Report of Labor Senators
Research Agencies
Legislation Amendment Bill 2002
Introduction
The Research Agencies Legislation Amendment Bill 2002 aims
to facilitate commercial activities undertaken by the Australian Institute of
Marine Science (AIMS) and the Australian Nuclear Science and Technology
Organisation (ANSTO) by amending their respective acts of establishment. Labor
senators support in general terms the aims of the bill.
The report of the Government senators states:
None of the submissions provided to the Committee expressed
concern about any direct aspects of the bill. [Government
senators’ report, par.1.9]
Labor senators do not agree with this assertion, and contend
that a number of submissions to this inquiry have raised serious and
far-reaching issues. The Department of Education, Science and Training itself
refers to the risks associated with commercialisation (DEST, Submission no.5,
p.4).
The Chief Scientist, Doctor Robin Batterham, also alludes to
potential risks, as follows:
I acknowledge achieving an appropriate balance between freeing
up government funded research institutions to enable them to secure the
benefits of commercialisation while protecting the principles of corporate
governance and financial due diligence raises some difficult issues.
In consideration of the Bill the Committee needs to be mindful
there are risks in any commercial activity.” [Chief
Scientist, Submission no.4, p.2]
Labor senators will discuss the issues raised by the Chief
Scientist in this minority report.
Concerns have been raised in submissions about the potential
implications of the passage of the bill for various aspects of the operations
of the two agencies, particularly their financial dealings, and safeguards
applying to these. A further concern is connected with the pitfalls and
dangers experienced by a number of other public-sector organisations in
commercialising their activities: Labor senators want to ensure that, as far as
possible, such difficulties are avoided by the two agencies that are the subject
of the bill. These concerns also arise in submissions to the Inquiry and are
discussed in this report.
The particular precedents that are instructive in this
regard are, first, the experience of CSIRO in commercialisation, and, secondly,
that of institutions in the publicly funded higher education sector. The
submission to this Inquiry from the CSIRO Staff Association (Submission 7)
details some of the issues that have arisen as the Organisation has moved to
increase its external earnings, including commercial earnings, highlighting the
shift away from basic and strategic research and the shift in resources towards
commercial operations, at the expense of aspects of the core mission of the
agency. Examples from CSIRO will be used to illustrate the concerns held by
Labor senators for AIMS and ANSTO.
The public university sector provides a further set of
illustrations of problems and tensions arising from the trend towards greater
reliance on commercial sources of income for what are essentially public-sector
institutions. The report of the Senate Committee’s Inquiry into the Capacity
of Public Universities to meet Australia’s Higher Education Needs, Universities
in crisis (Senate Employment, Workplace Relations, Small Business and Education
References Committee, 2001) deals with these issues at length, particularly in
connection with universities’ research activities. Thus the findings and
recommendations of that report are highly relevant to the current inquiry.
Accordingly, Labor senators will draw on that report in the context of their
discussion.
Finally, conclusions are drawn, and suggestions made, on
means to avoid or ameliorate, in this instance, the problems experienced
elsewhere in the public sector where commercialisation of research activities
has been actively pursued.
Financial management
The bill seeks to relax certain financial provisions and
requirements applying to the two agencies, ANSTO and AIMS. The objective here
is to allow them to enter into contractual arrangements more easily, and to
free up restrictions on their borrowings. Noting that the agencies themselves
have welcomed these initiatives in their submissions, the Labor senators
nevertheless wish to point to some issues that, if not carefully dealt with,
could give rise to concern.
In the case of both agencies, under this bill limitations
applying to the monetary value of contracts that they can enter into will be
wound back. For AIMS, this means an increase in the financial threshold at
which Ministerial approval must expressly be sought, from $100 000 to $1
million. For ANSTO, the proposed amendment to its Act takes a different form:
the agency will be able to enter into contracts above the current threshold of
$5 million where this is prescribed by regulation. Labor senators do not
oppose these measures, although, in the case of ANSTO, the proposed intent and
scope of the regulation need to be spelt out. In this way some of their
reservations about other aspects of the bill might be addressed.
