<p>INNOVATION AUSTRALIA</p><p>The Hon Greg Combet AM MP</p><p>Minister for Industry and Innovation</p><p>Parliament House</p><p>CANBERRA ACT 2600</p><p>Dear Minister</p><p>I have pleasure in presenting the Innovation Australia Annual Report on its activities for the year ending 30 June 2011, prepared in accordance with section 46(1) of the Industry Research and Development Act 1986.</p><p>Yours sincerely</p><p>David Miles AM</p><p>Chairman</p><p>Page 1 of 14 THE BOARD’S MISSION Empowered by the Industry Research and Development Act 1986, the mission of Innovation Australia is: “To increase the economic return from successful technology-based enterprises in Australia by guiding the Australian Government’s investment in the commercialisation of the nation’s research and development and innovation”. </p><p>THE BOARD’S VISION By accomplishing this mission, Australia will be:</p><p>“A nation that is achieving global competitiveness through a strong culture of industry innovation”. Picture of Innovation Australia as of 30 June 2011</p><p>Back row: Dr Laurie Hammond, Ms Margaret Calvert, Mr Kenneth Windle, Mr Peter Thomas, Mr Gerard Noonan, Mr Carlos Broens, Ms Elizabeth Lewis-Gray, Dr Jonathan Spring, Ms Chris Butler. Front Row: Mr Leslie Hosking, Dr Beverley Ronalds, Mr David Miles AM, Dr Peter Riddles.</p><p>2 of 14 CHAIRMAN’S REPORT It is my pleasure to inform you of the activities of Innovation Australia by presenting the Innovation Australia 2010-11 annual report. Over the 2010-11 year, Innovation Australia continued to support the Australian Government’s reform agenda for innovation, Powering Ideas – An Innovation Agenda for the 21st Century. The Board focused on identifying challenges, opportunities and strategies to promote a stronger innovation system including support for the introduction of new innovation initiatives such as the R&D Tax Incentive. Now more than ever, innovation is critical to lift productivity, economic growth, and employment through the creation of, and access to, new markets and the invigoration of established markets. An effective innovation system is dependent on agile companies accessing knowledge and information, and adapting and developing new innovative services and processes. Success in innovation is also reliant upon increased collaboration between Australian businesses, universities and publicly funded research agencies. This collaboration is a priority area for the Australian Government and has been a focus for Innovation Australia during 2010-11. One of the major challenges presented by the continuation of global financial instability has been the access to patient, high-risk capital; this has been keenly felt by Australia’s venture capital industry. Access to capital, especially at the pre-seed and seed stage to support start-ups and new ideas is critical to the commercialisation of new ideas with market potential. In response to these challenges and opportunities, in 2011-12 the Board’s work will concentrate on business R&D matters, in particular the implementation of the new R&D Tax Incentive which will remain one of the most important support mechanisms for innovation in business. The Board will administer the next tranche of the Innovation Investment Fund to continue to assist promising Australian ideas to access capital and to reach market. It will support implementation of the Government’s clean technology programs. The Board will progress its strategic work program in relation to mechanisms to grow Australia’s innovative businesses into larger and internationally competitive multinational enterprises and in the development of Australia’s bioeconomy. The Board will continue its work on the development of additional innovation metrics to enable monitoring and promotion of innovation and its benefits to Australian society.</p><p>MAJOR AREAS OF POLICY ADVICE The Board continued to draw on the deep expertise of its members and consulted widely with key stakeholders to inform Government of important innovation policy issues during the year. In February 2011, Innovation Australia made a submission to the Board of Taxation in response to its review of tax arrangements applying to collective investment vehicles. Innovation Australia’s submission noted that the current tax arrangements for the Venture Capital Limited Partnership (VCLP) and Early Stage Venture Capital Limited Partnership (ESVCLP) programs are considered to be operating in accord with the respective program objectives including the provision of tax concession benefits. Innovation Australia noted the inconsistent treatment for VCLP domestic investors and considered it appropriate to apply the deemed capital account </p><p>3 of 14 treatment to eligible domestic partners on gains made by a VCLP on their disposal of eligible investments. In the later part of 2010, the Board established the Innovation Performance Sub- committee to progress several strategic areas of its work program including examining linkages between innovation and productivity. In its findings, the Sub-committee highlighted that the dependency of productivity growth on innovation is the key to the macroeconomic understanding of modern advanced economies. For OECD countries including Australia, analyses of growth frequently quantify this dependency at 60 per cent or more of economic growth being attributable to multifactor productivity growth; encompassing the spectrum of innovation activities including technology adoption, regulatory reform, management skills, infrastructure, economies of scale, industry structural change and, especially, innovation including research and development1. Succinctly stated; innovation determines productivity and productivity determines real incomes. Further work of the Innovation Performance Sub-committee has identified a structural weakness that could impact on strategies to grow small-to-medium enterprises into multinational enterprises. The majority of Australian firms are small-to-medium enterprises with only around 3,000 firms employing more than 200 people, making Australia more ‘small-medium intensive’ than some other advanced economies. Among Australian firms, the propensity to innovate appears to correlate with company size, with large firms generally undertaking more innovation activity2. Larger firms are also more likely to engage in collaboration than smaller firms. For this reason, Innovation Australia has also engaged in strategic discussions on a range of fronts to explore mechanisms to promote collaboration between firms and publically funded research organisations and universities to maximise the significant government investment in research. These discussions highlighted the need to increase the transfer of ideas from tertiary institutions to businesses. Consequently the Board considered metrics for measuring collaboration and innovation between industry and publically funded research organisations and provided comments on University Compacts and the 2011 Strategic Roadmap for Australian Research Infrastructure Discussion Paper. </p><p>KEY PROGRAM OUTCOMES 2010-11 As highlighted in the Program Activity Overview on pages 10-11, in 2010-11 over $1.2 billion of government assistance was provided to 9,098 customers, leveraging over $16.8 billion in industry R&D and commercialisation activities. A further $61.9 million of Australian Government funding was provided to generate $525.2 million of investment in venture capital raising and energy and water efficient infrastructure in manufacturing. Key outcomes include:</p><p>1 Organisation for Economic Co-operation and Development (2010), The OECD Innovation Strategy: Getting A Head Start On Tomorrow http://www.oecd.org/document/15/0,3746,en_2649_34273_45154895_1_1_1_1,00.html, 2 Australian Bureau of Statistics (2009), Innovation in Australian Business, 2008-09, (cat no. 8158.0), Canberra, http://www.abs.gov.au/ausstats/[email protected]/mf/8158.0</p><p>4 of 14 As at 30 June 2011, 8,614 companies were registered for the R&D Tax Concession for the income year 2009-10. This corresponds to $16.55 billion in reported industry based R&D expenditure. The outcome of Innovation Investment Fund (IIF) Round 3 Tranche 3 was announced on 8 June 2011 with IIF licences worth $60 million in total granted to three fund managers. These licenses were matched with private capital. In 2010-11, $12.4 million was invested in 16 investee companies, of which $6.00 million was provided by the Australian Government. As at 30 June 2011, Commercialisation Australia received 279 eligible applications, seeking funding of more than $130 million, of which 130 projects worth $51.43 million were supported. At 30 June 2011, there were 41 Venture Capital Limited Partnerships (VCLPs) (including five conditionally registered) with total committed capital of $4.5 billion. VCLPs held investments of $1.4 billion in 134 businesses, which they valued at $1.7 billion. During the 2010-11 year, Early Stage Venture Capital Limited Partnerships (ESVCLPs) reported four investment deals in which $10.4 million was invested into three businesses. The number of registered ESVCLPs as at 30 June 2011 was nine (including five conditionally registered), representing an increase of three since 30 June 2010.</p><p>PROGRAM ADMINISTRATION Commercialisation Australia, which was announced as part of the 2009-10 Federal Budget, is now fully operational. Commercialisation Australia is a competitive, merit- based assistance program offering funding and resources to accelerate the business building process for Australian companies, entrepreneurs, researchers and inventors. The program offers a range of funding options as well as multi-layered networking opportunities to help achieve business success. Innovation Australia considered applications for Innovation Investment Fund (IIF) licences under IIF Round 3 Tranche 3. Given the quality of the applicants under this Round, the Board recommended that four new venture capital funds were of sufficient merit to invite them to make an offer for an IIF licence. The applicants had six months to raise the matching private capital. Three of the recommended applicants raised the required capital and were subsequently awarded IIF licenses. AusIndustry actively monitors the R&D Tax Concession on behalf of Innovation Australia. In 2010-11, around 15 per cent of registrations were reviewed following the introduction of the revised Compliance Framework for the program and as part of preparation for the implementation of the R&D Tax Incentive. The findings demonstrated that the majority of companies represent a low compliance risk in respect of their R&D activities. On 24 September 2010, the Re-tooling for Climate Change program closed to new applications. In its final year, the program funded twenty-one new projects worth $5.59 million from a broad cross-section of industry sectors. Successful projects in 2010-11 included water capture, recycling and filtration projects, process re- engineering and the application of energy efficient technologies.