Chapter 7
Innovation, research
and development
Introduction
7.1
Throughout
its inquiry the committee consistently received evidence suggesting that
research and development led innovation will be critical to the future of
Australia's food processing industry. As a result, one of the committee's key
concerns has been to identify the settings and incentives for encouraging
investment in research and development in the food processing sector.
7.2
This chapter examines
the opportunities and challenges for ongoing innovation through research and
development in Australia's food processing sector and identifies the role of
government in enabling the industry.
An
overview of expenditure
7.3
The
government estimates that during 2008–09, rural research and development
investment totalled $1.5 billion, $710 million of which was attributed to
government funding for programs including Cooperative Research Centres, the CSIRO
and universities, Rural Research and Development Corporations and revenue foregone
through the research and development tax concession.[1]
7.4
The CSIRO views
research and development within the food supply chain as 'important to ensure
that the Australian food industry is secure and sustainable'.[2]
Similarly, the Australian Bureau of Agricultural Resource Economics and
Sciences (ABARES) have stated that '[r]esearch and development on food supply
chains could be as important to food security as research to improve yields'.[3]
Although ABARES considers that '[t]here is no foreseeable risk to Australia's
food security', they have identified that there will be challenges to food
security in the coming decades:
Australia’s
strength in providing food to other countries faces a number of challenges over
coming decades. The rate of growth in agricultural productivity is declining in
Australia, and perhaps globally, as growth in investment in research and
development (R&D) has declined. Additional challenges include climate change,
increasing pressure on limited resources such as land, water and fertiliser,
and, if Australia follows the path of a number of other countries, demand from
non-food uses of crops, particularly for biofuel.[4]
7.5
ABARES
considers strong productivity growth will be key to ensuring food security in
the face of these challenges.[5]
Yet despite the benefits of research and development, ABARES has reported that
'public expenditure on R&D in agriculture, which grew at an average of 6.5
per cent a year between 1953 and 1980, has since grown at only 0.6 per cent a
year'.[6]
The concern that investment in research and development has declined over
recent years is shared by Dr Martin Cole and Mr Geoff Ball of the CSIRO:
Agricultural
research and development investment has declined globally over the last two
decades and is woefully inadequate to deal with the challenges... The lack of
investment in innovation has also seen the food industry become one of the
least profitable industry sectors...an increase in investment is needed if the
food industry is to overcome the many challenges of globalisation and realise
the growth opportunities of meeting the consumer drivers of health, convenience
and premium foods...[7]
7.6
Dr Cole and
Mr Ball claim that the 'complex issue of food security cannot be met solely by
increasing production efficiencies', but that opportunities that improve
sustainability must be found within the entire supply chain:
...this
will require investment in both pre and post-farm gate food production and
processing. The solution will require the development of new sustainable food
manufacturing technologies that minimise the impact on the environment, water
use, greenhouse gas emissions, waste generation and energy requirements.[8]
7.7
They consider
that a 'global perspective to innovation' is required to ensure 'cutting edge
ideas and technology from the rest of the world [can] be adapted and adopted
here' and suggest that 'a collaborative research network that partners with
industry will develop the human capital required for innovation.'[9]
The
role of government
7.8
Although the
food processing sector faces a multitude of challenges, many outside the realm
of government control, there remain opportunities for government to ensure its
policies encourage the sector's long term viability. One such area is by
providing an environment conducive to ongoing investment in research and
development.
7.9
Campbell
Arnott's made the point that, despite its size and value to the economy, the
food processing sector is often forgotten when the government is considering
policy responses to encourage ongoing investment:
When the
government talks about manufacturing, it is always about the car industry or
heavy industry. There are more than 300,000 people employed in food
manufacturing in this country. We have some manufacturers, including ourselves,
which have leading-edge technology that does require some of our best and
brightest from university to come and work with us to continue that trend.
