Australia hands out the best part of A$1 billion per year in grants to businesses. Many of these come with no strings attached, meaning there is no need to evaluate whether the grants boost employment, help the recipients become more efficient, or benefit the nation.
To test what good these grants do, my team at the Institute of Public Accountants-Deakin University Small and Medium Enterprise Research Centre tracked the performance of the 141,800 firms that received a total of $4.2 billion in Commonwealth government grants in the five years from 2018 to 2022.
Our task was made easier by a requirement that from 2018 all grants from Commonwealth entities be published on the government’s GrantConnect website.
GrantConnect gave us information about each firm that received a grant, which we used to examine its finances and compare them to the finances of other firms of similar sizes in similar locations and industries.
The largest number of grants were to firms that specialised in innovation and R&D (9,086), especially in the manufacturing and professional, scientific and technical industries. Another 2,150 were for “business development” and 2,084 were aimed at “small business”.
As far as we know, ours is the first such study in Australia.
Multiple recipients performed poorly
We find many of the grants generated no significant improvements in the performance of the firms that received them. In some cases they might have harmed them.
The firms that received repeated grants (almost two-thirds of the total) exhibited lower than normal efficiency and productivity. This suggests Australia’s system of grants might be propping up and sustaining an entire cohort of underperforming “subsidy businesses”.
This finding lends weight to predictions of global studies that have found receiving grants can lead to a “grant mentality” or “grant culture” within individual businesses.
These generally low-performing multiple grant recipients got $1.3 billion of the $4.2 billion total.
How grants are awarded matters
The average picture looked good. On average, the firms that received the grants boosted their employment, their business performance and their efficiency.
But the way in which the recipient was selected mattered a lot.
The firms that were simply awarded grants on the basis of being eligible rather than having to compete for them did badly. They suffered average declines in their returns on assets of 4.9% and declines in their turnover of 6.6%.
The overwhelming majority of grants (eight in ten) were awarded this way. Applicants merely had to meet eligibility criteria, without any assessment of their merits relative to other applicants or their obligations to taxpayers.
Older businesses gained more from grants than younger businesses. Recipients aged ten years and older increased their returns on assets by an average of 3.5% compared to startups, which increased their returns by an average of 2.7%.
For employment, things were the other way around. Startups recorded high average workforce gains of 5.1% compared to older firms, which recorded only 1.3%.
Opaque by design
We found it hard to assess the outcomes of grants against criteria because the Commonwealth seldom provides criteria with which to assess grant outcomes.
Nor, typically, does it provide comprehensive information on the purposes of individual grants.
This suggests a worrying lack of rigour in the government’s grant selection processes. There’s little to stop public funds going to companies that fail to convert taxpayer support into positive results for themselves or for the nation.
The Australian National Audit Office has also found a broad and systemic lack of transparency throughout most Commonwealth government grants programs, as we did in an earlier report on the process by which grants are awarded in February.
Our report found that while competitive selection was rare for every category of business grants, it was especially rare for business development grants, small business grants and industry innovation grants.
Small business grants awarded via ministerial discretion had higher average values than grants awarded via formal processes.
Ministers handed out about half-a-billion dollars without formal processes between 2018 and 2022.
While small tweaks to the existing system might help, our report recommends a complete overhaul to make the processes merit-based with clear criteria and benchmarks for success as well as evaluations of success after the event.
Importantly, our recommendations would be relatively costless, both for grant administrators and applicants.
Our investigations are not complete. Later this year we will publish our findings about grants to non-business community organisations.
George A. Tanewski, as Director of he IPA-Deakin SME Research Centre, receives funding from the Institute of Public Accountants.