- Money and finance
- This chapter discusses how the development of advanced manufacturing is influenced by the financial environment. It focuses on those areas where the Australian government can financially support or incentivise advanced manufacturing, directly or indirectly.
Backdrop: a global investment arms race
3.2As noted in Chapter 2, global markets are currently marked by fierce international competition for capital, with a resurgence of economic nationalism, subsidies and trade protections for home industries.
3.3The April 2023 OECD (Organisation for Economic Co-operation and Development) publication Government Support in Industrial Sectors: A Synthesis Report summarised some of the historical reasons for this development:
Even before the COVID-19 pandemic, concerns over national security, strategic autonomy, and fair competition were already prompting many governments to announce new support measures and trade barriers. The pandemic and related restrictions have aggravated these concerns, with shifts in consumer demand disrupting supply chains and leading to shortages of semiconductors and other key components. In addition, longer-term, structural trends are also fuelling demands for government support, including the growing role played by state-led economies, the need to transition toward net-zero greenhouse-gas emissions by mid-century, and growing digitalisation. More recently, security concerns have again flared up, with the Russian Federation’s … largescale aggression against Ukraine prompting some governments to offer emergency assistance to firms affected by related shortages and price spikes.
3.4Inquiry participants noted the following major examples of overseas industry support packages.
3.5The Inflation Reduction Act of 2022 (IRA) was passed in the United States (US) in August 2022 to accelerate the transition to net zero emissions. The IRA contains nearly US$400 billion in federal funding for new investments in industry. Nearly two-thirds of the funding is going to the energy industry, with the remainder in manufacturing, the environment, transport and agriculture. The funding will be provided through a mix of tax incentives, grants and loan guarantees. Generous production tax credits have received particular attention (discussed further below).
3.6The European Union (EU) is implementing a number of measures to support domestic manufacturing, including via the European Green Deal industrial plan. This plan contains multiple pillars to support scaling up of the EU’s manufacturing capacity in net zero technologies, including faster access to existing funding for green investments. Hydrogen electrolyser manufacturer Hysata explained that ‘this target is expected to be complemented with a generous investment package to attract global talent and technology, with €3 billion earmarked to guarantee hydrogen demand.’
3.7India has introduced direct financial incentives for the manufacturing of high-efficiency solar modules to encourage production and reduce import dependence. The National Programme on High Efficiency Solar PV Modules uses ‘production-linked incentives’—direct payments based on sales volumes rather than tax credits. Such support reduces after five years, to ensure that manufacturing will only continue in the medium term if it is independently competitive.
3.8Similarly, Canada introduced an investment tax credit in 2022. This targets clean technologies by providing a refundable tax credit equal to 30 per cent of the capital cost of investments in clean energy until 2030.
3.9As mentioned in Chapter 2, the inquiry also heard that over 100 countries have formal industrial strategies of various forms. This includes Germany’s Industrie 4.0, China’s Made in China 2025, Japan’s Green Transformation Act, Singapore’s Manufacturing 2030 and the United Kingdom’s (UK’s) Industrial Strategy. These are generally accompanied by a suite of policy measures—financial and non-financial—to support local industry growth.
3.10Australia has launched its own national industrial strategies in recent years, and deployed a range of industry support programs—although generally smaller than the examples outlined above. Submitters were overwhelmingly positive about such past and planned government support.
3.11However, many warned that the generous manufacturing incentives now offered by the US, EU and India—especially for the manufacturing of renewable energy equipment, infrastructure and fuels—had reset the playing field. The Committee heard that this changed context requires a substantial Australian response to secure ongoing investment, and adequate access to private capital for local manufacturers. Submitters were particularly concerned about the impact of the IRA.
The Inflation Reduction Act (US) and production tax credits
3.12Mr Wayne Smith, External Affairs Manager for the Smart Energy Council, told the Committee:
The US Inflation Reduction Act … has really changed everything. It is the most significant climate change program … at least $500 billion … perhaps ever in history. It is really a very deliberate attempt by the US to start manufacturing in that country. … So we now have a conga line of companies, including a whole bunch of our member companies, who are saying to us and the Australian government that, unless the Australian government matches the US Inflation Reduction Act in some form, they are out of here and are going to go to the US.
3.13Many stakeholders outside of the inquiry have also called for a rapid response to the IRA. For example, in October 2023 the Lowy Institute published ‘Five reasons why the government mustn’t cool its heels on an “Australian IRA”’, outlining the need for a proportionate response. As evidence, the authors cited Deloitte forecasts of the IRA’s likely impact on Australia’s nascent hydrogen industry, which predicted that Australia ‘could lose market share to the US and export 65% less renewable hydrogen by 2050’. Hysata pointed to the same report in its submission, describing the IRA’s likely impact on Australia’s future market share as ‘extreme’.
3.14Similarly, according to the Australian Aluminium Council, the IRA’s support for the US aluminium industry through tax credits—over the entire aluminium value chain—is ‘threatening Australia’s market share of these technologies.’
3.15Submitters to the inquiry explained how the IRA would work for US manufacturers in specific industries. For example, the Smart Energy Council explained that the IRA ‘offers direct support to U.S. manufacturing by providing production tax credits for the manufacture of solar panels, wind turbines, batteries and critical minerals processing.’ The IRA:
… also establishes bonus credits if components are produced domestically, with a new clean electricity investment tax credit for investment in qualifying zero-emissions electricity generation facilities or energy storage technology.
The impact is most noticeable on climate and energy technologies. Hysata informed the Committee that IRA tax credits ‘have on average reduced the cost to manufacture and produce climate technologies by 40%’ in the US. Solar panel manufacturer SunDrive Solar explained that investments would be stimulated up the entire supply chain, for example wafer and cell manufacturing capacity and investments in new machine tool capacity.
3.16Although Australia needs to respond to the IRA, inquiry participants appreciated the challenges of matching the quantum of incentives on offer in larger markets. The Committee heard that Australia does not need to introduce an identical scheme. For example, SunDrive pointed out that the IRA is uncapped—and an uncapped version in Australia could potentially become a huge burden on the taxpayer. Mr Leigh Heaney, Government Relations Manager for the Smart Energy Council, told the Committee:
You don’t necessarily need to think about this in terms of how we match [the] quantum and scale of the US with its IRA. We need to think about what we need for our energy transition in Australia. As a back-of-the-envelope idea, do we need 40 million batteries? How do you make 40 million batteries? You build four factories that make a million batteries a year for 10 years.
3.17Submitters also shared several suggestions about how Australia could affordably adopt key elements of international incentive packages like the IRA—particularly tax credits, as discussed later in this chapter.
Australia’s trade relationships
3.18Because of the small size of the domestic market, exporting goods is the key to long term profitability for many Australian manufacturers. Access to overseas markets is controlled by mutual trade agreements, negotiated by the Australian Government.
3.19As a starting principle, the free flow and free trade of goods across borders is seen as desirable by Australian manufacturers, and has been longstanding government policy. Medical device manufacturer ResMed explained:
… with a ventilator we’re making many hundreds of components from all sorts of countries and locations around the world. If anyone took a more sovereign position of not allowing an import or export of a component, not only would they not get a ventilator at the end of the day; no-one would get a ventilator at the end of the day.
