Knowledge Nation
and the next revolution in industry policy
The ALP’s Vision for Australia’s ICT
Industry
Australian Business Limited
Information and Communication Technology Network
12 September 2001
Canberra
There is momentum in favour of a change of Government
building in the community. It is driven by a growing, palpable sense of the need
for Australia to get back on track.
Back to the type of community we can be proud of, based on
understanding, tolerance and a confident sense of our place in the world.
And back on track with our commitment to education, health and a decent
welfare system.
And there is very definitely a need to get back on track
with a strategic, visionary industry policy framework.
In my view, industry policy will be one area where the
Howard Government is judged far more harshly by history than it is regarded even
now. It is an area where a decade and a half of diligent and sometimes brave
policy thinking by Labor Governments has been squandered in the past six years.
Luckily, it is not too late. Labor’s Knowledge Nation
Taskforce Report sets out the priority areas for a future Federal Labor
Government in recovering lost ground and then moving forward once again.
It has, admittedly, been a statement that was received
with some cynicism from an electorate that has learnt in the six years under the
Howard Government to treat everything they hear from politicians with a level of
mistrust. John Howard has performed
so many back-flips that it is not surprising that the electorate has lost
respect for political leaders.
So I would like to spend a little time putting Knowledge
Nation in the context of the Labor Party’s industry policy vision since the
1980s. I hope that in doing so you will see how it fits in a broader context as
another phase of an industry policy revolution.
It is a revolution that started with John Button and Bob
Hawke in 1983 when the new Labor administration committed itself to opening up
to the world our ossifying industrial base.
It was a policy that had two elements: the gradual but
consistent removal of barriers to international trade, in the form of tariffs
and quotas, alongside sectoral plans to help Australian industry to adjust to
international challenges and opportunities.
The course Australia charted through these challenging
times was sometimes criticised as being too cautious, but where other countries
succeeded only in destroying their industrial bases, Australia saw industries
such as automotives develop a new export focus at the same time as a generation
of bright, new born global companies sprang up to seize the opportunities that
were emerging.
Then, in the early 1990s, Labor recognised that the second
phase of this revolution was almost upon us, and that it was time to invest in
the infrastructure of the future. Labor introduced innovation as a platform for
industry onto the national agenda in 1992, and focused policies on issues that
the Coalition is today belatedly discovering, a decade later.
Labor addressed the need to encourage co-operation between
the public and private sector research efforts with programs such as the
co-operative research centres as well as encouraging private industry to invest
in R&D through the 150% tax concession.
These policies tackled our limited capacity to commercialise through
catalytic policies requiring collaboration and provided direct incentives for
very early investment in applied research.
Labor also invested directly in training and education to
equip Australia with the workforce of the future.
These were generic industry programs, designed to prepare
Australian industry in its entirety for the shift into the information age.
This industry policy was married with strategic trade
policy; the negotiation of multilateral and bi lateral agreements to open
international markets for our business community.
Being export oriented was a feature of a Labor plan that transformed
Australia into a country that embraced rather than rejected the world.
Creative Nation, Labor’s last big policy statement
before the 1996 election, emphasised the central importance of the creation of
knowledge and contained initiatives that strengthened our ability to create and
manage intellectual property.
However, the politics of the day caught up with Labor.
Unfortunately, what followed from 1996 was a period of
wanton destruction of these carefully constructed policy initiatives. Sectoral
industry programs were gutted in the 1996 slash and burn budget, alongside
generic programs such as the R&D tax concession.
Our leadership in multilateral trade negotiations was
sacrificed as the Government timidly shrank from the responsibility of leading
the way. The impact of
international trade on the Australian economy is illustrated by Australia's
terms of trade -- the average prices of our exports, divided by the average
prices of our imports. Australia
has suffered a long-term deterioration in our terms of trade over the past four
decades.
Put simply, this means that Australia's export earnings
cover less and less of the bill for our imported products, detracting from our
total national income. In
information and communication technologies, the terms of trade are dismal and
have deteriorated under the Coalition. The Howard Government have stated on many
occasions they are content with Australia being a country of technology users,
not producers.
This is one of the great policy cop-outs of the Howard
Government. Remember their rhetoric about support and developing Australian
Industry before the 1996 election? Yet since the day they won office, they have
not had the courage of their convictions to actually back in the emerging
wealth-creating industries in this country. They squibbed and bought the easy
Treasury line on the issue. Either that, or they simply have no conviction.
Either way, their cop-out will only contribute to worsening of the terms of
trade in ICT.
And, perhaps most irresponsible of all was the
Government’s almost gleeful attack on investment in education.
Since the election of the Howard Government in 1996,
education policy in Australia has been dominated by the drive to reduce costs.