Without technology and innovation, you will not be able to compete here. You
will never be able to compete with a box of biscuits coming out of China. ...The
only way to change that game is to have great R&D and technology, and
people in plants that can adapt that technology and scale it up.[10]
7.10
The
Australian Manufacturing Workers Union (AMWU) agreed that as much as possible
should be done to support Australian companies:
...to be
able to effectively take up any opportunities that arise in our region
including looking to greater support for R&D and innovation in the sector,
assisting food companies to re-equip with state-of-the-art food production
technologies that drive innovation and productivity, and effectively investing
in the skills and training of their management and workforce.[11]
Committee
view
7.11
The committee
notes the current government's claims it has fostered investment in the
industry through its tax settings and research programs. However, the committee
notes the changes that were made to the research and development tax credit in
2010 and the assertions of the then Minister, who, at the time, informed a
parliamentary committee that the recent doubling in claims, which the
government attributed to as resulting from illegitimate claims, was
'unsustainable'. The committee notes that although the government maintains
that the definitional changes that were subsequently introduced would ensure
only legitimate claims could be made, the effect of those changes would be a
capping of the expenditure:
In my
view, given the growth in expenditure that has occurred in this particular
area—and it has doubled in the last couple of years—you have to make an
assessment as to whether or not you think the level of genuine R&D
investment has doubled in that length of time. It poses another question: are
claims being submitted that are not legitimate? Under the current way in which
the law is interpreted, people are able to do this. We want to make some
changes because if you do not do the changes then the whole scheme becomes
unsustainable, the whole process is brought into disrepute. In my judgement, I
would be negligent not to act and take action if I knew this was going on, had
responsibility for the administration of this program and held it in the regard
that I do. That is what we have done. We have moved it from a system of
deductions to a system of credits. We are doing it within a funding envelope,
as I say, of $1.5 billion a year.[12]
7.12
The committee
takes the view that although it is too soon to understand the impact of the
changes to the research and development tax credit, there is a need to continue
to monitor if the reduction in the credit has a negative impact on the sector.
7.13
The committee
considers that additional and ongoing government investment through tax
settings and research programs is necessary to support research and development
led innovation in the food processing sector. In this context, the committee
views research and development led innovation as including improvements in all
parts of the processing chain—improved equipment and processes that create
production efficiencies as well as new product development. Innovation in all
parts of the chain is necessary given the challenges confronting the industry.
The importance of
research and development
7.14
Industry
participants on this inquiry consistently highlighted the important role research
and development needs to play, particularly if Australia is to capitalise on
the opportunities presented by growth in the Asian markets.
7.15
Lion Pty Ltd identified
the importance of investment and innovation in capturing the opportunities
presented by Asian markets:
There is
clearly an opportunity here for Australia to become the food bowl for Asia and
feed emerging markets. To do this, we must support local production and build
an international reputation as a producer of the highest quality food and
beverage products. It is only through investment and innovation that the
industry can take advantage of this opportunity.[13]
7.16
However, in
identifying this area of future growth, Lion Pty Ltd advised the committee that
their ability to continue to invest and take advantage of such opportunities is
suffering as a result of the current domestic market environment:
Unfortunately,
the current economic climate provides limited scope for business in the sector
to innovate and expand. Sustained low consumer confidence continues to put
downward pressure on pricing while input costs continue to spike, meaning that
most in the industry have found their margins squeezed and have limited ability
to reinvest. The Australian dollar continues to undermine exports while
enhancing opportunities for competing imports, particularly in private label.[14]
7.17
It is clear
that the strong Australian dollar, which is placing downward pressure on profit
margins, is affecting the level of investment businesses are able to make. Like
Lion Pty Ltd, the Australian Meat Industry Council (AMIC) highlighted the
difficulties they face in pursuing innovation and research and development:
The red
meat industry processing sector operates on margins of the order of one to
three per cent, against a set of tightly controlled cost-plus parameters. The
risk-reward balance is not as attractive for R&D in the red meat processing
sector because of the small margins industry has to fund innovation from. With
a margin of one to three per cent it is very hard to fund innovation.
Government needs to understand the specific needs of the red meat processing
sector in R&D programs.[15]
7.18
Campbell
Arnott's also identified the importance of innovation to their business and whilst
it appears to the committee that they focus more on growing their share of the
domestic market and are not as keenly looking to capture the opportunities
presented by foreign markets, the role of innovation is no less important to
their continued success:
To remain
competitive we have to continue to invest substantially for innovation and
growth. It is not just about cost. You have to be cost competitive but you have
to be innovating to grow. You have to have a reason to entice the consumer to
the supermarket shelves to want to buy your product. ...So cost is absolutely
important; innovation is more important. [emphasis added] We need to make
the products that our consumers want and also tempt them with products they
have not yet even thought of.[16]
7.19
However, not
all participants in the food processing sector are optimistic about the
opportunities that can be harnessed through increased investment in research
and development. This was most clearly identified by Mrs Mac's who, in their
submission, advised the committee that without 'radical innovation' the future
of food processing in Australia is not 'bright':
The
competitiveness of Australian processed foods at a global level is currently
being further eroded by the strong Australian Dollar and a lack of any
willingness by governments and retailers to consider applying a level
manufacturing playing field by requiring foreign manufacturers that export food
products in to Australia to meet the same processing standards and hence
consequential costs that are imposed by government regulation here in Australia
across all tiers of government.