3.20Our strong trade relationships are a key advantage, particularly in times of crisis. For example, ResMed told the Committee that the strength of Australia’s relationships was critical to its ability to access necessary goods, raw materials and freight capabilities.
3.21The Australian Government has a role to play in opening new international markets for Australian manufacturers. For example, Sun Cable—whose flagship project is the Australia–Asia PowerLink to export renewable electricity via subsea cable—suggested pursuing a stronger trade relationship with Indonesia, particularly in relation to green technology. Submitters were generally positive about the role of Austrade (the Australian Trade and Investment Commission) in providing guidance and support to Australian exporters, including guidance navigating the opportunities available through free trade agreements (FTAs).
3.22However, the Committee also heard that Australia’s network of FTAs could serve local firms more equitably—although this was not a recurrent theme in this inquiry. For example, Gilmour Space informed the inquiry that:
Most nations (except Australia) exclude Space and Defence technologies from their FTA agreements for national security reasons. The USA, Japan, and Europe, among others, have policies that preference their own sovereign capability. … All countries specifically carve out critical technologies like space and defence from their FTAs. Australia should do the same.
3.23This is discussed further in Chapter 6.
3.24Even where Australia has similar carve-outs and internal industry support programs, the difference in market scale can still result in an uneven global playing field. As discussed above, a noticeable area of global disparity is in clean energy spending, where the US’s IRA has made Australian green energy manufacturing less globally competitive.
3.25The inquiry heard that the Australia–US Climate, Critical Minerals and Clean Energy Transformation Compact, agreed in May 2023, may open opportunities for Australian manufacturers to be classed as ‘domestic suppliers’ to the US. Sun Cable also noted favourably Australia’s efforts to advance growth in green exports through other international trade and investment agreements, for example:
… the recent finalisation of the Singapore-Australia Green Economy Agreement (GEA) represents a watershed moment, as the first-ever agreement dedicated to low emissions trade and investment.
3.26The Committee is aware of the long and ongoing public discussion about the strengths and weaknesses of Australia’s FTAs, including the current inquiry into the Australian Government’s approach to negotiating trade and investment agreements by the Joint Standing Committee for Trade and Investment Growth.
3.27The Committee also notes intersections between FTAs and Australian governments’ ability to use procurement as a policy lever to grow domestic industry—discussed further below.
Tax policy as a lever
Value of a favourable tax environment
3.28Tax policy is one of the most important levers available to the Australian Government. Tax incentives can encourage research and development (R&D) and commercialisation, and make Australia an attractive choice for private investment in local manufacturing. The inquiry heard that investments in advanced manufacturing are long term and require a stable policy environment, including a reliable and internationally competitive tax environment.
3.29For example, in its submission to this inquiry, ResMed compared the tax incentives available in Australia with those at its other global innovation hubs, and the impact on its return on investment (ROI) for R&D.
Figure 3.1ResMed’s comparison of local incentives and costs across its global innovation hubs
Source: ResMed, Submission 26, p. 3.
Corporate tax rate
3.30Several submitters mentioned Australia’s comparatively high corporate tax rate, and the impact it has on competitiveness and decisions about where to locate export-oriented manufacturing operations, particularly for multinationals. For example, the Australian Academy of Health and Medical Sciences argued:
Corporate tax rates in Australia sit at around 30% for most companies and 25% for companies with a turnover of less than $50 million annually. The EU average is 21.3% corporate tax rate, Ireland sits at 12.5% and the USA at 21%. If Australia wants to attract foreign companies, we should review these international tax rates.
3.31Dr Andrea Douglas, Vice President of Strategic Industry Engagement for pharmaceuticals giant CSL, gave examples of the impact of a high corporate tax rate:
With regard to the business policy environment, pharmaceutical manufacturers are actively departing this economy… In 2020, both Pfizer and GSK announced that they were shutting down their significant manufacturing operations in WA and Victoria; and AstraZeneca have told this committee, through their submission, that they are now operating below capacity in New South Wales. Apart from CSL, there’s limited multinational pharmaceutical manufacturing left, once these majors have gone, and it’s difficult to see a major choosing to invest in a new facility here. That’s because Australia maintains one of the world’s highest corporate tax rates and offers few incentives for commercialisation.
3.32Packaging manufacturer Jamestrong Packaging Australasia considered uncompetitive, ‘one size fits all’ corporate tax rates a factor behind the ‘lack of value proposition’ for investment in Australia, along with high labour costs, noting that:
In China, for comparison, the corporate tax rate can be as low as 15%. In Canada, the corporate tax rate is 28% but, for companies earning profits in regional operations, there is a potential 10% discount on this. Jamestrong believes Australia’s one size fits all approach misses a significant opportunity.
3.33In this inquiry, concerns about Australia’s corporate tax rate were predominantly raised by stakeholders in medical and pharmaceutical manufacturing. This may reflect the nature of the sector, in which large companies—often multinationals—hold dominant roles as anchors in the local manufacturing ecosystem. These companies are able to fund lengthy R&D processes, and to comply with extremely strict, technically challenging and legally complex health regulations. Such companies can often have access to multiple global export markets and their pick of global locations from which to operate. This makes them particularly sensitive to differences in corporate tax rates between jurisdictions, and other factors such as the alignment of local regulatory requirements with prevailing requirements in larger markets, and the availability of a suitable talent pool.
3.34Some participants noted that a government’s corporate tax revenues depend on more than just the corporate tax rate itself—and the impacts of tax rate changes on revenue can be paradoxical. For example, an increase in industry competitiveness and profitability through a reduced tax rate may lead to an increase in corporate tax revenue. The Future Battery Industries Cooperative Research Centre quantified this in relation to advanced battery manufacturing in Australia, which they estimate has the potential to deliver an additional $55.2 billion in gross domestic product (GDP):
With a 28.7% Tax-to-GDP ratio, this implies $15.8b in new tax revenues per annum by 2030, resulting in an excellent payback ratio to both the private and public sector to develop the industry.
Tax incentives
Production/manufacturing tax credits
3.35The Committee heard that a powerful option for encouraging advanced manufacturing is to provide tax credits for production.
3.36Production credits provide a tax rebate based on the amount of production, and can be targeted to specific industries or circumstances. Production credits are used in other countries; in particular, they are a key component of the manufacturing incentives in the IRA and were highlighted by many participants in this inquiry as the most critical element of the IRA for Australia to adopt locally.
3.37Submitters argued that production credits would encourage companies to keep Australian-grown intellectual property (IP) in Australia during the commercialisation and production phases. ResMed argued that:
Companies that onshore the whole value chain should be rewarded for doing so, and we believe this is the key to unlocking Australia’s scientific capabilities and advanced manufacturing base.
3.38Submitters argued production credits would also encourage value-adding to Australian raw materials in Australia. Dr Katie Hepworth of the Australian Manufacturing Workers’ Union (AMWU) advised:
One of the things we reflect on is that we have been a country that just digs and ships. We dig up our minerals and take them overseas; a lot of the value-add is done overseas and then we import it back. There is a real opportunity to create incentives for companies to refine things onshore, and definitely to do that first stage onshore.