Of greater concern are the measures designed to remove
certain restrictions associated with borrowings on the part of one of the two
agencies: AIMS. The change would, it is understood, bring the AIMS legislation
into line with that of ANSTO, and Labor senators’ reservations about the change
for AIMS are also relevant to the other agency’s current situation in this
regard. The Department points out in its submission (p.3) that, as a small
agency with limited financial resources, AIMS lacks the capacity of larger
organisations, including CSIRO, to fund commercial ventures from within its own
resources. (CSIRO, under its legislation, does not have the power to make
external borrowings.) DEST says that:
Legal advice indicates that without AIMS having the power to
borrow, any spin-off company in which AIMS holds a significant equity interest
will not have this power.” [DEST, Submission
no.7, p.3]
Labor senators take it that the Department is offering this
consideration as a rationale for the proposed change in legislation. But the
measure goes much further in that it will allow the Institute itself to borrow
not just from the Commonwealth, but from other legal persons, although all
borrowings will need the written approval of the Minister. AIMS will also be
required to provide security for loans, under a Government guarantee.
Furthermore, AIMS will be empowered to make and guarantee
loans to its associated companies. Powers related to borrowing are already
available to ANSTO under its legislation. “Associated company” is defined in
the bill as one in which AIMS has 15 per cent or more of the votes exercisable
at a company general meeting. In other words, Labor senators note, AIMS would
be given powers under this bill to lend to companies in which it enjoys an
interest far short of a controlling one. Thus the Institute would be unable to
prevent the company from taking decisions that might be deleterious to AIMS’
own financial interests. This is of some concern.
The Department itself, however, also notes that:
... the participation of AIMS and ANSTO in spin-off companies,
like any commercial activity, is not without some risk... [DEST, Submission no.5, p.4]
Labor Senators draw attention to the serious problems that
have arisen in the public university sector associated with the financing of commercial
ventures, including their wholly- and partly-owned companies. Examples are
provided in the previous Committee’s Universities in crisis report
(Universities in crisis, 2001, p.236), to which a response from the Government
is now months overdue: these examples include the provision by the University
of NSW of a total of $17 million in equity ($10 million of which was a loan) to
its wholly-owned company, Unisearch Limited, between 1998 and 2000. Unisearch
reported a loss in 1999 of $5.2 million. Many other, similar, cases could be
pointed to. In reply to the charge that public funds were going to underwrite
the losses of universities’ failed commercial ventures, the Department replied
that the universities concerned had assured the Department that:
... no Commonwealth funds have been utilised to fill the gap
created by any losses... and there has been no report from auditors [general]
about any university utilising Commonwealth monies to cover losses of private
commercial arms. [Universities in crisis, 2001,
pp.236-7]
The report goes on to say (p.237) that, in the case of
Commonwealth-funded universities, it is not possible to distinguish
Commonwealth dollars in their possession from other funds. Thus the claim that
funds other than Commonwealth monies have gone to prop up commercial ventures
is without basis in reality. Universities in crisis notes (p.237) the view of
the Victorian Auditor-General, who has said that all assets of public
universities are public assets, because they have been developed through the
public university.
To draw a parallel with ANSTO and, more particularly, AIMS,
the power to make loans to subsidiaries or other associated companies carries
similar risk: potentially, public money could be lost. In such an instance,
the resources available to the agency are diminished and its capacity to pursue
its mission reduced. Given the comparative inexperience of many public-sector
agencies in commercial dealings, the dangers of such eventualities must be
considered.
The bill proposes a safeguard, in that the Minister’s
written authority would be required for borrowings and loans. While this is a
source of some comfort to the Labor senators, the restriction does not
constitute a guarantee that something untoward might not happen, in a financial
sense. The risks associated with commercial activity, noted by the Department
in its own submission, are real and must be borne in mind when approval to
enter into such transactions is sought and given.
Another matter highlighted by the Senate Higher Education
Inquiry of 2001 is the lack of profitability of a large number of universities’
commercial ventures. Of course, interaction with the commercial world has many
benefits and spin-offs, both for universities and also for the Commonwealth
scientific agencies: CSIRO Staff Association expresses a view about some of
these in its submission:
Our members have found working with private industry remarkable
satisfying. They value the direct interaction, the focus on results and most
of all seeing the fruits of their efforts being taken up and used. [CSIRO Staff Association, Submission no.7, Attachment,
p.11]
It is important, though, that the valuable public assets of
ANSTO and AIMS remain protected as far as possible from erosion and loss due to
poor commercial decisions. To this end, it is crucial that the activities of
their commercial operations, of any kind, be reported and monitored to the same
standards as those applying to the agencies themselves. The next section
discusses financial accountability measures.
