Lend Lease Ventures Submission to the Review of the National Innovation System
Author:
Mr Rod Fehring Chief Executive Officer Lend Lease Ventures Industry 30 The Bond 30 Hickson Road Millers Point, NSW 2000 rod.fehring@lendlease.com.au +61 2 9237 5879
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Declaration of Interest Lend Lease Ventures is the corporate venture capital arm of Lend Lease Corporation. Lend Lease Ventures is a member of the Australian Private Equity and Venture Capital Association. Lend Lease Ventures seeks a more favourable environment for the investment and commercialisation of innovation in the property and construction industry.
Summary
Among the major challenges facing Australia today, two near the top of the list include urban consolidation and climate change. Common to both challenges are buildings, for buildings are responsible for approximately 40% of total greenhouse gas emissions. These challenges demand not just innovation, but innovation delivered. This can best be achieved with the substantial involvement of large corporations that are embedded in and strongly influence their industry supply chains. Lend Lease has a proud history of and commitment to delivering innovation for the benefit of society, its employees and its shareholders. Part of this commitment has been the establishment of a corporate venture capital group – Lend Lease Ventures. The operation of this group has revealed a number of opportunities to improve the National Innovation System. The key recommendations are: 1. 2. 3. 4. Allow corporate venture capital players to purchase tax losses from their investee companies Establish a VC Investment Unit, similar to the Offshore Banking Unit Review taxation structures to ensure there are no disincentives to the relocation of skilled corporate employees both to and from Australia Include the building sector in an Australian Emissions Trading Scheme
Lend Lease Ventures believes these recommendations will help shape an improved National Innovation System. We welcome the opportunity to discuss each recommendation and their potential benefits further with the Review Panel.
Innovation and Corporate Venturing
There is a myth that permeates the business press: that large companies stifle product innovation because of the perception of cannibalisation. Not so. Large companies are acutely aware of the benefits that innovation can bring to strategic positioning and the creation of shareholder value. In recognition of the need to scan, identify, and harness innovative technologies, many large international companies established corporate venture capital groups in the late 1990s. Most failed and were wound down following the end of the dot-com bubble in 2000. Yet evidence suggests that those who stayed the course and pursued investments for strategic as well as financial motives have achieved success1. Research from the Wharton School shows that the greater the amount of corporate venture capital invested, the greater the innovation rate of the investing company2. So why are there so few corporate venture capital groups in Australia? As far as we are aware, Lend Lease Ventures is the only corporate venture capital group that is a member of the Australian Private Equity and Venture Capital Association (AVCAL), and is unique among our competitors in the property and construction industry.
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When Does Corporate Venture Capital Investment Create Firm Value? Dushinsky & Lenox, 2004. How Corporate Venture Capital Investing Increases Innovation. Knowledge@Wharton, 2005
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This deficiency of corporate venturing in Australia suggests that impediments exist in the National Innovation System.
Opportunities to Improve the National Innovation System
Lend Lease Ventures believes fundamentally that large corporations are best placed to deliver innovation, particularly in the Australian property and construction industry. Delivering innovation requires a combination of capital, talent, and an environment that motivates positive behaviour. We have identified four key opportunities across each of these areas to promote corporate venture capital for the benefit of the National Innovation System. Recommendation 1: Allow corporate venture capital players to purchase tax losses from their investee companies Start-up companies that create and/or commercialise new technologies are typically cash poor and incur significant tax losses in their first few years. There would be cash flow benefits to these innovative companies if their corporate venture capital investors were able to purchase these tax losses. The capital inflow into the new ventures from the sale of tax losses can be used to further invest in R&D and assist in the commercialisation of their technologies. The corporate venture capital investor is able to provide cash to the investee company without increasing its capital outlay. The adoption of this recommendation appears to require no additional Government funding commitment. Moreover, with careful structuring, there should be no Government revenue loss. The transfer of losses should only create a deferral of tax revenues, rather than a loss.
Recommendation 2: Establish a VC Investment Unit, similar to the Offshore Banking Unit Under Australian tax legislation, the Finance industry has access to an Off-Shore Banking Unit provision which makes the income derived from such a unit taxable at only 10%. To encourage large Australian companies to invest in the venture capital sector, a similar VC Investment Unit could be established. This would result in corporate venture capital players paying reduced amounts of tax on income derived from venture capital activities. This would encourage higher levels of corporate venture capital activity, for the benefit of National innovation. In addition to no additional funding requirement, the benefit of this recommendation to Government is the potential for additional tax revenue gain from an absolute increase in corporate venture capital activity.