3.39Production credits could be linked to industries or products critical to Australia. SunDrive believes this should include solar manufacturing, and suggests production credits linked to the production of photo-voltaic solar modules on a per watt basis, based on both the end product and supply chain inputs. SunDrive argued this would create a self-sufficient industry and supply chains for an essential product within Australia.
3.40The inquiry heard that production credits are most important at the point of establishing emerging industries, and can be scaled back when the industry is globally competitive—as with the Indian model. Credits can be given to nascent industries—and even used to create industries where none currently exist:
In the US context, they are paying tax credits for non-existent industries. So they will build the industries. They will get the jobs, they will get everything else that goes with it, and then there will be a tax credit that goes into that.
3.41Another advantage of production credits is that there is no government expenditure unless there is actual production:
If no solar panels are produced in Australia, the taxpayer doesn’t pay anything. That’s obviously very different to something like a grant or government equity, government debt. It’s all based on actual output.
3.42An Australian production tax credit should include eligibility requirements, which can be used to encourage certain types or ways of manufacturing and to keep the scheme affordable. The Committee heard that these eligibility requirements could be introduced to persuade companies to manufacture in regional areas, for example, or to maintain a certain percentage of Australian-based workers.
3.43The Committee also heard suggestions that production credits could also be used in any industry for green energy use, not just the manufacture of specific green energy products. Cooperative Research Australia advocates for incentives to ‘encourage the adoption of sustainable manufacturing practices, including the use of renewable energy and the reduction of waste and emissions.’
3.44The Committee also heard that taxes could be applied as a stick rather than a carrot to discourage continued reliance on raw materials exports—for example by imposing additional taxes on shipping unrefined components as a ‘negative value-added tax’. This view was not widely held.
Patent box legislation
3.45Several submitters advocated for a ‘patent box’ taxation regime to encourage Australian R&D to be commercialised in Australia. A patent box provides concessional tax treatment for income derived from certain types of IP—for example, IP that has been developed in Australia or by Australian companies.
3.46According to Medicines Australia, such a scheme would ‘further incentivise both global and local companies to commercialise IP in Australia.’ Dr Douglas from CSL explained how patent box schemes currently operate internationally:
If intellectual property is generated in that country, as an incentive to keep the intellectual property there for manufacturing, countries like the UK, Ireland and others have what they call a patent box. So if the patent is owned in that country, then the tax rate you pay on products that are manufactured is lower. So it is essentially an incentive to keep the manufacturing in the country of origin of the intellectual property versus looking overseas at all the attractive places to build your manufacturing facility.
3.47CSL also advocated for a broad application of any patent box regime, pointing out that in previous Australian proposals the incentives would only apply to IP generated after the legislation was introduced. With a lead time of 10 to 15 years before a commercial return on R&D in the pharmaceutical sector, CSL suggested any new patent box regime should apply to Australian patents already in existence.
3.48ResMed also advocated for a patent box regime, pointing out that global competition is developing in this area, with the introduction of versions of patent box legislation in the UK, France, Singapore and China. ResMed argued that incentives to commercialise new innovations within Australia would keep more of the supply chain onshore, improve local value capture and boost export competitiveness:
… it’s really important in terms of really levelling the playing field for Australia to actually encourage that investment and encourage the onshoring of manufacturing. We are really good at the R&D, and that’s incentivised, but once you’ve done that, when you commercialise it, when you manufacture the products there are no incentives whatsoever.
Reforming tax incentives
3.49The R&D Tax Incentive has been a consistent plank of innovation policy in Australia since 2011. The Committee heard evidence of the value of the R&D Tax Incentive and some suggested reforms.
3.50There was broad support for the R&D Tax Incentive. As just one example, Gilmour Space informed the Committee:
If not for Australia’s broad-based R&D Tax Incentive and our ability to attract VC [venture capital] funding so far, Gilmour Space would now be headquartered overseas.
3.51However, the Committee also heard many suggestions for how the R&D Tax Incentive could be built on, or improved. Various submitters offered suggestions for leveraging the existing R&D Tax Incentive framework to incentivise additional industry policy goals—including increasing industry–research collaboration and fostering advanced manufacturing.
3.52For example, Deakin University argued:
Consistent with the stated objectives of Australia’s innovation tax system, Deakin recommends that the R&D tax incentive (R&DTI) system shift focus to explicitly incentivise research collaboration. The current R&DTI scheme provides preferential treatment to collaborative research, permitting claims of less than $20,000. We support previous reviews calling for additional support for collaboration (Ferris et al. 2016) and recommend extending the preferential status of collaboration with research institutions to include a premium of 20 per cent to the relief provided by the R&DTI, reflecting the additional non-private benefits derived from collaboration.
3.53ResMed suggested expanding the R&D Tax Incentive to cover manufacturing activities, ‘given the Government’s desire to encourage both R&D and commercialisation in Australia.’ At a public hearing in Sydney, ResMed’s President of Operations, Mr Andrew Price, explained:
The way an advanced technology incentive could work is to expand the existing legislation of the R&D tax incentive to apply to both R&D activities and advanced manufacturing activities in Australia. … The advanced technology incentive could be applied as a tax credit on Australian advanced manufacturing profits. The program could work using the existing R&D tax incentive processes. Companies already register their R&D activities every year. So, under an advanced technology incentive, if Australian advanced manufacturing takes place following R&D activities that manufacturing and associated taxable income would be eligible for a tax credit.
3.54The Australian Industry Group (Ai Group) suggested complementing the broad-based R&D Tax Incentive with additional sector-specific, ‘vertical’ funding support for R&D, aligned with ‘selected areas of national priority.’
3.55Other submitters drew attention to the limitations of the R&D Tax Incentive to drive widespread manufacturing innovation in light of the very high percentage of small businesses in the sector—many of which may struggle to assess their eligibility and to navigate the application and reporting process (discussed further below).
3.56Deakin University noted the need to ‘aid in addressing the limited access to capital of SMEs and overcome any perceived cultural barriers that restrict collaboration’, suggesting that the R&D Tax Incentive be complemented by less complex, small-to-medium enterprise (SME)-friendly pathways, such as:
… the provision of innovation vouchers—an approach for which there is strong causal evidence supporting additionality and collaboration outcomes. Innovation vouchers provide conditional access to capital for use in R&D—redeemable only on presentation for research collaboration with a university or other publicly-funded research institution.
3.57Gilmour Space recommended making the cash R&D Tax Incentive more easily accessible, with a higher revenue threshold before it reverts to a credit rather than a cash incentive. Currently, only entities with an aggregated turnover of less than $20 million a year can be refunded any tax credit created by the R&D Tax Incentive, with entities with higher turnover able to access a non-refundable tax offset.
Anti-avoidance measures
3.58The inquiry heard that important measures to counter multinational tax avoidance can act as a disincentive for companies to manufacture in Australia, depending on how these policies are implemented. CSL described a situation where the treatment of controlled foreign companies (CFCs) for tax purposes puts an additional burden on Australian parent companies:
As an Australian company, we are subject to all of the tax rules, including the CFC rules. A foreign pharma company that happens to manufacture in Australia is not subject to those rules at all. … So we pay our tax on the manufacturing value-add that we do in Australia. But, when the finished product is sold by one of our offshore companies, we also are attributed, for Australian tax purposes, that profit.