Financial reporting and accountability
AIMS and ANSTO are subject to the financial reporting
requirements of the Commonwealth Authorities and Companies Act 1997 (CAC Act).
Labor senators are aware that the provisions of this Act are in certain ways
relatively prescriptive, and relevant clauses are summarised in the submission
by the Department of Education, Science and Training (DEST) (Submission no.5,
pp.2-3).
Turning to the university sector once again for a
comparison, it is interesting to note that university acts of establishment, of
themselves, are generally sketchy in terms of financial reporting
requirements. Universities, however, are required to report in detail to the
relevant parliament in terms set down by the appropriate minister. The
Commonwealth, as a condition of funding, requires universities to report on
their financial standing to DEST and the Department also carries out monitoring
of, and negotiations with, universities in the process known as “educational
profiles”. Section 14 of the Higher Education Funding Act provides for the
Commonwealth Minister to lay down conditions and rules applying to this
process, which is intended to ensure that universities husband taxpayers’
resources in a manner that serves the best interests of the public. This
process is detailed and relatively rigorous, although it is not, it should be
noted, an open one.
It is notable that universities’ commercial operations,
carried out through wholly-owned commercial arms or other companies, are not
subject to the reporting and accountability measures applying to their parent
institution. The report Universities in crisis observes (p.234) that a number
of State Auditors-General have identified what could be termed an
“accountability gap” in which at least some commercial operations associated
with universities take place.
A parallel phenomenon could easily exist in the case of the
commercial operations and interests of Commonwealth research agencies. Labor
senators draw the Government’s attention to the potential dangers here, with
regard to probity, accountability for the use of public funds and for the
security of public investment.
In Victoria, the Minister for Education and Training, Ms
Lynne Kosky, has recently announced the intention to tighten up requirements
and obligations placed on university councils in that State, with regard to
oversight of their commercial entities, including those established overseas.
The Government response to the review of university governance was released in
August 2002. Labor senators commend the Victorian Government in taking this
step, and call upon the Commonwealth Government to ensure that similar measures
are instituted in the case of Commonwealth research agencies.
Commercial operations and their impact on the core
business and management of research agencies
Submissions to the Inquiry from the Australian Professional
Engineers, Scientists and Managers’ Association (APESMA, Submission no.2) and
the CSIRO Officers’ Association (Submission no.7) drew the Committee’s
attention to potential contradictions and tensions in moves towards greater
emphasis on commercial activity and income on the part of Commonwealth research
agencies. APESMA, for example, noted:
... there is clearly potential for difficulty in striking a
balance between commercialisation and research in the national interest. On
the one hand commercialisation holds out scope for adding to the research and
development dollars available to ANSTO and AIMS. On the other hand
commercialisation should not be permitted to drive scientific research by
cherry picking the more lucrative commercial projects at the expense of
research effort in the national interest. Nor in our view should the
successful commercialisation of ANSTO and AIMS’ scientific work lead to the
withdrawal from them of government funds to undertake public sector research
and development. [APESMA, Submission no.2, p.4]
The CSIRO Staff Association’s submission adduces the
experience oft hat organisation’s members in a third Commonwealth research
agency, CSIRO:
The drive for external income has moved the nature of CSIRO’s
R&D downstream to short-term, problem solving and developmental science
that is limiting advancement of knowledge. The research direction is now
dictated by where and how the money can be obtained and this is not always in
the interests of the industry..... Many research sponsors do not pay the full
cost of the research or services they contract.... The planning of research
programs is largely dictated by what proposals successfully bring in the
funds. This has [led] to some duplication of research efforts and to
difficulties in workforce planning with a highly specialised staff. [CSIRO Staff Association, Submission no.7, Attachment,
p.5]
The submission also discusses the implications of undue
reliance on the volatile commercial market in terms of job security and the
existence of stable, viable career prospects for researchers and scientists
(ibid.). A further issue raised by the CSIRO Staff Association is the
instability of the commercial world when it comes to its financial and planning
commitment to R&D. Referring to the “moving famine” of private sector
R&D funding, the Association says:
Our members involved with the private sector sponsored projects
have noted significant changes in Australian businesses over the past 5-10
years. They state that economic changes appear to be having a greater impact
on the level of business expenditure on R&D than on any other business
activities... the quality of scientific interaction has declined. [CSIRO Staff Association, Submission no.7, Attachment,
p.12]
The submission goes on to note a recommendation of the
Innovation Summit report (Innovation – Unlocking the Future, Final report of
the Innovation Summit Implementation Group to the Prime Minister’s Science,
Engineering and Innovation Council, August 2000) to the effect that better
linkages should be built between research and industry. The Association notes
further, however, that the Innovation Summit report did not deal with the structural
and business practice impediments to investment by the corporate sector in
R&D that currently prevail in the Australian economy.