Once an above-average investor in education, Australia is now well below
the OECD average.
In 1998, Commonwealth funding constituted on 51.85 percent
of total university funding, down from 58.08 percent in 1996.
Overall, total university income has stagnated at a time when Australia
needs it to expand.
Cutbacks in Commonwealth funding of Vocational Education
and Training (VET) have been even more severe than for universities.
This has been compounded by the lesser ability of VET institutions to
raise private income compared to universities.
Arguably, no industry has been constrained more by a
skills shortage than that of information and communication technologies, with
conservative figures identifying a shortfall of 30,000 ICT graduates over five
years. This shortage inturn
reinforces other problems, including drawing teaching resources out of
institutions.
Make no mistake. In
a global economy where skills and knowledge are the core of an economy’s
ability to compete, this has been at the direct expense of national capacity.
A recent study indicates that if the shortage were to be ameliorated, the
synergistic effects could lead to a 0.9% rise in Australia’s GDP.
So while we went backwards, the rest of the world pushed
on, taking advantage of their improved status relative to countries like
Australia that seemed content to languish in mediocrity.
Fortunately, there is time for Australia to salvage its
position and stake a claim in the latest phase of the revolution.
This is the where Knowledge Nation fits.
Think of the 1980s as the focus being on transforming
traditional industries while allowing the new to emerge. The second phase, in
the early 1990s, was about investing in the infrastructure to let the fledgling
‘born global’ companies to take root and expand.
The next phase is in deepening this infrastructure as well
as identifying which of those new industries are strategically important enough,
dynamic enough and demonstrate enough promise to qualify for light-handed,
highly targeted Government encouragement, without going back to the bad old days
of protection and the unlevel playing field that smothered Australian
entrepreneurialism for so long.
Thanks to the Coalition cuts, this next phase of industry
policy needs to be accompanied by some remedial work too.
It will be necessary to rebuild the much-weakened foundations of
education. Labor’s challenge is
to build a comprehensive agenda that is working on all of these fronts.
The first problem to overcome is
Australia’s woeful R&D performance. Between 1996-97 and 1998-99 R&D as a share of GDP
declined from 1.65 percent to 1.49 percent.
Both the private and public sectors were responsible for this fall.
The investment in R&D by government is this country
addresses a crucial area of market dysfunction in the Australia economy: This
dysfunction goes beyond the reticence of business to invest in early stage
research and development, a weakness that was tackled head on with the R&D
tax incentive, and extends into the realm of personal investments in very early
stages of research by high wealth individuals.
Australia does not seem to have the entrepreneurial culture that
motivates people to invest their capital in high-risk ventures.
As a result, public investment in this area is needed to
initiate the opportunities for commercialisation of research and hence start the
process of attracting further rounds of venture capital investment downstream.
Labor understands that this public investment in R&D
underpins private sector innovation, commercialisation and ICT industry growth.
The Knowledge Nation agenda clearly re-establishes increased investment
in R&D as a policy goal. The taskforce report advocates doubling
Australia’s overall R&D as a percentage of GDP by 2010, bringing Australia
to the top of the OECD tables. How
quickly this can be achieved depends on the budget situation.
Not only must overall R&D spending be dramatically
increased, it must be more closely targeted to key Knowledge Nation industry
sectors, based on their prospects for commercialisation here in Australia, and
exports overseas. Five key emerging
industries are identified in the Knowledge Nation report as worthy of targeted
assistance. ICT is number one.
Crucial in its own right, ICT serves to enable the other key industries of
biotechnology, environment technology, education exports and medical exports.
Government should be in the business of determining
priority industries, it should not be in the business of trying to pick winning
companies. Fear of ‘picking
winners’ should not be allowed to constrain Australia from developing a
national investment strategy that strengthens and grows our existing enabling
industry of ICT. This
requires working with it to provide a critical mass of infrastructure, R&D
incentives, the development of management expertise and a skilled workforce.
It is widely argued that the information industries are
both key drivers of the global knowledge economy and central sources of growth
in modern economies. This impact
occurs through two main channels – rapid growth in output and employment in
the information industries themselves, and the rapid adoption of information
technology goods and services across all industries.
Recent trends highlight the need for this strategic focus.
After growing by 42.5% between 1992-93 and 1995-96, employment in these
industries increased by only 0.3% in the three years to 1998-99. This cessation
of growth reflects two main factors: a big decline (18.8%) in employment in the
communications services industries, as service providers cut back sharply on
staff levels, and a smaller decline in the manufacturing and wholesale area
(3.9%).
While the information services and content areas continued
to grow, by 35.2% and 12.1% respectively, this growth has been slower since
1995-96 than was the case for the previous three years, and has been largely
composed of an increase in the number of very small firms.