3.59CSL describes this as an additional tax that does not apply to foreign-owned competitors, and forms a disincentive for CSL to invest here in Australia.
Committee comment
3.60Whether delivered through the National Reconstruction Fund (NRF), tax incentives or other mechanisms, financial incentives for local manufacturing should be proportionate to industry and national needs—including the need to compete for global capital investment.
3.61Globally, governments are investing heavily in rebuilding their local manufacturing capability, including through the IRA in the US and Green Deal industrial plan in the EU, each worth hundreds of billions of dollars. Australia must respond quickly to avoid Australian industries losing market share.
3.62Financial support for Australian manufacturers should meet internationally competitive levels. Australia cannot afford to be left behind—we already rank poorly on economic complexity and manufacturing self-sufficiency, well behind comparable OECD nations. For renewable energy technologies, the opportunity to secure global market share is time limited, and the IRA is already triggering capital flight to the US. The Government must propose ambitious additional measures, proportionate to the challenges facing advanced manufacturing in this country.
3.63The Committee notes the $392.4 million Industry Growth Program announced in the 2023–24 Budget to assist innovative SMEs and startups to commercialise their ideas, building on the successful elements of the Accelerating Commercialisation component of the former Entrepreneurs Programme (discussed further below).
3.64Tax incentives are also a tested and effective mechanism for supporting the development of advanced manufacturing. The introduction of a scheme of production incentives—focused on the transition to net zero emissions—should be an immediate priority.
3.65Many inquiry participants—particularly medical manufacturers—also recommended a ‘patent box’ tax regime to better incentivise businesses to commercialise Australian R&D onshore. This model has been considered by the Australian Government in the past.
3.66The Australian Government should introduce production incentives for Australian advanced manufacturing. The incentive scheme should reflect Australia’s strategic priorities including, but not limited to, sovereign capacity in medical manufacturing and the transition to net zero emissions.
Access to capital
3.67Almost all businesses would need some capital investment to support a transition to advanced manufacturing approaches.
3.68Traditionally, high labour costs were seen as a disincentive to manufacturing in Australia. However, the inquiry heard that advanced manufacturing is capital intensive rather than labour intensive:
Being capital intensive, access to growth capital is a competitive advantage and this means those countries willing to co-invest and share capital risk will be the most successful in achieving rapid growth and value capture of the lion[’]s share of the rapidly growing sector.
3.69The CSIRO (Commonwealth Scientific and Industrial Research Organisation) has consulted widely with manufacturers and considers one of the key barriers to growth to be:
Difficulty in accessing sufficient financial capital to fund modernisation, expansion and diversification, each of which often have the adoption of robotics and AI at its core.
3.70Raising capital is particularly difficult for SMEs—the majority of Australian manufacturers. However, firms in established manufacturing industries also require significant capital to improve productivity through adopting more advanced manufacturing processes. For example, the Australian Dairy Products Federation advised that processing milk is an asset-heavy business model that requires significant capital to support modernisation.
3.71Other submitters explained the high cost of retrofitting advanced equipment, with Mr Downie of pharmaceuticals manufacturer AstraZeneca commenting that:
… the plant in North Ryde is built around a specific technology… We would have to look at some retrofit/repurposing of the factory, architectural and equipment changes. That obviously would need a longer-term strategy tied to it to rationalise the capital investment.
3.72The inquiry also heard that many small manufacturers are too small to attract investment from major players like superannuation funds, and that local banks can be reluctant to fund the equipment upgrades needed to apply advanced manufacturing technologies. Mr Peter Harris, Chief Information Officer of early-stage investment firm BRC Capital (which controls a portfolio of innovative start-ups), told the Committee:
If you think about our local finance industry, it’s probably not as sophisticated and as deep as some of the Asian and US markets. As for the first 3D printer that we bought, if we were buying that in Germany, it would be zero per cent down and five per cent interest. We had to put 50 per cent down and pay 18 per cent interest. Australian banks haven’t got their mind around advanced manufacturing. We have $3.6 trillion in Aussie super; we’re way too small and it’s way too complicated for them to look at. An overseas oil and gas pipeline, great; not so much advanced manufacturing in Australia. We don’t quite sit in any particular finance bucket from which you’ll be able to access easy funding.
3.73The inquiry heard a number of suggestions on how governments can better assist manufacturers to access capital, on both public and private capital markets.
Government funding
3.74One option is for the government to directly provide capital through grants or concessional loans. Several submitters explained how government funding had enabled them to move forward with advanced manufacturing initiatives. As one of many examples, biomedical manufacturer Vaxxas told the inquiry:
We are appreciative of the strategic support we have received from all levels of government, including co-investment in the facility with Vaxxas by the Queensland government, the federal government MMI1 and MMI2 grants [under the Modern Manufacturing Strategy], and the installation of specialised manufacturing infrastructure. At the local government level, we have received support from the Brisbane City Council. Together this assistance has allowed Vaxxas to develop its facility on home soil instead of being built overseas.
3.75The Australian Government’s $392.4 million Industry Growth Program was announced in the 2023–24 Budget and is expected to launch soon. It will provide matched grant funding and business advisory services to innovative SMEs and start-ups seeking to commercialise their ideas. Based on successful elements of the Accelerating Commercialisation component of the former Entrepreneurs Programme, the Industry Growth Program will specifically target SMEs and startups in NRF priority areas. According to the Department of Industry, Science and Resources (DISR), the most promising projects proposed by qualified SMEs will be invited to apply for grants for up to 50 per cent of eligible project expenditure, between $50,000 and $5 million.
3.76Concessional loans are another mechanism for providing finance to business. Repayable loans reduce the ultimate cost to the taxpayer, while offering businesses more affordable, sub-market interest rates. In contrast to venture capital, loans are also a non-dilutive method of financing—that is, the loan does not dilute or diminish the equity held by the owners—which assists in supporting more mature start-ups, and can reduce the company’s future cost of capital.
3.77Another, less common, mechanism is for the government to take an equity stake in a business. The inquiry heard about the Breakthrough Victoria model, which uses an independent company to manage the Breakthrough Victoria Fund:
Instead of giving you a handout, [Breakthrough Victoria] is taking equity in the entity that is being formed. The government may or may not get its money back, but if it is successful the government can get its money back and reinvest it in something else.
3.78One major advantage of government-provided capital is its ability to ‘crowd in’ private capital, producing a greater cumulative effect on a business’s capacity to grow and establish market share than either public or private finance would independently. This concept is central to the NRF: public support is intended to help promising businesses attain a sufficient size and customer base to attract additional private investment in their own right.
3.79Concessional loans, guarantees and equity finance are expected to be the key tools available to the NRF, rather than grants, as the NRF is intended to provide a budget neutral mechanism for supporting scale-up in priority industries. The Clean Energy Finance Corporation (CEFC) and Export Finance Australia are similar government investment vehicles, and have provided substantial growth capital to Australian businesses over time.
3.80In principle, NRF funding will complement existing funding streams, many of which are not required to generate a positive return (for example, grants from the Australian Renewable Energy Agency, ARENA). Inquiry participant feedback on the NRF model is discussed further below.
