Eco Investor June 2014

Unlisted Companies

Budget Blow to Commercializing Innovation

By Victor Bivell

Entrepreneurs commercializing innovative technology were dealt a massive blow by the Coalition Government's 2014 budget that is closing key programs such as the grant based Commercialisation Australia and the key venture capital industry support, the Innovation Investment Fund program.

Cleantech innovators received a double hit with the closure of the $1.3 billion Australian Renewable Energy Agency (ARENA), which has assisted many unlisted and listed cleantechs to further commercialize their technologies.

The very useful R&D Tax Incentive rebate will be reduced from 1 July. The rate falls by 1.5 per cent to 43.5 per cent for refundable offsets and to 38.5 per cent for non-refundable offsets. The change will apply for company income years that commence from 1 July.

The Cooperative Research Centres Program had its funding reduced by $80 million, and Round 17 for new CRCs will not go ahead.

Other commercialization related programs to close are Enterprise Solutions, Industry Innovation Councils, Enterprise Connect, Industry Innovation Precincts, and the Ethanol Production Grants Program.

The moves show a government that does not understand technology innovation and commercialization. Australia's commercialization infrastructure has taken over 30 years to develop and needs time and continued support to fully fulfil its potential role in the economy and become more self-sustaining.

Commercialization Australia was the outcome of previous Government grant programs and has supported hundreds of early stage technologies including many clean technology companies.

The Innovation Investment Fund was Australia's key Government venture capital program and is built on over 30 years of experience that began with the Management and Investment Companies (MIC) program in 1984. To abruptly end the IIF program with no discussion or substitute program is hugely irresponsible.

The decision means there will not be a fourth round of the IIF. Previously established venture capital funds are unaffected, and the last IIF is the $80 million Carnegie Innovation Fund No. 2 that was established last December.

The closure of ARENA is a huge blow to early stage clean energy companies. ARENA chair Greg Bourne said the ARENA Act needs to be repealed by Parliament before the changes can be implemented, but in the meantime ARENA will continue to perform its functions under the act including accepting and assessing applications. The Emerging Renewables Program (including the SHARE initiative) and the Accelerated Step Change Initiative will remain open during this period.

The changes do not affect the 181 projects, worth close to $1 billion, that already have funding agreements with ARENA.

The R&D Tax Incentive has been useful in helping many low cash companies.

An example of a company benefiting from the R&D Tax Incentive is Mt Gambier's de Bruin Engineering. With the sawmilling industry in decline, it branched out into agriculture. In 2010 it won the licence to manufacture an innovative weed controller – the de Bruin Harrington Seed Destructor (HSD), but needed further R&D including commissioning a hydraulic model.

The unit destroys at least 95 per cent of annual weed seeds during harvest, and can evenly spread all organic matter over the harvest site. "We had to spend about $250,000 in R&D in the first year to improve the design," said General Manager, John Millhouse, but the investment is beginning to pay off. de Bruin Engineering increased its staff numbers from 25 to 32 to meet demand for the machinery and 2014-15 sales of the HSD are projected at $1 million.

Rather than closing and reducing good programs, Australia needs to build on its established commercialization infrastructure and achieve world best practice. This is within reach, as shown by ATP Innovations, which last month won the 2014 Randall M. Whaley Incubator of the Year Award at the International Conference on Business Incubation. The National Business Incubator Association (NBIA) is the leading global body for business incubation and entrepreneurship with over 2,200 members in 60 countries.

ATP was selected because of its excellence in delivering business building services and its track record of building high growth technology companies with global reach. It has helped over 300 startups since 2000 and they have raised over $113 million in total capital since 2006. These include several cleantechs.

ATP also won the Dinah Adkins "Technology Focus" Incubator of the Year Award.

It takes time and experience to build a world class commercialization eco-system, not sudden stop-start policies that fail to grow and build on existing success.

In place of the many defunct and reduced programs, a new $484.2 million Entrepreneurs' Infrastructure Program (EIP) will commence on 1 July. But there has been no public discussion about this program and how it will work. The government has simply said the program will "drive business competitiveness and economic growth by supporting business improvement and commercialisation".

It said the program will offer business management skills for small and medium sized enterprises, support businesses to collaborate with the research sector to re-engineer business operations and develop new ideas with commercial potential, provide commercialization advice and brokering services for businesses to gain access to private capital, and support businesses to access expertise on intellectual property and to progress commercialization.

It does not seem to offer much hard cash.

Meanwhile, the Coalition Government is picking winners and has chosen the medical and mining industries as its favourites.

It is establishing a $20 billion Medical Research Future Fund to provide funding for medical research over decades. While medical research is worthwhile, such a massive amount of capital could have and should have been spread across many industries. It also risks entrenching Australia as a supplier of cheap R&D for overseas pharmaceutical and other medical giants.

Budget support for mining and energy of over $125 million includes $100 million for the Exploration Development Incentive to fund exploration for new mineral deposits. "The Exploration Development Incentive will provide small exploration companies with better access to capital from private sector investors via a refundable tax offset for greenfields exploration costs," it said.

There is also a joint grant with the Victorian Government of $50 million to develop two early stage brown coal demonstration plants in the Latrobe Valley that will produce oil, fertilizer and upgraded coal.

So life is good if you are an early stage medical or mining company; not so good for anyone else; and dire if you are an early stage cleantech.

There is no doubt that the loss of ARENA and Commercialisation Australia and the reduced R&D Tax Incentive will make it harder for early stage cleantechs to commercialize their technologies.

For listed early stage cleantechs, which are also affected, the majority of the Abbott's Government's damage was done when it opposed the Rudd's Government's introduction of the Carbon Pollution Reduction Scheme. For many, life since then has been a slow decline in their share prices, some into oblivion.

Industry minister Ian Macfarlane said "Industry policy will no longer be an overlapping plethora of small grants and entitlements. This new approach is based on setting the right economic environment by reducing red tape, equipping businesses with key market information and the opportunity to expand or export, and reigniting the Australian spirit of entrepreneurship."

Mr Macfarlane clearly does not understand that the spirit of Australian innovation and entrepreneurship was ignited many decades ago and has always burned brightly. Let's hope it will continue to burn brightly despite his government's incompetence and industry favouritism.

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