</p><p>5 of 14 The Prime Minister announced the closure of the Green Car Innovation Fund on 27 January 2011 as one of the saving measures to support rebuilding of infrastructure following the 2010-11 floods that affected large areas of Australia. All applications that had been received prior to the announced closure were considered. In 2010-11, $184.59 million in program funding was approved for 11 new projects aimed at reducing fuel use and/or greenhouse gas emissions. The Commercialising Emerging Technologies (COMET) program closed on 30 June 2011. Since commencing operations in 1999 COMET has awarded funding of $117.79 million to 1,764 companies and assisted its customers to achieve 5,266 commercialisation outcomes, including 2,807 alliances, licences and agreements; and 1,048 manufacturing commencements and product or service launches. Approximately $714 million in private capital was raised by COMET customers participating in the program, equating to more than six dollars of private capital raised for every one dollar in government grant funding. Enhanced support through Commercialisation Australia is now available for companies previously eligible for COMET.</p><p>INNOVATION ADVOCACY Innovation Australia continued its role in promoting collaboration through an active program of strategic engagement. Innovation Australia considered a number of presentations that appraised the Board of recent developments across the innovation spectrum. The Chief Executive Officer of the Australian Research Council (ARC), Professor Margaret Sheil, addressed the Board on the Excellence in Research for Australia (ERA) initiative and the ARC Linkages program. The Board observed that ERA data enables Australian researchers and institutions to identify their strengths and gaps relative to the sector, and monitor their ongoing performance. At a higher level of overview, the data provides the means to map and monitor clusters of excellence and their geographic locales. The ARC’s intention to broaden the scope of ERA reporting with an accompanying intention to improve innovation measurement can only make the resource more valuable to policy makers and the higher education sector. The Deputy Secretary of the Department of Innovation, Industry, Science and Research, Ms Patricia Kelly, addressed the Board on the work of the APS200 Project Committee and its recommendations to the Secretaries Board. The APS200 project examined innovation in the public sector as part of the implementation of recommendations arising in the report Empowering Change: Fostering Innovation in the Public Service. The Board supports the Committee’s recommendation for greater openness and improved collaboration and information sharing across government agencies. Collaboration is an essential early component of innovation, and new ideas like those coming out of the APS200 project can provide another driver for innovative activity in the private sector. Innovation Australia participated in AusIndustry’s State-based R&D Tax Concession consultative fora during November and December 2010. The fora were held in Sydney, Melbourne, Brisbane, Adelaide, Perth, Canberra and Hobart and focussed on the implementation of AusIndustry’s new compliance framework. The fora were well received and AusIndustry received valuable feedback from participants. </p><p>6 of 14 Mr Doron Ben-Meir, Chief Executive Officer of Commercialisation Australia, presented to the Board on the status of the Commercialisation Australia initiative. Australia is well represented with promising research and development activity, however the capital to get early stage ventures to the market place does not match this level of activity. Commercialisation Australia reviews proposals for research commercialisation and provides assistance through case managers and networks to steer new ideas through the final development stages and into the market place. In its consideration of patient risk capital to assist early-stage ventures, the Board invited Ms Fiona Trafford-Walker, Managing Director of Frontier Investment Consulting to attend its August 2010 meeting. Ms Trafford-Walker presented the Board with an analysis of the Australian superannuation regime and the role of these fund managers as primary allocators of capital, and some of the challenges in diversifying its funding of asset classes. I was pleased to have the opportunity to meet with the new Chief Scientist, Professor Ian Chubb, on 26 May 2011. Innovation Australia enjoys a productive relationship with the Office of the Chief Scientist both directly and through the Standing Committee of the Prime Minister's Science, Engineering and Innovation Council (PMSEIC). Our discussions