Competitiveness: Three wins but is the money well spent?

by Jim Minifie

An edited version was published at The Conversation, Tuesday 14 October

Yesterday the government announced its Industry Innovation and Competitiveness Agenda. The Agenda sets out what the government has done and what it aims to do in four areas: the business environment, the labour force, infrastructure and industry policy.

The government’s ‘has done’ list includes some questionable calls, such as ending carbon pricing. Its ‘will do’ list includes some questionable commitments, such as the paid parental leave scheme.

But the concrete new initiatives announced in the Agenda look broadly sensible and do not cost much.

Three initiatives could turn out to be big contributors to startups, gains from trade, and skilled migration.

Reforms to the Employee Share Scheme taxation arrangements are overdue. Paying employees partly in shares or share options can be a great way for cash-strapped startups to reward employees while burning through a minimum of cash. Yet since 2009, Australian startup employees have had to pay tax from the first day their shares or share options are issued. That has put them in the absurd position of having to pay tax well before their shares can be sold for cash. While some startups have found ways around the restrictions, many say the rules sorely limit the value of share schemes in Australia. Delaying the point of taxation will make it much easier for startups to make attractive offers to their employees.

The new tougher test on the creation of Australian standards is also welcome and overdue. Before a new Australia-specific standard can be set, regulators will need to show a good reason to introduce one. Government will also apply the new test to existing Australian standards.

Standards can be a two-edged sword: they can reduce the costs to buyers of assessing quality but they can also restrict competition, to the detriment of customers.Take the case of children’s car seats. ISOFIX seats — the international standard developed in the 1990s — have the potential to be much safer than Australian belt-fixed seats, because they are less often installed incorrectly. But it took Australia until last month, 16 years after the first ISOFIX products came on the market overseas, to approve a modified Australian standard that incorporates ISOFIX. The reforms should also help Australian exporters achieve production scale by using a single certification for domestic and international markets.

Reforms for skilled migration are also sensible, if relatively minor. Research overseas has shown that skilled migrants do not take jobs away from locals, but instead can boost their incomes. Skilled migrants can make locals more productive, start businesses that employ locals, or help local firms plug into international networks. Anecdotally, technology firms in some cases have had difficulty attracting top international talent. It’s less clear whether an initiative to further open the door to migrants with large sums to invest (‘significant’ and ‘premium’ investors) will add much value. But reducing barriers to equity capital inflow could be useful as investors may start new businesses where they live. A second factor is that foreign equity investors may pay double tax on Australian dividends, so foreign investment is biased towards debt rather than equity, so that may provide some basis for attracting foreign equity including through investor visas.

The program also offers substantial spending on apprenticeships, and several smaller funded programs.

The largest single funded initiative is the $200 million a year Australian Apprentice Support Network. Helping more apprentices finish their apprenticeship is an admirable goal, yet one wonders whether the Network’s offers of screening, job matching and case management will help much when so many apprentices say they drop out because apprenticeships pay relatively little. The package also includes two smaller initiatives: regional scholarships and a regional youth employment pathway.

The rest of the education program aims to strengthen science, technology and mathematics (STEM) in schools and to pilot a hybrid advanced secondary school model, P-Tech. STEM education in Australian schools has lagged, with enrolments falling in the 2000s, and many schools say they are short of teachers with strong mathematics and science qualifications. While questions can be raised about whether the demand exists for tertiary STEM graduates, it’s much easier to make the case for stronger secondary STEM education, which creates options for students and builds foundation skills. But the investment, at under $15m, is small.

Finally, five Industry Growth Centres will get seed grants and can apply for further funding for innovations and for working closely with researchers. They bring to mind the previous government’s Innovation Precincts. The focus areas — food/agribusiness; mining technology and services; oil, gas and energy; medical technology; advanced manufacturing — are not a million miles from those suggested by McKinsey in a report it did for the Business Council of Australia this year.

A case can be made for such initiatives on the bases that firms can be reluctant to innovate where they expect others will capture benefits and that Australian universities do currently not score well on ‘translation’ of research to industry. The sectors seem to have been chosen on the ground that as large or rapidly developing sectors they will provide the biggest payoff. The evidence that such programs work is weak. Yet as long as they are evaluated rigorously, they have some chance of paying off: if they fail they will at least teach us about what doesn’t work.

The Agenda includes some inexpensive reforms that could materially open up the economy to gains from innovation, trade, and skilled migration; a substantial increase in expenditure on apprenticeships; and a few smaller, more tentatively funded programs. Overall, these reforms are solid and defensible.

The Conversation