Ideas to Industries: How to get the most out of public money for industrial development

Overview

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Australia, like the rest of the world, is grappling with a changing political and economic landscape, while trying to ensure our economy is set up to thrive into the future. Australia’s level of economic complexity – a measure that typically reflects a country’s ability to absorb shocks and respond dynamically to global changes – is currently 93rd out of 133 countries, just behind Armenia and Uganda. Building new industries to diversify the economy depends on investment in research, innovation, and supporting the development of new markets. 

Ideas to industries: How to get the most out of public money for industrial development is a report from the Centre for Policy Development, authored by Mara Hammerle, Toby Phillips and Arjuna Dibley.

It finds government funding is generally skewed towards the later stages of industry development which are already comparatively well-financed by private capital markets. It suggests shifting more funding towards the early stages of industry development, including high-risk high-reward projects that might otherwise struggle to gain private finance, and could one day become major players in the Australian economy.

Download Ideas to industries

Ideas to industries lays out a pathway for the most efficient use of the government balance sheet for industrial development, with a focus on the earlier stages of the innovation chain that are typically not well-financed by the private sector.

Why is it important to develop new industries?

Australia’s industrial structure is relatively narrow, and its comparative advantage is heavily reliant on fossil fuels and other carbon-intensive industries (like supplying iron for steelmaking). This leaves Australia exposed to declining international demand, which could become particularly problematic as the net zero transition accelerates, new technologies come to market, and global value chains are restructured. The costs to the public in waiting for private finance to develop the industries of the future are high – a more rapid transition to build out future industries will likely save trillions of dollars and secure the next generation of Australia’s international competitiveness.

Where do current gaps exist in financing?

Industrial development is not a task for governments to pursue alone – private capital markets are and will remain the biggest driving force in financing new industries. But because private investors seek financial returns, private capital is typically most available at the early speculative stages of a technology, where risks and rewards are highest, and after a technology has matured, where the risks are lowest. 

This leaves significant “valleys of death” through which ventures need to traverse before achieving commercial scale for their technologies. There is an important role for public sector financing to smooth the path from ideas to industries.

What does the report recommend?

The report makes the following recommendations to help catalyse the development of new industries and secure Australia’s future competitiveness:

1. Increase the relative share of financial support for the pre-commercial stage of new industry development as compared to the commercial stage.

2. Amend the investment mandates and risk appetites of the CEFC and NRF to enable them to more aggressively fulfil their role as catalysts of new economic activity:

  • Target a return of 0-3% above the cost of capital, instead of 2-3%.
  • Amend the risk statement to refer to an “acceptable but not excessive level of risk in pursuit of catalysing new economic activity”.
  • Amend mandates to explicitly encourage greater concessional lending and financial accommodation at the margins.
  • Use caps on concessionality – rather than limits on the total level of lending – to manage the government’s financial exposure to loan portfolios.

3. Make broader use of profit-sharing mechanisms for early-stage funding, to ensure a fair return to society for incubating nascent industries.

4. Pre-commercial projects should be given assistance to navigate the complex system of government funding opportunities and policy frameworks, either through the Treasury’s “front door” or through the Industry Growth Program.

5. Where tax credits are used, they should be designed to have a material impact on early-stage ventures (e.g. by being transferable).

Ideas to industries in the media

Federal funding bodies supporting energy and industrial transformation should direct more funds towards early stage R&D to support innovation according to a new report from the Centre for Policy Development.
The Albanese government is being urged to amend its investment mandates and risk appetites to channel more of its landmark industry support to research and deep technologies after analysis found its current approach is too conservative.

About the authors

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