Risks of government-provided capital
3.81Submitters cautioned that government-provided capital carries some risks. There can be a higher risk of failure in one-off capital investments, with new initiatives needing time and sustained investment to develop over the longer term. Discussing research infrastructure, Deakin University stated that:
Often funding is given to a new initiative or infrastructure build with an expectation that it will rapidly become self sufficient, yet few are, due in part to the overheads for operating open access capabilities, but also due to [the] need to regularly update technology.
3.82The time taken for governments to release capital was also noted as a problem. Sun Cable pointed out that although ARENA and the CEFC have made significant achievements and are valued by industry, slow approval processes are a roadblock to innovative development. Sun Cable Chief Executive Officer (CEO) Mr David Griffin told the Committee:
My one bugbear with ARENA is that it is very slow to make a decision. You are talking about companies, by definition, being innovative. They get to a roadblock, and they have to sit and wait with this innovation. The rest of the world is moving on. It can take a year to get a decision out of ARENA.
3.83The inquiry heard that slow or complex application processes are particularly strong disincentives for SMEs. In relation to existing R&D funding opportunities, the Australian Cobotics Centre observed:
Most existing SMEs have little resources to dedicate to R&D and may not have existing capabilities to raise capital and achieve innovation and growth. Even though government grants have been helpful for many, some manufacturers are reluctant to apply for grants due to issues such as the time taken, limited knowledge of the process or a lack of prior success.
3.84Hysata noted the need to ‘ensure that small and medium, time-poor businesses can access support quickly.’ It compared the EU and US support packages for climate and manufacturing, noting that the US tax credits and grants were much more accessible, and less complicated and bureaucratic, than the EU equivalents.
3.85Ai Group argued that ‘Government should invest in uplifting the capability of the accounting industry or other potential multipliers in providing guidance to SMEs in utilising R&D support schemes.’ Mr Samuel Jesuadian, Chief Operating Officer of the Advanced Robotics for Manufacturing (ARM) Hub, told a public hearing in Brisbane that part of his organisation’s role was assisting SMEs to apply for grants and other funding.
3.86Facilitation services by such ‘broker’ professions and organisations could play a valuable role helping SMEs navigate new opportunities, such as the NRF. However, Mr Harris of BRC Capital observed that the NRF has already ‘created an industry in itself’ with ‘the big four consulting firms’ advising large businesses on how to access funding. Mr Harris warned: ‘We don’t have the capacity to compete with the big global guys who are trying to featherbed that fund.’
3.87As noted by the Australian Cobotics Centre, lack of success in securing a grant can leave SMEs reluctant to participate in government funding processes again, viewing it as a poor return for time spent. The inquiry also heard that feedback on unsuccessful grant applications can be too ‘vanilla’, and not provide sufficient information for applicants.
3.88Another risk is that government funding may be targeted too narrowly, focusing on product-level innovation or strictly defined sectors rather than broader platform or enabling technologies (discussed in Chapter 6).
3.89Regardless of the funding mechanism, the inquiry heard that government funding processes can be too focused on avoiding or minimising risk to truly support innovation. Gilmour Space suggested that a higher risk tolerance would lead to more technology development in Australia, pointing out that inaction carries its own risk in rapidly evolving industries.
3.90Sun Cable’s Mr Griffin echoed these sentiments with regard to ARENA grant processes:
I wouldn’t say they are ‘risk averse’. They are trying to match risk with the direction they have been given by government. Faster decisions will mean more errors, more money that comes to nothing, because they won’t have analysed it to the nth degree. But overall I think it will lead to more successes. … [T]hey need to know that it is okay for them to take on a bit more risk; they are not going to get criticised by government. If they have made a boo-boo and that company failed, that needs to be accepted as part and parcel of a grants organisation trying to support innovation. Not all innovation is going to succeed.
National Reconstruction Fund
3.91The inquiry heard that the NRF has generally met with industry approval—particularly the strong focus on renewables and low emissions technologies. There was broad agreement on the use of the NRF to build sovereign capacity in strategically important areas, and to grow industries where Australia has a competitive advantage (see Chapter 6).
3.92Inquiry participants offered a number of suggestions for the NRF’s operating model and the forthcoming investment mandate from the Australian Government. Many inquiry participants had also made submissions to the consultation on NRF implementation.
3.93One repeated criticism of the NRF was that it may not be big enough to have an impact on the global competitiveness of Australian manufacturers in light of new overseas investment incentives, particularly for manufacturers in renewable energy value chains. Sun Cable warned in its submission:
… that the global renewables technology production arms race should give pause for thought as to the adequacy of the NRF’s commitments. [Its] commitment of at least AUD$3 billion for ‘renewables and low emissions technologies’ is now dwarfed by competing plans delivered by the US and European governments.
3.94In a public hearing, Sun Cable CEO Mr Griffin elaborated:
We are at this tipping point: there is a crazy amount of demand. We are right on the cusp where we can bring the expertise of manufacturers from around the world back to Australia. But $3 billion will not go very far. It is a good model; the number, we think, is wrong.
3.95Many submitters were waiting on further information about the NRF before determining if it would be used by their business. Larger companies, with greater access to private capital, were unsure if the NRF would make business sense without looking at the details of how it might apply to their specific circumstances.
3.96One suggestion heard by the inquiry for increasing the NRF’s investment footprint at no cost to government was to leverage co-investment from superannuation funds. BioScience Managers is an international healthcare venture capital firm based in Melbourne. It told the inquiry:
It is well understood that Australian Government investment provides leadership and stimulates the multiplier effect of capital. It’s a crucial policy lever to drive innovation and there is clear scope for the Australian Government to accelerate co-investment contributions through the NRF. That leadership also provides encouragement for other pools of capital, such as those within the superannuation funds, to participate. The Australian Government should support and actively work with superannuation funds [to] encourage investment in advanced manufacturing technologies.
3.97The Committee notes that the Australian Government has already identified the potential for the NRF, as a co-investment fund, to provide a mechanism to leverage the nation’s $3.4 trillion superannuation pool. The potential to leverage superannuation investment is discussed further below.
3.98Several suggestions sought to counter the common disadvantages of government-provided capital outlined above. One such suggestion was that the NRF have an increased risk tolerance compared with typical government funding programs, supported by a long-term portfolio rate of return in the investment mandate, rather than a directive that all investments should succeed.
3.99Others recommended that fund managers actively curate investment opportunities based on success stories from other federal or state innovation programs, rather than an exclusively demand-driven approach dependent on which businesses take the initiative to apply. Science & Technology Australia recommended:
To maximise its success, the NRF should ‘forward scout’ new cutting-edge research breakthroughs and applied research emerging from other Government-funded initiatives such as Australia’s Economic Accelerator program, Cooperative Research Centres, Australian Research Centres of Excellence, and innovations developed in sophisticated facilities supported by the National Collaborative Research Infrastructure Strategy.