Unless
this situation changes, then with the exception of niche products, or some
radical innovation to processing techniques developed in Australia, there is
not a bright future for Australian food processing and manufacturing companies.[17]
Committee
view
7.20
Given that investment
in research and development and increased cost efficiencies and improved
competitiveness, the committee takes the view that more needs to be done to
support continued investment in research and development. As tighter margins further
reduce the capacity of firms to invest in research and development, the committee
considers it critical that the government needs to provide an environment that encourages
ongoing investment in this area.
7.21
The committee
considers that the evidence it has received demonstrates that research and
development led innovation will be key to overcoming the challenging
environment that many in the food processing sector face. Campbell Arnott's
explained this very well:
We are
beset at the moment with a number of unique challenges that we probably have
not seen before occurring at the same time. As I said earlier, you can bemoan
them or you can work out how to compete... We have certainly seen a huge benefit
from incentivising good investment in technology in our plans to enable us to
continue to grow the business and also move up the food chain, if I can use
that word colloquially, in terms of technology, which then requires a different
skilled workforce over time to manage.[18]
7.22
The committee
is encouraged by the resilience of the sector and its commitment to facing the
challenges head on but acknowledges the role of government in supporting
industry through setting appropriate policies, specifically in this instance,
those relating to research and development.
The
challenges to research and development led innovation
7.23
A unique
challenge among those facing food processors is the growth in private label supermarket
products. The role of these products in the mix offered to the market place
poses a significant risk to food processors that were once more able to rely on
loyalty through their established brands:
Consumers
do want choice, and the permeation of home brand damages the opportunity for
food manufacturers to build brands and brand loyalty.[19]
7.24
Over time,
however, as the major retailers have sought to grow their businesses by
entering the market with private label products which provide a similar, if not
identical alternative to consumers at a reduced cost, the need to capture
improvements through innovation, whether that be through new products or
improved processes, has become paramount for survival.
Intellectual
Property
7.25
Research and
development enables Australian food processors to innovate their product
offerings and ensure that their business models are as lean and competitive as
possible. However, with the growth in private labels, the incentive for such
investment is diminishing given that the large retailers are able to take
advantage of the available intellectual property for their private label brands,
without having to make any investment.
7.26
The
Australian Food and Grocery Council (AFGC) explained how this can occur:
There are
several ways that it can happen, where the IP can be taken over by the
supermarkets. One is the declaration, up to 12 months before the product
launch, by the branded manufacturers of what they are proposing in terms of new
products or product renovation. There are anecdotes of exactly what you say
happening, where the supermarkets have launched a private label even before the
branded manufacturers have, with the same product concept... The other way that
they take the IP from the branded manufacturers is simply when a product is
seen to be successful on the supermarket shelves the retailers then demand a
private label version of it, which is almost identical if not identical.[20]
7.27
Food South
Australia were also worried by this trend:
Retailers
can capitalise on the leading brands’ innovation without the risk and expense
of developing the intellectual property. Gone are the days when people only
bought home brand if they could not afford anything else.[21]
Success
through innovation
7.28
Despite this concerning
evidence, the committee also received information that suggests that some food
processing businesses, who have continued to innovate, have been able to resist
moving into private label processing by maintaining their brands and developing
new products:
We
certainly see our focus being around our brands. We have some very strong
brands in this country. Arnott’s is seen in 96 per cent of all households in
the country. Tim Tam is one of the strongest brands in the country. We see our
resources—our capacity management of the asset base as well as our R&D and
plant personnel being focused behind those brands—as being of higher importance
than manufacturing private label. We have an asset base also—and this is
probably different to colleagues who have spoken today—that is highly utilised.
You have to continue to ensure that that asset base remains highly utilised and
that the investments that go in behind it are behind innovation and technology
to enable your brands to grow.[22]
7.29
Campbell
Arnott's attribute their success to product innovation:
We have
[maintained our share of shelf] through staying ahead of the game and giving
retailers a reason for wanting us to be on the shelf―because the
consumers want our product. Consumers are savvy. They certainly are looking for
price, but they are also looking for innovation and new products. ...
We are
fortunate that we are in a sector that is fairly exciting. We are able to bring
different products, textures and flavourings to a marketplace to excite
consumers. We are taking advantage of that. We also have a very large R&D
marketing group who really do understand the consumer in this country and that
allows us to bring those products to market.[23]
7.30
Mr Vincent
Pinneri of Coca-Cola Amatil also explained to the committee instances when they
are able to take this approach and resist producing private label products:
On a
particular innovation where we have first mover advantage we will not allow
that to go into private label, versus other areas like tin cans, which is where
our infrastructure is and our overheads are, it is about leveraging the infrastructure
while we are in that space.[24]
Wine
7.31
The committee
heard that the growth of private label products is spreading further than
everyday grocery items and now poses a potential problem to the Australian wine
industry.