focussed on further advancement of the innovation agenda through PMSEIC and flagged future opportunities for strategic discussions between Professor Chubb and Innovation Australia. Innovation Australia participated in the Department of Innovation, Industry, Science and Research Chair's Workshop in Canberra on 1 March 2011. The workshops were established by the Minister for Innovation, Industry, Science and Research to provide valuable opportunities to strengthen networks between advisory bodies, facilitate collaboration and provide a forum to consider issues in conjunction with senior officers of the Department. Mr John Ryan, Executive Director of Cloon Economics and member of the Government’s Carbon Capture and Storage Assessment Panel, provided Innovation Australia with an update on the current developments in the clean technology industry and the Government’s Clean Energy Initiative in July 2010. The knowledge and experience sharing in this meeting led to the identification of potential areas where greater collaboration could provide a more efficient delivery of the Government’s clean energy initiatives. In February 2011, representatives from the Department’s Science and Infrastructure Division, presented to the Board on the National Research Infrastructure Council’s (NRIC) Strategic Framework and Roadmap. The Roadmap is developed in consultation with research and industry sectors and will inform future decisions on strategic infrastructure investments to develop research capacity and improve research outcomes over the next five to ten years. The Board supports the work undertaken on the research infrastructure roadmap and consider that it could assist industry access research services and strengthen future collaboration between researchers and industry. Innovation Australia in collaboration with the Department, hosted the Powering Productivity through Innovation showcase in Melbourne in March 2011. The showcase was attended by around 320 AusIndustry customers and key stakeholders and featured 15 companies exhibiting hi-tech products that were developed or commercialised with the assistance of the Australian Government, including </p><p>7 of 14 AusIndustry. The event promoted the engagement with new ideas and research to boost manufacturing and move towards a cleaner and more efficient future. On 9 June 2011, members of Innovation Australia attended Markets, Money and Talent, a collaborative network event hosted at the Australian Technology Park by AusIndustry’s NSW State Office, Commercialisation Australia and ATP Innovations (ATPi). The event showcased successful companies undertaking innovation with the assistance of the Australian Government. Markets, Money and Talent facilitated networking between investors, fund managers, angel investors, entrepreneurs and researchers. During the year, Innovation Australia considered reports to further its understanding of the contemporary innovation climate and inform its future strategic thinking. Reports reviewed by the Board included: reports on 2008-09 Business Expenditure on Research and Development (BERD) and the Gross Expenditure on Research and Development (GERD) in October 2010 the Climate Ready Outcomes Report in December 2010 Measuring Innovation – A New Perspective in July 2010 detailed reports on the status of the Tax Laws Amendment (Research and Development) Bill 2010 and the Income Tax Rates Amendment (Research and Development) Bill 2010 in July 2010 details of the 2009-10 ABS annual survey on Venture Capital and Later Stage Private Equity in March 2011 presentations on the Potential for Biomass Value Chains in Australia and Global Trends in Life Sciences and Biotechnology in May 2011 the Murdoch University Report University Commercialisation in Australia - a review of current trends, and thoughts on how to achieve long term success in May 2011.</p><p>GOVERNANCE The Green Car Innovation Fund closed to new applications on 27 January 2011, subsequently the Green Car Innovation Committee was revoked on 30 June 2011. The Fund and its recipients will continue to be closely monitored by the Board. The Re-tooling for Climate Change program was closed to new applications on 9 November 2010. Responsibility for the program’s administration resides with the Climate Ready Committee. </p><p>FAREWELLS AND WELCOME TO NEW MEMBERS Mr Roger Harley was farewelled after nine years of service to Innovation Australia (and its predecessor, the Industry Research and Development Board). Mr Harley also served as a member of Innovation Australia’s Venture Capital Committee and the Innovation Investment Fund Companies’ Boards of Directors. He also served as a member of the Pooled Development Funds Registration Board, the Venture Capital Registration Board, and the Fund Management Committee. Mr Harley’s expertise in venture capital, extensive experience and the contribution he made was acknowledged and greatly appreciated by the Board. </p><p>8 of 14 IN CONCLUSION Innovation Australia has availed itself of many opportunities during the year to strengthen its association with other innovation and advisory bodies working with government to develop the national innovation system. Innovation Australia will continue to play an active role