Another issue raised by the CSIRO Staff is the dramatic
increase in short-term contract employment by the agency over the last decade,
coinciding with the shift to commercialisation and external sources of income
generally. Contract positions of less than five years’ duration have grown
from less than 10 per cent to over 24 per cent of the total employee numbers in
the period 1991-2001(CSIRO Staff Association, submission no. 7, p.15). The
Association says that this has led to high staff turnover, loss of expertise
and extra costs associated with replacing staff, training new staff and so on.
This has induced, the Association, asserts, a short-term “limited vision
culture inimical to good R&D outcomes” (ibid.).
APESMA raises a further issue associated with workforce
planning. The Association notes (APESMA submission no.2, p.5) that, for ANSTO
and AIMS, the Government requires that salaries above the Australian Public
Service average must be paid for out of commercial earnings. However, it says,
the scope for commercial work in the case of these agencies is relatively
limited, because they are more specialised than, say, CSIRO. Thus it will
become more difficult for the two agencies to attract and retain staff of
internationally-recognised calibre. The Government, says APESMA, must provide
greater supplementation of funding for these agencies, so that they can
negotiate market salary levels for their research staff (p.6).
A problem that was identified in the Committee’s
Universities in crisis report, for universities, is the comparative lack of
experience and expertise of university researchers and university staff more
generally in dealing with the commercial world. The diversion of energy and
attention of institutional management and governing bodies to overseeing and
planning commercial ventures was undesirable, the report said (p.235), because
it drew these individuals and structures away from their core mission.
Further, where university employees became financially involved in spin-off
companies, obvious dangers of conflict of interest arose (pp.257-260). All of
these issues have the potential to arise in the circumstances to be facilitated
by the passage of the Research Agencies Legislation Amendment Bill 2002.
The Government senators, in their report (par.1.6), identify
a reason for the introduction of the bill: namely, that AIMS and ANSTO need to
be able to exploit respective non-marine and non-nuclear outcomes of their
research – something currently precluded under their acts. The bill, it says,
will allow this to occur. While Labor senators agree that this change is
desirable, they warn that the agencies should not be diverted from their core
missions by these activities: if the products of their research fall too far
outside the purview of these core aims, then a real danger exists that such
diversion might occur.
Finally, it will be necessary for the agencies to review
their intellectual property rules and regimes to ensure that the interests of
all partners involved in commercial activities and the commercialisation of
research are appropriately protected.
Conclusion
Labor senators, as noted at the outset, do not oppose the
passage of this bill. It is hoped, however, that, in implementing the changes
and developments that this bill will facilitate, the Government takes note of
the concerns and reservations expressed in this minority report.
In particular, the Government should ensure that:
Safeguards are set in place to ensure that the financial
management of commercial ventures undertaken by ANSTO and AIMS is soundly
based, well informed and subject to open public scrutiny;
Public assets are not put at risk in the agencies’
commercial ventures or operations;
Financial accountability, probity and reporting requirements
with regard to commercial ventures and associated companies of the two agencies
are of a rigorous standard, comparable as far as possible to those applying to
the parent agencies themselves;
The core missions and public resources, including staffing
resources, of the agencies are not compromised or undermined by their
commercial activities;
Intellectual property regimes of appropriate rigour and
robustness are put in place to protect both public assets and the interests of
commercial partners; and
The freeing up of restrictions on the commercial activities
of these agencies does not lead to a withdrawal of Commonwealth funds intended
to provide resources for their core public-good missions.
Senator George Campbell Senator
Kim Carr
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