7.32
The Winemakers'
Federation of Australia (WFA) explained the loss of diversity to the committee
and how their industry organisation intends to confront the challenge that it
presents through research and development. It also explained the importance of
the RDC (Research and Development Corporations) model in including small grape
growers and wine makers.
WFA
believes that research and development plays a critical role in the wine
industry’s future, particularly in the areas of viticulture, oenology and
market development. WFA’s priority is to ensure that returns from R&D
activities are maximised ....In partnership with Wine Grape Growers Australia
(WGGA), we have established the Innovation Policy Committee to ensure R&D,
especially that funded by industry levies, delivers cost-effective outcomes.
WFA also works productively with [other organisations]. ....WFA is seeking to
achieve a better alignment of government and industry objectives from Research,
Development and Extension (RD&E) and a stronger, expanded R&D base to
ensure we maintain a dedicated R&D agenda that reflects the collaborative
nature of the wine sector.
There are
a large number of small grape growers and winemakers in the Australian wine
sector – which is one of its greatest strengths. These businesses have little
chance of conducting effective R&D on an individual basis and therefore
rely heavily on the capability that is developed through levies allocated by
the GWRDC towards research. WFA believes strongly that the RDC model is world
leading and reflects the unique nature of much of Australia’s agriculture and
value-added businesses. Its preservation is important for ongoing innovation
across the sector.[25]
7.33
For those food
processing sector participants that are unable to decline requests to provide
product for private label goods, the committee received evidence that they must
remain competitive, either through new product development or process
improvements that reduce the costs in their business. However, in a tight
market this can be difficult as spending on research and development may be one
of the first areas of cost to be cut.
7.34
Mr John Berry
of JBS Australia identified that this is occurring as operators look to take
costs out of their business to ensure their survival, including funding that
would otherwise be invested in research and development:
You may
not be aware of this, but the meat-processing industry pays statutory levies on
the processed animal direct to the Department of Agriculture, Fisheries and
Forestry. That is then reallocated to the Australian Meat Processor Corporation.
Its levy-paying members have access to 15 per cent of those funds to be used
for the purposes of R&D. They can be leveraged on a dollar-for-dollar basis
through the federal government.
That is a
good model and has been a very successful model. But, without being too
dramatic, I think we are currently in a situation where we are looking to take
cost out of the business. [26]
7.35
Mr Berry
explained that in the meat-processing industry there are limits to the amount
of automation and therefore 'leanness' that can be built into the production
line and therefore, where research and development will not have a 'commercial
payback' it will not be prioritised:
It is not
realistic to expect that we can automate these businesses. They are and they
will continue to be labour intensive businesses. So we are looking to implement
technologies where we can. But, again, they have to meet commercial paybacks.
We are looking to identify key areas of cost which we can take out of the
business.[27]
7.36
Although Coca-Cola
Amatil do not face the same challenges as commodity processors such as the meat
and dairy industries, they advised the committee that their ability to create
new products through innovation will enable them to share more of the profits they
make with their suppliers not only through requiring more product but also as a
result of increased margins on new items. They gave the example of pears:
Historically,
the business used to export a significant amount of pears to Japan, Germany and
all over the world. We have subsequently reduced our quota to probably half, or
maybe even less than that, but the trees are still there. So those pears are
now going into the fresh market, which is reducing the fresh market price. Our
ability to change that will be driven by our ability to execute a new
processing technology, which we have found, that will allow us to do sliced
pears that have a longer shelf life―21 days. They are still fresh, but
sliced, and have anti-ageing and antibacterials. ...Being able to do a sliced
pear is very different to selling a can of tinned fruit, which you can get from
anywhere and can be easily replicated. It is about price realisation, which
then allows us to share more equitably with the growers and other people in the
supply chain [28]
Committee
view
7.37
The committee
acknowledges that there are many complex challenges facing the Australian food
processing sector and that the opportunities that research and development led
innovation provide may not be accessible to all food processing sector
participants. In light of this fact and given that researchers have identified
that future success will depend on innovation within the entire supply chain,
the committee considers that the role of government in ensuring that taxation
and regulatory settings encourage innovation is even more important,
particularly for small and medium enterprises and those commodity based processors
that do not have the same ability to either access research and development or diversify
their products.