3.100The inquiry also found broad support for using the NRF to drive collaboration and commercialisation, by funding physical infrastructure projects with potential to create place-based ecosystems of aligned manufacturers and researchers. For example, Deakin University suggested that the NRF could support a national network of regional manufacturing hubs, to support skills development, improve regional industry and ‘embed a culture of innovation into the regions’. The AMWU also supports using the NRF to fund publicly-owned common user facilities in innovation precincts in strategic locations, to support local industry clusters; it particularly noted the benefits of such facilities for SMEs (discussed further in Chapter 4). Research Australia similarly suggested the NRF could be used to develop domestic manufacturing facilities for clinical trials of medical products.
3.101The AMWU noted that governments can collect leasing revenue from such common user facilities, to help recoup the up-front costs of investing in infrastructure and equipment. This model could prove important, as the NRF will be required to make a positive financial return.
3.102Submitters also suggested certain products or manufacturing subsectors for inclusion in the NRF’s investment mandate, beyond the detail available on the high-level priority areas announced to date. For example, Sun Cable made a number of specific recommendations, including listing high-voltage direct current subsea cables, solar panels and batteries as investment priorities.
3.103However, although submitters were supportive of the industry-specific focus areas of the NRF, many also cautioned the inquiry not to cement investment silos. The Committee heard that the NRF should be able to support investments in technologies that can be applied across more than one sector. During site visits, the inquiry saw multiple applications of additive manufacturing (3D printing), from large metal maritime equipment to micro-needle arrays. This issue is discussed in Chapter 6.
Levers to improve access to private capital
3.104The inquiry heard that access to private capital is more difficult for high risk and complex manufacturing sectors, particularly when those products or capabilities will also take a long time to reach the market. Submitters also stressed the difficulties faced by SMEs—and hence most Australian manufacturers—in raising capital on private markets.
3.105The inquiry heard suggestions for how the federal government could better support Australian manufacturers to compete for private capital.
Impact of strategic clarity and commitment by governments
3.106Submitters pointed out that strong industry policies with a long-term strategic focus and commitment—ideally with bipartisan and federal–state alignment—can give private investors the confidence to invest capital in manufacturing for the longer term.
3.107For example, during the COVID pandemic, the strategic outcome—vaccine production—was known and certain. According to AstraZeneca, this level of strategic clarity and commitment should be continued into the future, to provide certainty about which pharmaceutical products should be developed and manufactured in Australia over the long term.
Local participation targets and procurement contracts
3.108Government local participation targets can also give confidence to investors in that industry. The Australian Steel Institute suggested local participation targets for manufacturing renewable energy equipment and infrastructure:
The key to driving the required capital investment is the existence of firm local participation targets for supply of renewable energy infrastructure, which are set at a level sufficiently high enough to ensure manufacturing economies of scale are achieved.
3.109Institute Chief Executive Mr Mark Cain explained:
… the renewable energy push in Australia is highly steel intensive. … Wind towers are made out of steel plate; the offshore wind towers also, and the platforms that they sit on. The solar farms sit on steel racking, and the transmission towers for the cables are made of steel. Presently, all of that is imported, and we’ve estimated a per annum demand between now and 2030 of about 400,000 tonnes of steel-intensive infrastructure for the renewable energy sector. … 400,000 tonnes a year is a lot of steel, going through to 2030, and this is only taking into account projects that are for decarbonising the electricity grid.
… The primary steel products can be and are made here. The plate, the pipe, the reinforcing steel for the foundations and all the rest of it are all available here. What we’re lacking is, at scale, converting that to the finished product. For example, we have fabricators that can make a wind tower, but they can only make one every three weeks, whereas if you had a dedicated facility you’d be popping two out per week. That means not only that the supply meets the demand but also that the cost position can be met. You need dedicated facilities, like a sausage machine punching these things out. …
People have looked at investing in these facilities, but they’re nervous because they believe that there’s a chance that they could invest and still not win business. So we’re advocating for industry participation plans. They are only triggered if, at the federal and state level, there is government investment. … Local participation plans—and, even better, if we can have some local content targets—will give confidence for investment. We know that there are people waiting to invest if they have the confidence. If we were to do that, it would bring additional modern manufacturing to Australia because these plants would be dedicated facilities and state-of-the-art.
3.110The AMWU’s Dr Hepworth shared similar insights from her conversations with companies in offshore wind production (among other industries), noting the key message that:
… there is a real role for government to play in procurement and using procurement to create a pipeline of demand that gives companies the stability of investment that allows them to grow and invest in their own manufacturing capabilities.
3.111However, the Committee also heard that lending institutions can be sceptical of government commitments to buy locally, based on a lack of past follow-through. Mr Paul Docherty, Chair of BRC Capital and co-founder of 3DMEDiTech, explained:
I don’t want to sound controversial here, but I will say: do those banks that are lending believe that the government is supporting its own policies around manufacturing sovereignty and procurement in Australia? … [T]he banks are saying, ‘Sorry guys, it’s lovely, it’s really nice thinking, but they are just going to go back and buy out of China’. That is the cynical response we get week in and week out.
3.112Government procurement contracts were repeatedly raised as an especially powerful lever for unlocking local firms’ access to private investment and bank loans. Procurement is discussed in a standalone section below.
Potential of targeted fast-track regulatory approvals to attract private capital
3.113Although Australia’s strong regulatory environment is generally a positive for investment, long timelines for approvals can have a direct negative impact on capital investment. Mr Demus King, General Manager of Trade, Investment and Investor Relations for the Minerals Council of Australia, shared this example:
There was one case in Australia where a mine took a decade and a million sheets of paper to go through the approvals process. That costs money. It also frames Australia as a destination for capital that is difficult. We need to ensure that capital investors in Australia look at Australia as a preferred destination for investment.
3.114Long timeframes are particularly noticeable in developing medical products, which go through lengthy clinical trial and approval processes. Pathology Technology Australia told the inquiry that medical products take in excess of 10 years from development to approval—too long to be of interest to most private investors. It suggested a targeted, quicker process for regulatory approval of the most promising technologies:
If we can identify high-value horizon technology and put it through an accelerated process, then what will happen is that private capital will pile in.
Potential of superannuation as a force multiplier
3.115As noted above, some submitters raised the opportunity for mechanisms like the NRF to support government co-investment in priority industries with Australia’s superannuation industry, to tap the largest available pool of domestic investment capital. The inquiry heard of a recent UK initiative that could be emulated locally:
With superannuation funds actively seeking investment opportunities, Australia has a significant competitive advantage in terms of access to capital that should not be overlooked. Recently in the United Kingdom, the Chancellor announced a voluntary agreement by the pensions industry to increase investment in innovative sectors of the UK economy, including life sciences, biotech, fintech and clean technology. The proposal will see pension funds commit … 5% of their assets in default funds to unlisted equities, including venture capital backed companies and those quoted on London’s growth market. This will reportedly unlock up to £50 billion of investment in high growth companies by 2030 and increase investment in the UK’s most promising companies. Australia should look to implement a similar approach in advanced manufacturing.
Supporting the Australian venture capital ecosystem
3.116Venture capital is a form of investment typically provided to emerging or start-up companies where there is a significant element of risk to any future return.