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Recommendation 3: Review taxation structures to ensure there are no disincentives to the relocation of skilled corporate employees both to and from Australia Corporate venture capital players are typically long-term “strategic” investors. This means that in addition to capital, they usually provide skills and capabilities to the new venture companies to accelerate their commercialisation. Lend Lease is an international company with staff located around the world. Providing the most appropriate resources to assist the growth of an investee company might require the relocation of staff from overseas back to Australia or, more likely, the relocation of staff from Australia for international expansion. There appear to be tax disincentives to the movement of these resources, related mostly to retirement savings. This results in frictional costs that are typically borne by the corporate venture capital player. A review of these tax disincentives might reduce these frictional costs to delivering innovation.
Recommendation 4: Include the building sector in an Australian Emissions Trading Scheme In a joint submission3 in April 2008, Lend Lease has separately responded to the Garnaut Climate Change Review Emissions Trading Scheme Discussion Paper. We will paraphrase that submission here, and explain the benefits of the recommendation to the National Innovation System. According to the OECD 4 and the United Nations Sustainable Buildings & Construction Initiative5, if upstream emissions from heat and electricity are included, emissions from buildings total 40% of global greenhouse gas emissions6. In 2005, the U.S. Environmental Protection Agency stated that buildings account for 39% of total energy use, 38% of greenhouse gas emissions, and 68% of total electricity consumption 7 . According to the Council of the City of Sydney 8 , the city was responsible for 3,589,000 tonnes of greenhouse gas emissions (tCO2-e) in 2006, with the largest contributor being commercial office buildings at 48%. Based upon this understanding, the most effective Emissions Trading Scheme will include the building sector because it provides more potential for quick, deep and cost effective greenhouse gas mitigation than any other industry. Its introduction will drive emissions reductions at the design, construction and operation phases of both new building and refurbishment of existing buildings.
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Joint Submission by Lend Lease Corporation, Lincolne Scott and Advanced Environmental in response to the Garnaut Climate Change Review Emissions Trading Scheme Discussion Paper Released 20 March 2008 4 Environmentally Sustainable Buildings: Challenges and Policies. A report by the OECD' (Organisation for Economic Cooperation and Development, 2003 5 'BUILDINGS AND CLIMATE CHANGE, Status, Challenges and Opportunities' (United Nations Environment Programme, 2007) 6 Stern Review on the Economics of Climate Change – Annex 7e (2006) 7 ‘Green Buildings: Why Build Green?’ US EPA report, 2005 8 www.cityofsydney.nsw.gov.au/environment/GreenhouseAndAirQuality/CurrentStatus
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Importantly, this will enable developers and owners to make a competitive financial return on their investments in emissions reduction initiatives and drive the commercialisation of innovation in the Cleantech sector. This will inevitably lead to an expansion of corporate venture capital in the property and construction industry, to the benefit of Australian innovators and entrepreneurs.
14% Industrial 23%
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Appendix 1 – Lend Lease
Who We Are Lend Lease is a leading property group with broad skills across the value chain of property development, project management and construction, and property investment management Headquartered in Australia, Lend Lease operates in over 40 countries in the key markets of Asia Pacific, the Americas, the United Kingdom, Europe and the Middle East Lend Lease is committed to delivering the best possible outcomes for all our stakeholders that are consistent with core values of respect, integrity, innovation, collaboration and excellence Lend Lease is passionate about the relationship between people and places and its role in building a legacy for future generations - safely, ethically and sustainably
A Track Record of Innovation Australia’s first high rise building – Caltex House The world’s first listed property trust – GPT, 8 years ahead of the first listed property trust in the USA The world’s first high rise strata-title building – Blues Point Tower (Australia was the second country in the world to implement strata title) Australia’s first self-administered employee profit sharing scheme and share ownership program The world’s largest solar community, twice – Sydney Olympic Village, and again on Army Hawaii Family Housing Australia’s first 5 Star Green Star – Office As Built project, 30 The Bond Australia's first fully-tenanted high-rise CBD office refurbishment to achieve 5 Star Green Star – 500 Collins, Project Manager, BLL Consulting Since 1960, Lend Lease has owned or registered 23 patents
Lend Lease Ventures As part of its ongoing commitment to innovation, Lend Lease established Lend Lease Ventures (LLV), a corporate venture capital group, in 2007 LLV has a nominal $200 million investment fund, and a global mandate to invest in innovative technologies that will improve the way buildings and communities are constructed and operated. This generally leads to opportunities in building materials, energy and water – also referred to as Cleantech LLV has two streams of activity: - Corporate Ventures focuses on transforming internally generated ideas and innovations into operating business ventures capable of creating value across business lines and geographies
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- Venture Capital focuses on accelerating the commercialisation of external ventures both locally and internationally by leveraging Lend Lease’s pipeline and delivery capabilities The greatest benefit that LLV provides these new ventures – beyond capital – is a commercialisation platform. Otherwise, most new ventures in this sphere fail to penetrate the property and construction industry, due to resistance from a wide range of stakeholders, including architects, engineers, regulators, local authorities, financiers, insurers, and unions
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