Government support for
research and development
7.38
The
government currently provides support for research and development through the
research and development tax concession and the provision of funding for
Cooperative Research Centres, Rural Research and Development Corporations, the
CSIRO, and universities.
7.39
Throughout
its inquiry, the committee sought to understand how effective the existing
support provided by these programs has been in encouraging research and
development.
Overview
of industry research programs
7.40
Cooperative
Research Centres (CRCs) support research and development by fostering collaboration
between researchers, industries, communities and governments to solve major
challenges facing Australia.[29]
They do this by linking researchers with industry to focus research and
development towards utilisation and commercialisation.[30]
CRCs may have many participating organisations including universities and research
institutions, businesses, governments, international partners, not-for-profit
organisations, and industry and community associations. At present there are eight
active CRCs related to the food industry.[31]
7.41
Research and
development corporations (RDCs) cover nearly all of Australia's agricultural
industries and are the primary channel through which government provides
funding for rural research and development.[32]
RDCs do this by investing in research, development and innovation that seeks to
improve productivity and quality to ensure competitiveness, profitability and
sustainability.[33]
RDCs involve partnership between government and industry.[34]
7.42
The Clean
Technology Investment Program is a competitive, merit-based grants program introduced
in 2011 to support Australian manufacturers to maintain competitiveness in a
carbon constrained economy. It seeks to do this through grants for investments
in energy efficient capital equipment and low emission technologies, processes
and products.[35]
The
effectiveness of these programs
7.43
The committee
sought the advice of the responsible government departments as to the
effectiveness of these programs. On raising the matter of CRCs with the
Department of Industry, Innovation, Science, Research and Tertiary Education
(DIISRTE), the department explained that there are currently eight active CRCs related
to the food industry but that none of those CRCs is specific to food
processing:
I will
start with the eight active CRCs... We listed the National Plant Biosecurity CRC,
which had a ceasing date of 30 June 2012. It was actually successful in the
14th selection round we ran last year, and will continue funding for another
six years starting from 1 July 2014. The Beef Genetics Technology CRC will
cease on 30 June 2012...The other CRCs that are currently in place are the Sheep
Industry Innovation CRC, , the Australian Seafood CRC, and the Future Farm
Industries CRC [which will all] cease on 30 June 2014. We have another three
which will cease over 2016, 2017 and 2019, the latter being the High Integrity
Australian Pork CRC. .[36]
7.44
Despite there
being no active CRCs that specifically look to assist the food processing
sector, DIISRTE did advise the committee that they are in the early stages of
looking at possible opportunities to address this situation:
We are
looking at some early concepts around working closely with the research
organisations, academia, state governments, the Commonwealth government and the
CSIRO around what we can do to assist the process of collaboration. We only
have early ideas at the moment. They are not developed enough to be mentioned
today, but they might be developed well enough at the stage of the National
Food Plan, the white paper.[37]
7.45
In evidence
to the committee however, Mr Callum Elder, Executive General Manager, Quality
and Innovation, Simplot Australia Pty Ltd explained that investment beyond CRCs
is required. Mr Elder explained that in order to innovate businesses need
access to pilot plant and equipment to test whether or not the new equipment will
provide their processes with efficiencies, and therefore whether the investment
in the capital is worthwhile. Mr Elder explained however that access to pilot
plant and equipment in Australia is very limited:
Every
university has a nutrition or food course; hardly any of them have any
technical food science courses anymore, because they are required to have
equipment and this equipment is expensive to buy and maintain. So we find
access to pilot plant equipment and expertise that we can draw on in people who
can utilise that equipment to be a very difficult thing. Quite often now we are
actually getting graduates and people from overseas, from Germany and other
countries that do have wonderful centres. [Here there is only the] CSIRO centre
at Werribee.... How do SMEs, which are not big companies like us, get to trial
new equipment...if they cannot access that at a centre of excellence or a
research centre?[38]
7.46
In response
to the committee's questions concerning the level of demand for access to the
Clean Technology Investment Program by the food processing sector, the department
advised that there had been a lot of interest in the Food and Foundries
Investment Program:
$150
million is dedicated to food. We launched it on 16 February. It would be fair
to say we have had a very significant response to the food and foundries
program. Our initial push into the industry was electronically. Since [the
launch day], the webpage for the program has had over 15,000 hits. ...We already
have 16 applications from the food industry, seeking grant support of about
$12.9 million, and we are working through that at the moment. Considering a 16
February launch, that is a fairly impressive response, from our experience of
launching grant programs in the past.[39]
7.47
Dr Edwards
explained that the funding that has been set aside for the program is to be
allocated over six
years and that 16 applications had been received.[40]
Committee
view
7.48
The committee
takes the view that the Food and Foundries Investment Program is not in fact
additional investment in the food processing sector, rather the funding that
has been set aside for this program represents compensation for the industry.