in the administration of programs and provision of advice to government on the development of an innovation economy. Members of the Board and its Committees have given generously of their time in the promotion of the Government’s innovation agenda and I would like to thank all members for their continued commitment and dedication throughout the year. I would also like to acknowledge the support and dedication of the Department of Innovation, Industry, Science and Research and the AusIndustry team. David Miles AM Chairman</p><p>9 of 14 PROGRAM ACTIVITY OVERVIEW Innovation Australia administers a range of Australian Government programs that stimulate innovation through research and development, commercialisation and increased availability of venture capital, which in turn promotes economic growth, creates jobs and provides long term national benefits for Australia. Detail on each of these programs is provided under Section 2. During the year 2010-11 Innovation Australia’s programs were delivered by AusIndustry, a division within the Department of Innovation, Industry, Science and Research. The tables below provide an overview of program activity in 2010-11. The full set of figures underpinning this overview can be found at Appendix E and a list of Acronyms is provided at page 221.</p><p>Program Australian Benefits Value of R&D & Number Governmen disbursed commercialisatio of t budget ($m) n supported ($m) customers ($m) assisted</p><p>R&D Tax 2009-10 a N/A 1,105.00 16,546.60 8,614</p><p>ACIS 2 MVP R&D b N/A 22.54 50.16 3</p><p>Climate Ready c, f 14.57 13.01 26.32 70</p><p>Commercial Ready c, f 5.10 5.57 11.24 41</p><p>Commercialisation 23.47 22.22 80.00 112 Australia c, f</p><p>COMET c, f 5.05 4.79 7.56 231</p><p>GCIF c, d, f 62.90 62.98 96.22 12</p><p>ICIP c, f 1.46 1.37 2.74 11</p><p>REDI c, e, f N/A 0.60 1.20 4</p><p>Total 112.49 1,238.09 16,822.03 9,098 </p><p>Note: All financial figures are provided on a cash basis a) There is no 'Australian Government budget' for the R&D Tax Concession. The 2010 Taxation Expenditure Statement estimates revenue foregone attributable to this program. b) The ACIS 2 Motor Vehicle Producer R&D Scheme does not have an annual budget or appropriation, though the assistance provided by the Scheme is capped at $150 million over five years in the form of import duty concessions.</p><p>10 of 14 c) Commercialisation Australia, Climate Ready, Commercial Ready, COMET, GCIF, ICIP and REDI payments reflect gross amounts and do not account for amounts that may have been repaid. d) The GCIF budget is only for administered grant payments and does not include operating expenses. e) Payments for REDI grants are met from within the Commercial Ready allocation. f) Value listed reflects the component of the investment that attracts grant funding and not necessarily total project expenditure.</p><p>Program Australian Benefits Value of Number Governmen disbursed Investments of t budget ($m) supported ($m) customer ($m) s assisted</p><p>PDF a N/A 9.00 3.30 12</p><p>ESVCLP a, f N/A 9.00 10.40 3 VCLP a N/A 11.00 431.80 79</p><p>IIF b, c, e 75.79 6.00 12.40 16</p><p>IIFF b, c 23.47 17.20 17.20 17</p><p>PSF b, c 10.63 2.08 2.98 12</p><p>REEF 0.00 0.00 0.00 0 RCC d 8.08 7.62 47.09 64</p><p>Total 117.98 61.90 525.16 203 </p><p>Note: All financial figures are provided on a cash basis. a) There is no 'Australian Government budget' for the PDF, VCLP or ESVCLP programs. The 2010 Taxation Expenditure Statement estimates revenue foregone attributable to each of these programs. g) The 'Benefits disbursed' figures reflect investments made and excludes Fund Managers' fees and recoverable expenses. The figures include funds drawn down in 2010-11 from the Australian Government (IIF $6.00 million, PSF $2.08 million, IIFF $17.20 million). h) The ‘number of customers’ is the number of investee companies receiving investments during the year from fund managers licensed under the relevant program. Companies that received investments from multiple fund managers are counted once.</p><p>11 of 14 i) RCC payments reflect gross amounts and do not account for amounts that may have been repaid. j) The 'Australian Government budget' figures includes Revolving Fund Proceeds of $37.56 million. k) There were no disbursements under ESVCLP in 2010-11, however the Treasury estimate relates to disbursements that over time may be attributed to 2010-11.</p><p>12 of 14 2010-11 CUSTOMERS ASSISTED BY STATE The figures below illustrate the distribution, by state, of assisted customers and benefits in 2010-11. As in previous years, the majority of customers assisted during 2010-11 were based in New South Wales and Victoria 5,393 (58.1%), with 3,892 (41.9%) being based in the other states and territories. Figure 1 2010-11 CUSTOMERS ASSISTED BY STATE</p><p>2010-11 BENEFITS DISBURSED BY STATE Customers based in states other than New South Wales and Victoria received assistance worth $131.5 million in 2010-11, which is 22.0% of total assistance provided by programs other than the R&D Tax Concession. The Tax Concession is excluded from these figures as only the Australian Taxation Office holds data on tax return claims.</p><p>Page 13 of 14 Figure 2 2010-11 BENEFITS DISBURSED BY STATE</p><p>Page 14 of 14</p>