An innovation-led recovery: Federal Budget 2020-21 and investment in R&D

A number of significant funding measures announced in the Federal Government’s 2020-21 Budget will come as welcome news to organisations involved in innovation and research and development (R&D). 

We are hopeful that the funding announcements will result in confident investment in R&D by industry of all sizes and also significant growth and investment in certain targeted industries (including the space, defence, resources, food and beverage and medical sectors).

R&D tax incentive

The R&D tax incentive is seen by many as one of the most significant supports for Australian businesses of all sizes that are engaging in eligible R&D.

Instead of the proposed $1.8 billion cut backs to the incentive – which were hanging over the technology sector for several years and the subject of an open letter from tech leaders (including Australian tech unicorns, Canva and Atlassian) to the Prime Minister in August 2020 – from July 2021 the Government will be dedicating an additional $2 billion to R&D tax incentives to assist businesses in developing new products and services.

This turnaround by the Government on the proposed changes to the incentive has been very well received by the technology sector and is seen as a welcome indication of the Government’s view that the technology sector will drive economic activity and recovery. Unfortunately however, the Budget did not reveal any intention to eliminate the uncertainty as to the eligibility of software development for the R&D tax incentive, which will no doubt be the subject of further lobbying by the technology sector.

See our Insight for further information on the tax implications of the 2020-21 Federal Budget.

Modern Manufacturing Strategy

On 1 October 2020, Prime Minister Scott Morrison announced the Government’s Modern Manufacturing Strategy, which is targeted at driving growth, delivering higher value jobs and improving the resilience of supply chains following the COVID-19 pandemic.[1]

The strategy focuses on providing Government co-funding across the following six National Manufacturing Priorities of strategic importance (noting that the breadth of these categories has not yet been articulated):

• resources technology and critical minerals processing;
• food and beverage;
• medical products;
• recycling and clean energy;
• defence; and
• space.

Underpinning the strategy is the Government’s $1.3 billion ‘Modern Manufacturing Initiative’, which focuses on facilitating greater collaboration between business, researchers and investors, and supporting the scaling and commercialisation of research into market-ready products. Under the initiative, funding will be distributed via the following three streams:

1. Manufacturing Collaboration Stream. This stream will provide funding for large projects that support business-to-business and business-to-research collaboration to build economies of scale. Funding will be provided on a co-investment basis up to one third of eligible product costs.
   
   
2. Manufacturing Translation Stream. This stream is designed to assist manufacturers to translate ideas into commercial outcomes, and encourages investment in non-R&D innovation. Successful applicants will be provided funding on a co-investment basis up to 50% of eligible project costs.
   
   
3. Manufacturing Integration Stream. This stream seeks to assist manufacturers to integrate into local and international supply chains and markets, with funding provided up to 50% of eligible project costs.

Eligibility for the initiative will be confined to trading corporations (i.e. it doesn’t appear the funding will be payable to Universities and research institutes), and while there will be no specific business size requirements, the Government states that funding will be focused on supporting businesses to scale. Guidelines, eligibility and merit criteria for each stream will be available in the first half of 2021.

Supply Chain Resilience Initiative

In its 2020-21 Budget, the Government is committing $107.2 million to its Supply Chain Resilience Initiative, under which it will partner with industry to develop Sovereign Manufacturing Capability Plans that identify vulnerabilities and growth opportunities in Australia’s domestic and international supply chains.

From 1 July 2020, businesses will be eligible for funding under this initiative where they can demonstrate that they can address a supply chain vulnerability for a critical product or output identified a Sovereign Manufacturing Capability Plan and their project will result in a measurable strengthening of the supply chain.

Manufacturing Modernisation Fund

The Government has also announced a second round of funding for its Manufacturing Modernisation Fund, which will provide $52.8 million in co-funding to support Australia’s economic recovery efforts by funding Australian manufacturers to produce transformative and innovative technologies and processes.

The Manufacturing Modernisation Fund provides grants of $50,000 to $1 million to eligible small and medium manufacturing enterprises aimed at upgrading manufacturing processes and growing skilled workforces.[2]

Research support for universities

The Government has also dedicated an additional $1 billion in research funding to alleviate immediate financial pressure in the university sector. Of this funding, $41.6 million will be used to establish a Strategic University Reform Fund, aimed at encouraging universities to undertake innovative reform programs that align with priority areas within local communities.

The Government also plans to utilise $5.8 million of the funding to undertake a scoping study of potential options to accelerate the translation and commercialisation of university research. While Australia’s research excellence is measured very highly in comparison with other OECD countries, the level of industry spend on R&D and the track record on translation of research into commercial outcomes has been poor and action needs to be taken to improve it.[3] The study will consider new partnerships between universities and industry and opportunities for investments as potential options.

The Government is also dedicating $1.9 billion in funding for the 2020 Research Infrastructure Investment Plan as a measure to ensure that investment in national research infrastructure is being maintained. Australia’s public sector research agency, the CSIRO, will also receive $459 million in funding over the next four years.

Defence economic support

The Government also announced that it will be bringing forward $1 billion in projects to support jobs for Australians in the defence industry. This funding (which is in addition to the amount allocated to the defence sector under the Modern Manufacturing Strategy discussed above) will be used to create opportunities and jobs in air and space transport, computer system design, engineering, manufacturing, construction and scientific and technical services.

Measures that the government intends on implementing include accelerating key capability projects, developing and maintaining defence infrastructure and assets across regional Australia, and expanding the existing defence industry grants programs. These changes are consistent with the important changes being implemented by the Government as part of the 2020 Defence Force Structure Plan and 2020 Defence Strategic Update, released on 1 July 2020, which will provide defence with $575 billion in funding over the coming decade.[4]

Looking ahead

Times of crisis and the resulting disruption often lead to innovation and opportunity. New products and services are developed or re-engineered, supply chains are re-visited and digitalisation becomes a priority. The 20-21 Federal Budget provides welcome support for Australia to do better on research translation and innovation and to accelerate its economic recovery from the COVID-19 pandemic.