This compensation is only necessary as a result of the additional costs being
introduced by the government through its carbon price.
7.49
The inquiry
heard that the industry is generally complimentary of the RDC program. Indeed,
the Australian Dairy Industry Council (ADIC) in their submission explained that
they have found RDCs to be responsive to changing conditions:
Over the
years the RDCs have proved responsive to changing external conditions. While
the overall structure of RDCs has remained the same, the governing framework
has been modified. Internal governance systems have seen RDCs devise a range of
approaches to developing R&D investment strategy, measuring return on investment,
managing commercialisation and developing extension/application programs.
7.50
ADIC explained
that they see RDCs as playing a 'valuable role in identifying, funding and
guiding the commercial application and extension of innovation' and gave the
example of the dairy RDC, Dairy Australia Limited, which was established five
years ago:
[The
dairy RDC was established] out of an industry-led initiative to respond to and
manage the changing needs of dairy farming, and maximise the returns to farmers
from levy-based investment. The Dairy Australia / RDC model provides a
framework for Australia's 8,000 dairy farmers to directly invest in R&D and
encourages farmers collectively to engage in the continuous pursuit of industry
innovation and advancement.[41]
7.51
They did
explain however that RDCs could be further improved by ensuring '[m]aintenance
of the RDC model with closer alignment to industry focus and funding and
government priorities.'[42]
7.52
Like the
dairy industry, the WFA were also complimentary of the RDC model:
WFA
believes strongly that the RDC model is world leading and reflects the unique
nature of much of Australia’s agriculture and value-added businesses. Its
preservation is important for ongoing innovation across the sector.[43]
7.53
Although most
industry participants view RDCs favourably, AMIC suggested that existing
research and development programs, including RDCs, are uncoordinated as a
result of their joint administration:
The
disconnected nature of R and D investment and prioritisation between the RDC structure
overseen by DAFF and that of the Department of Innovation, Industry, Science
and Research (DIISR) presents an on-going source of frustration (due to competition
and/or fragmentation of investment) for the red meat and livestock industry
(and agriculture more broadly).[44]
7.54
The committee
is concerned by recent government decisions to reduce investment in research
and development, including the decision to stop funding Land and Water
Australia and an apparent move away from agricultural CRCs. The committee is
particularly concerned by these developments particularly in light of evidence
it received throughout the course of its inquiry that demonstrated the
importance of research and development and innovation to the food processing
sector.
7.55
The committee
does however consider that in view of the government's commitment to the
development of a National Food Plan, there are opportunities for new CRCs to be
established that specifically look to address the challenges facing the food
processing sector. The committee would also like to see that funding
arrangements due to expire for existing CRCs be reviewed with a view to
providing ongoing support.
7.56
The committee
is encouraged that industry participants do appear to be engaging with
government sponsored programs that aim to enable and support investment in
research and development but notes the evidence it received suggesting that
more needs to be done to encourage investment in pilot plant and equipment. The
committee takes the view that in the absence of such investment, it is clear
that the food processing sector will continue to rely on importing skilled
labour and intellectual property.
7.57
The committee
is pleased that food industry participants have shown interest in the Food and
Foundries Investment Program (part of the Clean Technology Investment Program)
however remains convinced that this program does not reflect additional
investment in research and development but is rather compensation for
additional costs being imposed by the government through the introduction of a
carbon tax. Further, the committee notes that given there have only been 16
applications, more should be done to ensure that smaller businesses within the
industry are aware of the program and the opportunity it provides to upgrade
plant and equipment.
7.58
In respect of
the RDCs, the committee is pleased that in their preliminary response to the
Productivity Commission's report into RDCs that the government has indicated it
will not adopt the recommendation to reduce funding to these research bodies
but suggests in fact that what is required is an increase in funding for these
bodies.
7.59
The committee
notes that small and medium enterprises at times struggle to access research
and development funding. The committee views equity of access to research and
development funding as vital to an ongoing vibrant and sustainable food
industry.
Research
and development tax concessions
7.60
Throughout
its inquiry, the committee also sought to understand how the recent changes in the
research and development tax concession had affected business investment
activity.