Between 1995-96 and 1998-99, the number of medium sized firms (20-99
employees) actually fell, and there was only a small increase in large firms.
It is likely that an industry that consists primarily of
small firms operating in the information services area will not be able to
compete effectively with the large international companies that play such a
decisive role globally. In fact, one of the most disturbing trends of the period
since 1995-96 has been the falling share of the large Australian market that has
been met by Australian providers. The
share of domestic production in total income from Australian sales has fallen
sharply for the packaged software and communications and ICT hardware markets.
These trends and this issue of size indicate that existing
Australian firms are being limited in their capacity to grow.
With industry policy under the Coalition focussed on hi-tech start-ups
and luring international investment, there is a clear policy void in supporting
existing ICT firms to become bigger and take on or expand their export
capability.
This void is the inevitable result of the Howard
Government’s unwillingness to back in Australia’s industry with innovative,
courageous policy. When the policy going gets tough, they have fled, abandoning
Australian industry.
Policies designed to expand our indigenous ICT SME’s
sector will assist in reversing the decline in Australia's terms of trade in
ICT. A critical policy lever is
government purchasing, with 40% of ICT expenditure coming from Government, the
opportunity exists to leverage this expenditure to support the growth of
SME’s.
By way of
background, government procurement has a substantial impact on the domestic
economy. In 1997-98 the value of
purchases by Commonwealth Budget funded agencies, not including government
business enterprises, was $8.8 billion. At
that time it was estimated that local, State and Commonwealth governments
combined spent approximately $45 billion per year on goods and services.
Given the Productivity Commission’s estimate that expenditure by all
levels of government on goods and services accounts for between 10% and 15% of
GDP, spending in 1999-2000 would have been of the order of $63 billion to $95
billion.
It is imperative
that such massive purchasing power be mobilised to maximise the benefits to
Australian industry. Properly
managed, government purchasing can stimulate industry development in general and
also achieve specific strategic objectives including sector specific goals and
general improvements in competitiveness. As
indicated in the most recent of a series of House of Representatives committee
reports
“the
decision to purchase from an Australian supplier can impact on the Australian
economy by influencing employment, taxation revenue, technological development,
and ultimately Australia’s balance of trade.”
(Joint
Committee of Public Accounts and Audit, Report 369 on “Australian Government
Procurement”, June 1999, p 61.)
Procurement spending on the scale
practiced by government has an enormous potential to influence the viability and
growth of key strategic industries, such as the information technology and
communications industries. This is
an issue that despite having paid endless lip service, the Coalition has
discriminated against SME’s by effectively excluding them from being eligible
to tender for Government IT by virtue of the sheer size and complexity of the
tenders.
It is worth noting that five years of
the IT Outsourcing Initiative have accompanied the dismal statistics regarding
the Australian ICT sector and the two are obviously related.
Clearly, what little industry development that derived from the
Coalition’s IT outsourcing was initially an accidental side effect, and later,
a disjointed afterthought.
Even the most recent discussions have
missed the point. The point is
this: The opportunity for ICT industry expansion through purchasing policies
lies in an SME’s ability to prime government contracts and use them as a
platform for growth through innovation and export. Hence policies that optimise the involvement of ICT SME’s
are required.
This is why Labor welcomed the Humphry
Review recommendations to devolve ICT purchasing to agencies and departments.
This devolution is expected to carry with it a decrease in the size of
contract offerings to the market, creating opportunities more in line with the
capability of SME’s trying to expand their horizons.
In the meantime, the Coalition is
tangling itself, not to mention industry, up in knots with all sorts of hooks
embedded in the contracts. This
approach of trying to create additional industry development and unrelated
obligations as a result of signing a contract inevitably detracts from the
contractor’s ability provide the best value for money service.
I do however, urge the Government to
get cracking with their promise to tackle the inhibitors to SME participation,
like the financial guarantees and unlimited liability that they are required to
provide.
But even stronger political direction is required to
challenge the risk-averse culture that makes multinationals the default choice
of Government. Labor has already
released our over-arching policy on Government Purchasing, and while we are yet
to release our policy on strategic sourcing of ICT in the public sector, this
policy tackles this culture at its core.
Labor proposes to amend the Financial Management Act and
association legislation to broaden the interpretation of ‘value for money’
to include industry development objectives.
Leadership and direction at the highest level is an important
pre-requisite to changing a culture, and department and agency heads will be
required to use this broader definition of ’value for money’ in their
procurement decisions.
Labor’s commitment is to create
a smarter, more transparent government procurement structure that will result in
administrative efficiencies and achieve the following broad objectives:
