Innovation Rebate Caps Are Restricting Australia’s Prosperity

Australia is at an economic crossroads. The perceived end of the mining boom and the disappearance of the last bastions of the traditional manufacturing sector have created uncertainty about Australia’s future and its place in the global economy. Innovative solutions are needed to fill these gaps, and unfortunately the government’s policy, as it stands, is not sufficient.

Despite the end of the mining boom, Australia remains blessed with bountiful natural resources. However, much of the value derived from these resources is in down-stream processing and value-adding, not simply the extraction and sale of the raw material. This is value that Australia is currently allowing to be shipped offshore. As Western Australia’s Chief Scientist Peter Klinken described it, Australia at present is just a “dig and grow” economy.

Lithium is a rapidly growing sector that is spawning significant innovation, fuelled by demand from the electric vehicles which have now been adopted by every major automotive  manufacturer. Australia is fortunate to find itself possessed of large lithium reserves. Indeed, since 2013, Australian mines have produced more lithium each year than any other country in the world.

Yet while Australia provides the raw materials to produce what becomes $200 billion of value added lithium products each year, it nets only $1 billion of the revenue, or 0.5%. The remaining 99.5% of the revenue generated from the lithium pulled from Australian soil is taken offshore, and realized by downstream processing of that material.. With investment in research and development (R&D) in downstream processing, Australia could position itself to be a leading producer of advanced lithium products, rather than simply a source from which other countries take 99% of the value.

In the race to innovate and develop technology, Australia has been gifted a fantastic head start – it has a highly educated population with the necessary expertise, and enormous natural resource reserves to utilise. Regrettably though, the Australian government is squandering these natural advantages by capping incentives for companies to undertake the R&D so necessary to develop the processing technologies capable of capturing the greater value.

These are not Australian companies seeking handouts – rather they simply wish to see the policy revert to what was the status-quo. Since 2011, the R&D tax incentive provided uncapped rebates for R&D spending; the new short-sighted policy, in the name of budget-balancing, has capped the tax rebate at $4 million per project, which is threatening the long term economic well-being of the country.

These adverse effects are already being felt on the “Lithium Valley”, a broad-based value-adding plan to establish a battery industry in Western Australia. If implemented the plan will capture more of the value chain ultimately by the manufacture of lithium-ion battery precursors, or the batteries themselves within Australia. However, this has been thrown into doubt by the Australian government’s decision to cut the innovation rebate. The damage of losing this business overseas is quantifiable; Regional Development Australia estimates that if Australia was able to secure only secondary processing capacity for lithium and nothing more, it would retain an additional 27% of the revenue generated, or $57 billion.

Implementation of the Lithium Valley initiative is a once only opportunity, driven by Western Australia’s control of the primary inputs into a supply chain. That supply chain is in its infancy but growing at about 18% pa. As the supply chain matures, longer term contractual arrangements will dominate the market to such an extent that there will never be another opportunity to capture the value on Australian soil. The time to act is now and a positive R&D policy will enable the technologies required to capture this value to be developed here.

Lithium Australia, which presently has investments in sustainable supply (waste processing, recycling and production of battery precursors), is evaluating locations for their businesses’ operations. Presently under consideration is Australia’s emerging Lithium Valley cluster, and a site in Germany where the company has a subsidiary and established resources. Unfortunately these are the types of commercial decisions that will increasingly go against Australia if action is not taken to provide innovation incentives comparable to competing nations.

Government policy will make or break Australia’s future as an innovative economy – and while other countries offer generous incentives for companies to come to their shores and undertake R&D, Australia risks being left behind. It is crucial that Australians communicate to their elected representatives that they value long-term economic foresight over short-sighted austerity – if you would like to add your voice to those calling for a reversal in policy regarding government support for innovation, please sign the petition and follow the instructions to send a message to your local member of parliament.

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