About
the concession
7.61
From 1 July
2011 the government introduced changes to the research and development tax
concession. The existing research and development tax concession was replaced
with a new incentive comprised of two elements:
- A 45%
refundable research and development tax offset available to eligible companies
with an aggregated turnover of less than $20 million per annum; and
- A 40%
non-refundable R&D tax offset available to all other eligible companies. (Any
unused component of the non-refundable offset can be carried forward for use in
future years.)[45]
7.62
Prior to
these changes, the tax concessions available for research and development
included:
- a 125 per
cent tax concession that provided claimants with a deduction of 125 per cent of
eligible expenditure incurred on Australian owned R&D activities;
- an R&D
tax offset that enabled small companies with an annual turnover of less than $5
million and whose aggregate Australian-owned R&D expenditure was more than
$20,000 but less than $1 million to obtain a tax offset equivalent to their tax
concession entitlement;
-
an
incremental 175 per cent premium tax concession for those companies that
increase their R&D expenditure in Australia relative to their average
R&D expenditure over the previous three years; and
- an
incremental 175 per cent international premium tax concession available for
increased in foreign-owned R&D activities carried on by a company
incorporated in Australia.[46]
7.63
The changes
to the tax concession that took effect from 1 July 2011 were the subject of a
Senate Economics Legislation Committee inquiry in June 2010. Throughout that inquiry
stakeholders raised concern that the changes would result in a reduction of
investment in research and development in Australia. Submitters criticised the
time which the government had allocated for consultation with stakeholders as
well as the definitional changes to 'core' and 'supporting' research and
development that the bill contained. Stakeholders were concerned that these
changes would disqualify their investment in research and development
activities from the concessions.[47]
7.64
The committee
notes, however, that the recommendation of the majority report to review the
program after two years was taken up by the government and as a result an R&D
Tax Incentive Advisory Committee has been established, under Innovation Australia:[48]
The
Advisory Committee will canvass a broad range of views and provide advice to
the government on the implementation and operation of the new R&D Tax
Incentive. The R&D Tax Incentive will be reviewed after two years of
operation to gauge the policy’s effective implementation.[49]
7.65
Despite the
newness of the research and development tax arrangements, throughout its
inquiry the committee sought to identify whether or not the changes had had the
effect of reducing investment in these activities.
Effects
of the changes to the concession
7.66
When asked
about the effect of the changes to the regime, Mr Andrew Redman, Regional
Quality and Regulatory Operations Manager, General Mills Australia and New
Zealand commented:
I
personally do not have any sense of how that has played out for industry in
that short period of time. I know that things like compliance with the
legislation makes it difficult. Being a larger company, we are in a position to
do that. ... I think it would be prohibitive for smaller companies [without the
infrastructure in-house] to take advantage of the R&D concession. [50]
7.67
The AFGC
however do consider that the 'erosion' of the tax concession has dampened
investment in research and development:
Public
sector support for the food processing industry, however, is lower now than any
time in the past decade through a combination of the erosion of the value of
the R&D Tax Concession scheme and a loss of direct grants to the industry.[51]
7.68
Simplot's
Executive General Manager of Quality and Innovation, Mr Callum Elder, also commented
on the recent changes to the research and development tax concession. He
suggested that although it is hard to measure the impact at this point in time:
...fundamentally,
to increase productivity you need to invest. One of the forms that you need to
invest in is new technology, new approaches to doing things—doing things
smarter and better, as you talked about. To undertake that research and
development costs money. I think one of the best encouragements that government
can give to industry is to have an effective IRD [interest rate differential] tax
concession that truly encourages innovation and the use of the skills that we
have right across this country, in universities, research centres of excellence
and within companies. ...[but] it looks at the moment like our particular tax
concession amount will drop by 30 per cent next year, because the range of
activities for which you can make claim have been narrowed.[52]
Risks
to local research and development
7.69
Mr Elder
identified the risk that changes to the tax concession may lead companies
offshore for their research and development activities:
There are
certain provisions that are also restrictive relating to it. In the global
economy, R&D can be conducted by multinationals literally anywhere. Where
do we want that R&D to be conducted? It should be conducted in this country
for the benefit of our society, our people and our industry. In relation to an
effective tax rate, for our return at the moment we would be lucky to get 7c in
the dollar for our R&D spend. By the time we put our costs against that—all
the record-keeping and other activities required, the accounting costs—it is
barely worth doing, and that is for a large company like ours. For a smaller
SME, it would not even bother. It would not be worthwhile.[53]
7.70
General Mills
Australia and New Zealand also suggested to the committee that there is a need
to encourage local investment in research and development and ensure any
'temptation to take R&D offshore' is removed:
One of
the things we have here to try and help value add in the industry is the
ability to add some innovative R&D to differentiate ourselves. I think a
