8.2 Research and development

The Commonwealth provides around $9 billion per year in support for Australian research and innovation. Australia’s research system generally performs well relative to other nations.

The Productivity Commission identified two rationales for public support of science and innovation.

The first is that governments need to fund research and development associated with their own core functions (for example research into defence technology and biosecurity concerns).

The second is because not all of the benefits from research can be captured by the innovator, with some benefits ‘spilling over’ to later researchers or adopters. These positive spillovers mean that some research that would benefit the overall economy may not be undertaken by business, as each individual business would not receive a sufficient return.

Where the benefits from capturing these spillovers clearly exceed the costs to government from intervening, there may be a role for Commonwealth support.

As shown in Chart 8.2, there are three main research sectors in Australia – universities, publicly funded research agencies (such as CSIRO and the Australian Nuclear Science and Technology Organisation) and private sector businesses. Some research, particularly in the area of health, also takes place in the not-for-profit sector.

Australia’s universities generally focus on basic research. Basic research has wider benefits and is less likely to be undertaken by the private sector. Publicly-funded research agencies tend to focus on applied research that may be used in the public or private sector. The private sector typically focuses on implementation of new ideas into products and processes in the workplace.

.

Chart 8.2: Commonwealth Government funding by research sector
This chart shows budgetary assistance increasing over time, in nominal terms.

Source: The Australian Government's 2013-14 Science, Research and Innovation Budget Tables

The last decade has seen strong growth in government funding for research and development, with funding growing by around 3 per cent per year in real terms. Given overall budget constraints, it is important to take a strategic, whole-of-government approach to where Australia’s research dollars are spent.

Quality research infrastructure is a critical component of Australia’s research and development system and, since 2001, the Commonwealth Government has provided a series of funding programmes for large-scale research infrastructure. However, current funding for research infrastructure terminates on 30 June 2015.

Ongoing funding for critical research infrastructure in Australia could be informed by a reassessment of existing research infrastructure provision and requirements.

The Commonwealth provides direct budget funding of around $1.8 billion per year to publicly-funded research agencies. Funding for these research agencies should be directed to those areas which are of government priority or have the highest expected spillovers.

CSIRO is by far the largest publicly funded research agency in Australia, with more than 6,500 employees. It undertakes research across a wide range of policy areas. Changing the legislative basis for CSIRO into a Financial Management and Accountability Act 1997 body would enable the Commonwealth Government to have more visibility over CSIRO's work and ensure that resources are being directed to areas of greatest policy priority. This is the approach taken in New Zealand.

The universities sector receives around $2.9 billion per year, most of which comes through research block grants. The universities sector also receives the majority of Australian Research Council funding each year. There is scope to streamline and better align the various different streams of funding for the direct and indirect costs of research.

The private sector receives Commonwealth support for research of around $2.1 billion per year, most of which comes through the Research and Development Tax Incentive.

The remaining $1.8 billion in Commonwealth funding each year can be accessed by researchers across different sectors. This includes funding from programmes such as the National Health and Medical Research Centre and Cooperative Research Centres.

There are also some 150 other minor research funding programmes and agreements across various Commonwealth agencies and departments, ranging from research into wind forecasting capability to national acoustics laboratories.

A reduction in duplication of administrative support and processes could be achieved by better aligning research programmes to the Government’s policy priorities, targeting those areas with high spillovers, and consolidating a range of other programmes.

Aligning the Australian Research Council and National Health and Medical Research Centre grant processes (but keeping the entities separate) would reduce administrative costs to the Commonwealth and should also decrease the cost to researchers of applying for grants.

A significant amount of firm and sector-specific research is supported by measures such as the Research and Development tax concession. Specific grant programmes in addition to this support have the potential to skew investment decisions.

The Commission considers that sector-specific grants (such as those through the Australian Renewable Energy Agency, National Low Emissions Coal initiative, Carbon Capture and Storage Flagships and the Innovation Investment Fund) should be abolished.

There is an array of Rural Research and Development Corporations in the Agriculture Portfolio which are co-funded by industry (through a compulsory levy administered by the Commonwealth) and by government. These Corporations do not receive the benefits of the research and development tax incentive.

In return for the government contribution, the Rural Research and Development Corporations are expected to fund some research that has broader public good objectives. The wider industry and community have access to the outcomes and benefits of the Rural Research and Development Corporations’ research in order to maximise spillovers.

Changes to the current funding model, consistent with Productivity Commission recommendations, would reduce the amount of government funding and better reflect the mix of private and public benefits. In particular, the current cap on dollar for dollar matching of industry contributions by government (currently set at 0.5 per cent of gross value of production) should be halved over a 10 year period.

A new uncapped subsidy at the rate of 20 cents in the dollar should be introduced for industry contributions above the level that attracts dollar for dollar matching. Duplication of administrative support and processes should be reduced by aligning ‘backroom’ processes across the various Rural Research and Development Corporations.

Collaboration between the different sectors of Australia’s research system is crucial. For example, universities, not-for-profit organisations and the private sector collaborate in health research and development. There are inherent incentives for public and private sector researchers to collaborate to share funding, knowledge and intellectual property, so government should play a targeted role in this space.

Currently there is a range of programmes designed to encourage collaboration between universities and the private sector. Given that all of these programmes have the same objective, there would be efficiency benefits in consolidating them.

Cooperative Research Centres should be abolished, with funding rolled into the Australian Research Council Linkages programme. As part of this transition, consideration should be given to allowing longer funding periods for Australian Research Council grants. The Collaborative Research Network programme — which provides funding for larger universities to collaborate with smaller, less research-intensive and regional universities — should also be abolished, allowing researchers to determine their own collaboration priorities.

Given that the evidence base shows that industry clusters created deliberately by government rarely become independent of government funding, government should pull back from this area, abolishing the current Industry Innovation Precincts programme, including the associated Industry Collaboration Fund.

Recommendation 34: Research and development

The Commonwealth provides around $9 billion per year to support Australian research and innovation. The Commission recommends the Government take a more strategic, whole of government approach to the funding of research and development, including by:

  1. abolishing sector-specific research and development programmes;
  2. reducing government support for Rural Research and Development Corporations to better reflect the mix of private and public benefits;
  3. consolidating existing research programmes aimed at fostering collaboration;
  4. aligning the Australian Research Council and the National Health and Medical Research Council grant processes;
  5. streamlining the current system of research block grants and postgraduate scholarships and looking at options for better aligning funding for the direct and indirect costs of research;
  6. committing to ongoing funding for critical research infrastructure in Australia, informed by a reassessment of existing research infrastructure provision and requirements; and
  7. allowing for more government oversight of the work of the Commonwealth Scientific and Industrial Research Organisation to ensure that resources are being directed to areas of greatest priority.