3.117Venture capital firm BioScience Managers noted the importance of a strong venture capital sector to fund innovation commercialisation. It argued that it is more efficient than governments in identifying high-potential businesses and projects at critical moments in the path towards commercialisation, and thus maximising the financial return on investment:
Venture capital firms are incentivised to maximise returns, exceeding what might be expected as a normal commercial return within Government.
3.118The Committee notes existing Australian Government programs that support the venture capital sector, as outlined in the submission by DISR:
The Government also encourages venture capital investment in start-ups by providing incentives for investors through the Early Stage Venture Capital Limited Partnerships (ESVCLP) and Venture Capital Limited Partnerships (VCLP) programs. The programs attract capital into the venture capital sector, build investment skills and support the growth of globally competitive businesses.
3.119The CSIRO also plays a role in connecting venture capital investors with potential start-up companies, and considers good relationships with the venture capital community a vital part of its commercialisation facilitation role. However the CSIRO acknowledged the challenge to businesses of sourcing adequate venture capital within Australia, in contrast to jurisdictions with large, mature venture capital markets:
To give you a contrast: in Australia a biomedical start-up company might get first-round venture capital funding of $3 million to $5 million, something like that. In the Boston or the Silicon Valley area it would be more like $30 million to $40 million. A company with a $30 million or $40 million kick-start in venture capital can go out and build laboratories and buy equipment and hire people and do stuff. Scientific equipment might cost $750,000 or $1 million for one bit of kit. With that sort of money you can do it. In Australia it’s much more difficult.
Committee comment
3.120Although the private market should be the primary source of capital for Australian businesses, there is clearly a useful role for the government to play in providing and crowding-in funding through grants, concessional loans, guarantees and equity.
3.121Government funding should be provided under a coordinated and strategic approach that supports national priorities—but without imposing artificial silos around funding for cross-cutting technologies. Funding decisions should reflect transparent and consistent decision-making.
3.122The NRF seems well positioned to meet the requirements that investment be targeted and coordinated. However, the Committee notes the concerns of submitters to the inquiry that the NRF’s usefulness will depend on details of the scheme that are not yet known. Given the timing of this report and the Government’s dedicated consultation process on implementing the NRF, the Committee does not make any formal recommendations regarding the NRF at this stage.
3.123However, given the high proportion of SMEs among Australian manufacturers, the Committee suggests that consideration be given to ways of supporting SMEs to access the NRF and other available funding programs, whether through ‘chaperone’ or ‘concierge’ services or careful consideration of NRF processes and interfaces.
3.124Further, the Committee notes the low rate of Industry 4.0 adoption among manufacturing SMEs (see Chapter 2), and reports that local banks are reluctant to finance advanced manufacturing equipment purchases on favourable terms. The Australian Government may wish to consider how best to leverage the NRF or other mechanisms to support SMEs to access capital for technology upgrades. Without limiting possible avenues, the Committee notes low-interest government loans, loan guarantees (to crowd-in finance from local banks) and targeted instant asset tax write-offs for Industry 4.0 technologies as possible models.
3.125Governments should continue to apply other levers to increase investor confidence and crowd-in private finance, including by making clear long-term strategic commitments, setting and following through on local participation targets, streamlining regulatory processes, and supporting the domestic venture capital ecosystem. Mechanisms for co-investment with superannuation funds, including the NRF, should continue to be explored.
Procurement as an industry policy lever
Current government policy
3.126All levels of government have potential to drive developments in advanced manufacturing by targeted procurement of Australian products.
3.127In its submission, DISR set out the Australian government’s commitment to buying Australian:
… the Government is committed to using its significant purchasing power to build more resilient, innovative and sustainable domestic industry and advanced manufacturing capability through the Buy Australian Plan. The Government has established the Future Made in Australia Office within the Department of Finance to coordinate delivery of the Buy Australian Plan.
Government contracts building confidence
3.128Submitters pointed out that a government commitment to purchase goods benefits the supplier in many more ways than the money received for those goods. When asked outright if they would prefer low-cost capital from the government or procurement contracts, Mr Docherty of BRC Capital and 3DMEDiTech was unequivocal:
Government procurement contracts. We do not want the industry to get lazy. If we have contracts, we are working, we are building capacity, we are creating jobs—and we are doing all those things at the same time.
3.129Additive manufacturing (3D printing) specialist Amaero agreed that private capital markets responded well to government contracts and certainty of revenues, pointing out that these contracts would not only result in more funding support from the market but also a share price uplift (for listed companies).
Aligning procurement practice with Australia’s priorities
3.130Procurement can be used to develop or support industries that the government considers to be of strategic importance for Australia into the future. Government contracts can also be used for emerging industries to establish commercial capability where none yet exists, or where Australia is not yet globally competitive. One example is hydrogen. Mr Smith from the Smart Energy Council explained the impact of government purchasing:
One thing we really need as an industry is offtake agreements—sort of power purchase agreements, effectively a demonstration from the Australian government that it will actually procure from those projects in hydrogen, ammonia or whatever, but also from renewable product developers as well.
3.131Amaero points to government defence and health departments as large-scale purchasers, and argues that much of the infrastructure, equipment and goods currently procured for our defence and public health sectors could—and should—be sourced from Australian manufacturers.
3.132The AMWU argued that the government’s procurement strategy needs to look at the current gaps in supply chains, and understand ‘how procurement can be used to build out the industry to address those gaps.’
3.133Government investment in innovations could also be directly linked to future purchasing commitments. Defence industry R&D co-investment partnership DMTC Limited (formerly known as the Defence Materials Technology Centre) argued that a tie-in between developmental contracts and procurement should be a key consideration in extracting the best value from innovation funding. DMTC told the inquiry that guaranteed purchasing arrangements, contingent on a technology or product meeting agreed milestones, could be a ‘game-changer in government contracting in Australia’, and called for this type of contracting reform to be pursued in parallel with the NRF.
Challenges in deploying procurement as a lever
Widespread scepticism of local purchasing commitments
3.134Despite the Government’s stated commitment to purchasing Australian products, many submitters to the inquiry were sceptical as to whether this is really considered by decision makers during procurement processes. Mr Harris of BRC Capital pointed to the lack of transparency around procurement decisions:
We have A Future Made in Australia policy, so that, essentially, if you can provide something for the same price and same quality, you should buy local. But you just don’t see that in practice when dealing with the government; you have this veil that comes down that makes it quite difficult to see exactly what the requirements are.
3.135Gilmour Space expressed some frustration with the government not yet purchasing or contracting work from local space technology companies, arguing that the assumption Australian-based companies are more expensive is a ‘common misconception’ in government agencies.
A narrow approach to value-for-money considerations and risk
3.136Government procurement requires decision makers to assess ‘value for money’ when purchasing goods or services using public funds. However, this does not always mean the cheapest product, which may not represent the best value for money overall.
3.137Submitters argued that value for money was not being appropriately considered in many government purchasing decisions, particularly in terms of capturing the broader economic effects of purchasing complex products manufactured locally:
… if we’re going to save a cent and export jobs to another country, it doesn’t make any sense. You will have found from your research, potentially, that many high-tech manufacturing roles attract about a 133 per cent premium to the dollar. So every dollar that you spend on products out of high-tech is worth about $1.36 to the economy…
3.138The inquiry also heard that officials can be reluctant to take risks, and tend to default to suppliers and products that have been used before. Mr Harris of BRC Capital argued that this can only be overcome by active and clear top-down direction:
… at the bureaucratic level, bureaucrats aren’t paid to take risks. If the direction from the top is, ‘Hey, we need more local content and we’re going to ask you to report on this,’ you’re going to get a response.