lot of companies really value the R&D tax concessions... If we can encourage
more local R&D in the food manufacturing sector I think that is only going
to add a lot of value [and] benefit the whole community.[54]
7.71
Simplot is of
the view that the changes will lead to a reduction in local research and
development expenditure, particularly for the multinationals:
They will
conduct the R&D offshore where they get better tax effective treatment for
that investment. Of course, there are all sorts of flow-on benefits to the
R&D apart from just conducting it. The maintenance of our skill sets and
know-how in universities right through is very short-sighted. There are
countries out there that have 150 or 200 per cent deductibility on R&D
activities. Ours is roughly 125 to 130. You can claim the 100 per cent as a
business activity anyway. It is effectively 25 or 30 per cent of then a 30 per
cent tax rate on a company. You can see the numbers come down very rapidly to
say, 'Is this actually worthwhile?' I know some of my counterparts across the
industry are saying that this will probably be the end of their R&D
activities in this country in the future.[55]
7.72
The evidence
provided to the committee by Simplot was noted with concern by the Tasmanian
Government, particularly in light of investment they expect will occur in
Tasmania in the future:
I hear
with concern comments made by Mr Elder from Simplot that, given a company of
that size and the R&D framework that is currently in place, it is barely
worthwhile for them to be undertaking it. My impression is that R&D is
generally carried out by larger companies—I am thinking in the food processing
and manufacturers space and leaving aside primary industries. Given that they
are often global or national companies, that in most cases will be taking place
outside Tasmania. There is, from what I have seen, not a lot going on in the
R&D space in the manufacturing area.[56]
Committee
view
7.73
Although the
committee heard that it is still too early to tell if the recent changes to the
tax concession for research and development have affected investment activity,
the committee is concerned by the evidence that it received and particularly
the suggestion that processors may consider relocating their research and
development activities offshore.
7.74
Throughout
its inquiry, the committee has heard of the difficult challenges which confront
the industry and, like those who have contributed to the inquiry, considers that
research and development led innovation will play a vital role in ensuring the
ongoing viability of the sector. Given this, the committee is concerned by any
suggestion that the new research and development tax framework will not provide
the support the industry desperately needs.
7.75
The committee
considers that government has a role to play in ensuring that taxation and
regulatory settings are appropriate so the sector can continue to innovate and
remain competitive in international markets. Campbell Arnott's supported this,
advocating that:
What we
are asking government to do is this: if you can level the playing field, that
would be great, and continue to support us on tax advantages and tax investment
strategies and work on the labour piece and the regulatory environment. If we
continue to ensure that they are being focused on, we as an organisation can
continue to keep a manufacturing footprint that is significant in this country
and we will continue to be very competitive and have some of our competitors
from overseas continue to try to work out how to beat us.[57]
7.76
As identified
in both this chapter and chapter 2, investment in research and development has
a role to play in ensuring a future skilled workforce for Australia's food
processing sector. A failure to encourage such investment, particularly through
investment in the CSIRO, CRCs, RDCs or joint ventures with industry, will
diminish capacity and potentially inhibit the ability of the industry to play a
role in satisfying the growing demand out of Asia.
7.77
The committee
agrees with the evidence it has received that competition in the sector
'ensures efficient use of resources, incentivises innovation and encourages
rapid uptake of technology' and the suggestion that the government needs to do
more in terms of 'co-investment and collaboration in new technology,
particularly in manufacturing, environmental sustainability and in
non-food-specific areas such as food safety R&D.'[58]
7.78
The committee
is convinced of the role research and development led innovation has to play in
enhancing efficiency and competitiveness in the Australian food processing
sector.
Recommendation
27
7.79
The committee
recommends that the government investigate the effectiveness of research and
development in the food processing sector and in doing so consider the
following questions:
- has been a
market failure of research and development in the food processing sector?
- are food
processors relying on research and development conducted by primary producers?
-
is there
scope to develop a cooperative research and development approach in the food
processing sector similar to rural research and development corporations?
- do the
current arrangements for research and development funding support equity of
access, particularly for small and medium enterprises?
Recommendation 28
7.80
The committee
recommends that the government consider providing research and development
assistance specific to the food processing sector.
Recommendation 29
7.81
The committee
recommends that the government reviews tax and regulatory settings to support
innovation.
Recommendation 30
7.82
The committee acknowledges the establishment of the Food Processing
Industry Strategy Group and encourages its active engagement of leading food
manufacturing and processing companies to encourage large scale investment in
food manufacturing in Australia.
Recommendation 31
7.83
The committee
recommends that the government review the funding it has allocated for research
and development in the Australian food processing sector.
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