Government should direct more of the billions in public support slated for major programs like Future Made in Australia (FMiA) and the National Reconstruction Fund (NRF) towards early stages of the innovation chain, including high-risk high-reward development of new industries, according to a new report from the Centre for Policy Development (CPD).
The report – Ideas to industries: How to get the most out of public money for industrial development – compares government funding for the development of new technologies, the “pre-commercial stage”, with funding for the scale-up of proven technologies, the “commercial stage”.
Government in-house investment vehicles such as the NRF, the Clean Energy Finance Corporation (CEFC) and the Australian Renewable Energy Agency (ARENA), which manage $50 billion in public funds for developing new industries, have the potential to unlock significant opportunities in pre-commercial industry development – especially as the world transitions to a net-zero economy.
The report revealed that in FY2024, most Commonwealth Government funding for low-carbon industries went toward commercialising existing technologies. However, it recommends shifting more funding toward pre-commercial industry development to capitalise on new technologies essential for staying competitive in a changing global economy.
Government support for the early stages of industry development is crucial, as private capital markets often shy away due to higher risks and uncertainty. Early-stage investment is also key to building a diverse, resilient economy. Currently, Australia’s economy – largely reliant on fossil fuels and raw materials – ranks 93rd out of 133 countries in economic complexity, just behind Armenia and Uganda. To accelerate the energy transition, safeguard against economic shocks, and address inequality, Australia must diversify its key industries.
The report recommends the government direct more funding to programs suited for financing pre-commercial projects, such as ARENA and the Industry Growth Program. It also highlights the importance of using safeguards like the National Interest Framework under Future Made in Australia to ensure investment decisions are rigorous and strategic.
The report also found that while the CEFC has offered $100 million in loan concessionality over its lifetime – financing on more favourable-than-commercial terms – it could have given $3.6 billion in discounts under its mandate, presenting a significant opportunity to support more early-stage projects. Discounted financing is crucial for enabling projects that are on the edge of viability, which might otherwise struggle to secure full funding from commercial banks.
Further reforms could enable investment vehicles like the CEFC and NRF to more aggressively fulfil their role as catalysts for new economic activity by adjusting their mandates, benchmark returns, and risk appetites.
CPD economic director Toby Phillips spoke about the importance of getting the most out of government investment in new industries.
“The government has the biggest balance sheet in the country. With smart use of these resources, it can support vital new industries for long-term prosperity.
“Government capital should be focused more on boldly driving new industries and less on chasing commercial returns.
“The use of so-called ‘off budget’ funds are appealing to governments because they don’t require funding from the budget. But this limits their ability to support new industries to become economically viable.
“Investing in new industries is a high-risk, high-reward game. If we want the rewards we have to be willing to take more risk with public capital.”
CPD senior economic adviser Mara Hammerle emphasised the importance of government investment in the pre-commercial stage of new industry development to secure Australia’s future prosperity.
“Funding for developing completely new technologies is critical to boosting productivity and seeding ideas for the industries of the future.
“You only need to look as far as the fundamentally world-altering invention of Wi-Fi to see how well public investment in R&D has paid off in Australia.
“Australia’s current R&D spend of around 1.7% of GDP is well below the OECD average of 2.7%.
“When it comes to major existential challenges like climate change and supply chain resilience, we cannot afford to under-invest in potential solutions.”
