim a tax deduction for their R&D expenditure at the rate of 100% and not the concessional 150%.

Tax exempt government bodies (unless they are registered as Commercial Government Bodies), which have been the early participants in syndicated R&D arrangements, have now been prohibited from participating in 'not at risk' structures. This has effectively excluded them from competing for syndication funds to finance their R&D.

The trigger for the restriction placed on government bodies is the perception that the tax exempt status of government bodies represented in effect unlimited 'tax losses' which can be traded for new R&D funds without the need for any real commercial decision on the part of the research organisation. This raised the concern that scarce funds were diverted away from the private sector which is seen to be conducting more commercially-focussed R&D activities. Accordingly, it is perceived that the potential cost to revenue may not be justified in terms of the net effectiveness of syndicated R&D arrangements in raising investment in R&D.

It is submitted that the perceived concerns can be addressed by current legislative requirements and criteria set out by the Industry Research and Development Board ('the IR&D Board') and the Taxation Office in their guidelines, without the drastic need for a blanket exclusion of government bodies in 'not at risk' structures. The exclusion of government bodies has impacted significantly on the ability of government bodies to attract syndicated funding resulting in valuable technologies not being commercialised. Such a result has serious adverse implications for the ability of the Government to achieve the objectives of its science and technology policy and also for Australia achieving the international competitiveness necessary for economic well-being. Accordingly, it is time that the decision to exclude government bodies from 'not at risk' syndicated R&D arrangements be reviewed by the Government. Arguments in support of removing the blanket exclusion are set out in the attachment.

Cooperative Research Centre Scheme

The Academy strongly supported the CRC scheme in its submission to the enquiry. It is seen as an effective mechanism to promote greater research networking between Universities, CSIRO and the private sector, and improving university, CSIRO, industry links. Many of the CRCs have the potential to produce new knowledge which can be used in different applications. The Academy is aware of some tensions in the Universities and CSIRO because of the impact of CRCs on priorities and the potential for Centres to cause some administrative and teaching problems. Industry is often concerned about issues of confidentiality, and conflicts in the exploitation of research results. There is an opportunity to examine issues such as these in the current evaluation of the CRC Program, although it is probably too early to assess the potential of the scheme to meet its major objectives and contribute to an improved innovation system.

Rural research

The Academy is opposed to the recommendations of the report that the rate of government contribution to funding rural research corporations be gradually reduced to one dollar for every four dollars collected in levies. Rural research has made a crucial contribution to the efficiency of Australia's cropping and grazing industries over a very long period. There is enormous potential for growth in the agri-food industry, particularly exports to the nearby Asian markets. Increasing levels of disposable incomeare creating new food preferences in these markets with emphasis on increased protein and increased cereal-based products. R&D and technology developments will be important to commercial success, with biotechnology destined to play an increasing role, both in rural commodity production and valued-added products.

The Commission's draft report argues that a 1:4 contribution for research for the Rural Research Corporations would be more consistent with arrangements for manufacturing industry. The report lacks an analysis of the structures of the agri-food and agri industries to justify the recommendation. The levy is funded by the farmers, but much of the benefit of the research will have significant spillover to the processors and the distributors of the products of the agri-food industry. The capacity for growth of this industry, which is already the largest single component of the manufacturing industry sector in Australia, is considerable.

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