3.139The Committee also heard how the potential of procurement contracts to support world-changing Australian innovations is being undercut by the inflexibility of accepted procurement models. This is magnified by a strong bias towards performing value-for-money assessments and evaluating risk in procedurally rigid and potentially short-sighted ways. For example, defaulting to traditional procurement models and established, ‘safe’ suppliers neglects the cumulative strategic and economic risks of losing Australian innovations to overseas markets.
3.140For example, 3DMEDiTech shared their experience when putting forward a world-first proposal to supply a ‘virtual stockpile’ of 3D-printed medical products. Currently, physical nasal swabs are stockpiled and disposed of if not used by their expiry date—a source of significant financial and environmental waste. 3DMEDiTech developed a proposal to sell guaranteed use of its manufacturing capability to produce swabs onshore—at whatever time health departments required, and only in the quantity required. As related by 3DMEDiTech co-founder Mr Paul Docherty:
You then know, via guarantee from our facility, that you’ve got capacity at any time you want to turn it on. You can turn it on straight away. You don’t have the wastage associated with having to put these things into landfill every 18 months, and you’re building sovereign capacity and capability and industry at the same time. Most people would say, ‘Well, that’s an absolute no-brainer.’ The last part of that is that you save a lot of money doing that. Put all that together. Everyone has said to us, including the bureaucrats, ‘That’s amazing; it’s going to be a great idea.’ But … where we’ve ended up is that then you get into the procurement funnel and it’s very hard to break out of that. My anticipation is that, as we go through this and get out the other side—again, I’m not a cynic at all—we will be saying, ‘How much is it going to cost for us to buy a swab?’ … One of the interesting things that’s come out of it is that, as we’ve started to talk about a virtual stockpile, the Canadians have approached us, the UK government has approached us and we’ve now got inquiry from the United States. We have international investment partners saying, ‘We want to pull all of that IP and that capacity into our environment.’ We built that. This is an Australian idea—concept, IP, knowledge. All of that is Australian and yet we aren’t able to support that Australian function.
3.141The Committee heard that safety, longevity and suitability for purpose are also important considerations in the value-for-money equation. Mr Cain of the Australian Steel Institute provided the example of fabricated steel, advocating that all government contracts should specify certification to a compliance scheme using the Australian standard. Inclusion of this specification would ensure that the higher safety standards are considered during the procurement process, ensuring ‘that the steel is made to the Australian standard and is safe.’
Participation barriers for SMEs
3.142Complex procurement processes can impose a disproportionate burden on smaller organisations, and small businesses often find it difficult to access government contracts.
3.143The AMWU advocated that fair allowances to be made in procurement processes for participation by Australian SMEs:
For SMEs to compete globally for those [international] procurement contracts, there needs to be an allowance for them to participate in government procurement processes. There needs to be a streamlining of processes to allow smaller companies to participate within those processes.
3.144For example, BRC Capital suggested a ‘chaperone’ system to guide smaller businesses through the procurement process, with Mr Harris drawing a sharp contrast between government facilitation of export market development for Australian firms, and the lack of guidance for participating in equally or more lucrative government tenders:
If we’re trying to export a product overseas, Austrade are super helpful. You saw our circle helmets. If you give them a helmet, they go, ‘Okay, this is the market and this is the person that you should approach.’ With a government department, they could have some sort of chaperone or, basically, just someone to guide you through the process. If we were a Johnson & Johnson or a Stryker, you’d have 15 people in government procurement. We’re a small company; we have no chance of being able to step through those hoops and know exactly what’s going on. Someone to help is what is needed.
3.145SMEs are also less able to withstand peaks and troughs in demand, which could be ameliorated by consistent, phased government purchasing contracts.
3.146Finally, the Committee heard that procurement policies differ across states and territories. This can further complicate participation by local manufacturers, and raise costs for everyone. The Australasian Railway Association noted the ‘varying jurisdictional policies on procurement, standards, type approval, and local content requirements’ and called for national harmonisation:
A National Local Content Policy, as opposed to a series of State local content policies, offers the key to unlocking the benefits of scale, componentry harmonisation and design efficiencies. These could amount to a cut of some 19 per cent in rolling stock manufacturing procurement expenses, which would be of considerable benefit across the country, allowing state governments to increase spending in areas such as education and health care.
Committee comment
3.147Government procurement can be a major driver in developing advanced manufacturing. Purchasing contracts guarantee future revenue, increase access to private capital, and allow manufacturers to both scale up and make further innovations. Public funds spent to acquire goods should prioritise the future of Australian industries.
3.148The Committee notes the new Buy Australian Plan funded in the Australian Government’s October 2023–23 and 2023–24 Budgets. The Plan includes measures to ‘open the door to more government work for more small and medium businesses by decoding and simplifying procurement processes’, ‘support industry sectors through the government’s purchasing power’, ‘use government spending power to take action on climate change and support energy projects’ and ‘strengthen Defence industries and capability’, among other things. The 2023–24 Budget funded improvements to the AusTender procurement platform, new tools and greater SME outreach, to make it easier for businesses to compete for procurement opportunities. It also included funding to improve Australian Public Service capabilities in procurement and contract management.
3.149This reform process was at a very early stage at the time of this inquiry. As such, the Committee is mindful that the evidence heard reflects manufacturers’ past experiences, rather than the Australian Government’s aspirations under the Buy Australian Plan.
3.150However, the Committee notes the common view that there has been a gap between the rhetoric of government purchasing and the reality experienced by Australian manufacturers. Purchasing decisions should appropriately weight the important flow-on effects of buying local for the broader Australian economy. Procurement guidelines should provide avenues for innovative procurement models, such as just-in-time supply guarantees backed by advanced manufacturing capabilities. Ideally, such policies should be harmonised nationally.
3.151The Committee supports developing specific and detailed industry plans and investment strategies for promising sub-sectors of the Australian manufacturing industry, to develop sovereign capability in advanced manufacturing supply chains. This should be complemented by robust ‘Buy Australian’ procurement policies that account for the benefits of local manufacturing in creating Australian jobs.
3.152The Committee supports the view that governments should review policy options, including local preferential procurement strategies, to encourage and give confidence to Australian industry to invest in local manufacturing for renewable energy technologies and infrastructure, including structural and electrical components and other material inputs. This would include, in the case of wind towers, the manufacturing of blades, towers, bases and internal turbine components.
3.153Building on the Buy Australian Plan, the government should review federal procurement legislation and guidance. In order to enable decision makers to make more sophisticated assessments, revisions should emphasise the importance of local economic benefits in assessing value for money and outline methods for estimating those benefits. The guidance should introduce regular reporting by government agencies on the use of Australian suppliers. In partnership with the states and territories, the government should identify further steps it could take to increase locally manufactured content in renewable energy infrastructure and equipment installations, medical and health supplies, and other areas where governments are major customers.