Innovative key to reform for Malcolm Turnbull’s government

The government must review areas where policy is blocking growth.

Minister Wyatt Roy. Picture: Peter Wallis

When Telstra executive Deena Shiff decided to set up a venture capital business within Australia’s largest telecommunications company more than five years ago, it was a radical idea.

While other big telecommunications companies, including Deutsche Telekom, SingTel and Spain’s Telefonica, had their own funds to invest in small industry-related businesses, few big Australian organisations were doing it.

Shiff managed to convince Telstra’s management of the idea and was the founding chief executive of Telstra Ventures when it launched in 2011.

“It was a bit out there when we did it,” Shiff recalls, “but the idea (of big companies having their own venture capital funds) has since gained international acceptance.”

Shiff, who retired from Telstra more than two years ago, has since developed a career of involvement in venture-capital investment, including Scale Angels, which helps female entrepreneurs, and new cutting-edge companies.

She will be sharing some practical thoughts on the government’s role in fostering innovation at the Rebuilding Foundations for Reform conference, which begins in Melbourne today sponsored by The Australian and the Melbourne Institute.

The conference, which will be opened this morning by MalcolmTurnbull, himself one of Australia’s most successful start-up investors, comes when his government is considering a new innovation statement, to be delivered before the end of the year.

Today’s speakers include Reserve Bank governor Glenn Stevens, Productivity Commission chairman Peter Harris, opposition Treasury spokesman Chris Bowen and Treasury secretary John Fraser.

Tomorrow’s session on innovation will discuss what the government’s role in supporting business innovation should be, with speakers including Paul Jensen, acting director and professorial research fellow at the Melbourne Institute; Matthew Butlin, red tape commissioner at the Victorian Department of Treasury and Finance; and McKinsey principal David Dyer, the author of Compete to Prosper, a report on improving Australia’s global competitiveness, released last year by the Business Council of Australia.

A lot has happened in the private sector with regard to innovation during the past few years, with the growth of venture-capital funds set up by companies and high-net-worth individuals, and a rapid expansion of co-working spaces and start-up incubators such as Telstra’s muru-D in Sydney’s Paddington.

Now based in Australia and California’s Silicon Valley, Telstra Ventures has invested more than $200 million in companies such as enepath, Cohere Technologies, Elastica and mobile-security company Zimperium.

“When I left Telstra I would give talks to boardroom lunches about digital disruption,” Shiff recalls.

“I wouldn’t dream of doing it now, as people understand what it is all about. It has become part of the mainstream.”

A former partner with law firm Mallesons Stephen Jaques, Shiff is now on the board of communications services company the Citadel Group and speech recognition company Appen; she is also a member of the expert panel of Commercialisation Australia.

She argues the federal government’s innovation policy should include three related areas: the government’s role in encouraging innovative new companies; improving the commercialisation of Australian intellectual property; and deepening the skill base through the education system.

“The more new companies that are created — that use new pro­cesses, new business models and new technologies — the more ‘life’ feeds the economy,” Shiff says. “Not all of the companies that are created will succeed and many will go out of business; but company formation is vital to the health of the Australian economy.”

One of the key areas to be included in the Innovation Statement will be the use of tax incentives to encourage investment in start-ups and innovation.

GRAPHIC: Economic and Social Outlook Conference

Shiff argues that the present tax system is unfriendly to individual investors making risky investments in early-stage companies. But she notes things have come a long way since she helped set up Telstra Ventures, with an increasing array of potential investors and a growing number of small companies now opting to list on the Australian Securities Exchange to raise capital.

“There is now a lot of competi­tion amongst sophisticated and venture capital investors for companies about to hit their straps,” Shiff says. “Giving individual investors a better tax break where the risk is earlier and higher and where the pool of companies can be expanded makes sense.”

The question, of course, in giving out tax breaks is how to make them effective: how to prevent them becoming a burden on taxpayers by costing more in revenue forgone than they generate, and how to prevent blatant rorting.

Many players in the innovation policy debate are pointing to the success of the British government’s Seed Enterprise Investment Scheme and the submission by accounting firm KPMG to the federal government’s tax-reform inquiry as providing leads on how to approach new tax concessions to encourage investment in innovation.

Shiff particularly likes KPMG’s suggestion of a tax deduction around losses associated with the salary costs of setting up new innovative companies.

“This has a great resonance for entrepreneurs who struggle to meet payroll and worry about quitting their day job.”

Other tax-related issues are strengthening and improving the present research and development tax-offset scheme, which effectively targets investment in innovation by enabling firms to recoup their spending on new systems and processes.

Encouraging the commercialisation of the intellectual property coming out of Australia’s univer­sities and research institutes is another area to be included in the innovation policy statement.

Shiff points out that in commercialising ideas and research developed in universities there needs to be a clear distinction between funding for research and funding for commercialisation of univer­sity-developed ideas.

She argues that setting up new funds where the private sector can co-invest with government is a good way to go, but warns it is important “not to throw the research baby out with the bathwater”. Pressuring universities to divert research for short-term commercial gains could have dangerous consequences.

McKinsey’s Dyer argues that as the resources boom fades and the easy productivity improvements of the past have all been made, Australia needs to gear itself up to compete in a very different global market.

“This is a time of profound economic disruption,” he says. “Australia must be innovative to find new ways to prosper. To achieve this we will need to be externally focused, agile and optimistic.”

Dyer rejects the suggestion that the debate over government support for innovation is about whether it is a good idea for government to “pick winners”.

“We need to get past that simplistic debate and understand that there is a more nuanced role for government,” he says. Within this context, Dyer points out, there are a wide range of policy options to encourage innovation.

He argues that one of the key roles of government is setting the political tone around the importance of innovation.

“The government can play an important role in setting the tone by explaining the economic circumstances facing the country, encouraging innovation and entrepreneurship,” he says.

Dyer believes Australia already has a good record of attracting foreign capital investment and highly skilled labour, which is important for innovation and setting up innovative new companies.

Australia’s track record of encouraging skilled migration, he says, is far better than that of the US and needs to be continued.

Securing access to international markets, Dyer argues, through initiatives such as free-trade agreements and trade missions, is another area where the government can help innovation.

Australian management, he says, is world-class in many ways, but more needs to be done to make it more externally focused.

Dyer argues there is also a key role for governments to play in developing the “physical and knowledge infrastructure” that enables innovation. This includes the development of cities but also innovation clusters, particularly those associated with universities.

In the US there are prime examples around Boston and Silicon Valley, while Australian univer­sities, particularly business schools, are doing more practical work with business.

Ultimo, Sydney-based start-up space Fishburners, which houses more than 100 start-up companies, recently has reached a co-operation agreement with the University of Technology Sydney, just around the corner.

Fishburners general manager Murray Hurps says governments need to provide greater access to cheap rent spaces for start-ups and entrepreneurs to work in inner-city areas. The ecosystem around co-working spaces provides a fertile ground for encouragement and stimulation of would-be entrepreneurs and serves as a focal point for investors.

The co-working spaces not only encourage collaboration — the new-style approach to business — but provide entrepreneurs with the assistance they need, whether technical or commercial.

Dyer argues that measures to improve innovation in industries should be tailored to specific industries.

“There needs to be a focus on delivering sector-specific reforms that unlock the economy’s potential,” he says. “The barriers that hold back different industry sectors are often very specific, needing targeted reform.

“Given that reform is difficult, government should prioritise those sectors with the greatest potential to succeed — typically those where our comparative advantages are strongest.”

Dyer also believes government can drive innovation through its own direct activities.

“Government is a very large portion of most economies,” he says, “and innovating how gov­ernment procures and provides ser­vices can itself be a major stimulus for innovation in the private sector.”

In the recent policy “hackathon” in Sydney start-up space BlueChilli, conducted by Assistant Innovation Minister Wyatt Roy, several entrepreneurs raised the importance of closer engagement between government agencies and the start-up sector.

The event, which saw 20 senior public servants fly into Sydney first thing one Saturday morning for an all-day series of meetings with entrepreneurs and investors, highlighted the importance of more proactive connections between government and private sector innovators.

In his speech today the Prime Minister is not expected to give away too much about the proposed innovation statement. He is expected to talk about the importance of Australia having a “culture of adaptability, flexibility and innovation”. Government, he will say, should be prepared to review areas where policy is standing in the way of generating growth, productivity, investment and jobs.

“The task is to craft a tax system to ensure the taxes we impose to collect these revenues aren’t overly distorting the economic decisions which workers, business and consumers make,” he will say.

“People want a tax system that will back them in rather than hold them back.”

Exactly how this will play out in terms of a policy to encourage innovation remains to be seen. There are many issues to be discussed.

The tone has changed under the Turnbull government in favour of encouraging innovation, but the next thing is to produce some practical suggestions for change.

Tomorrow’s discussions may not provide all the answers but they will provide some informed food for policy thought.