Australia should beware of space industry subsidies
13 Jul 2020|

Australia should be careful to avoid the negative consequences of subsidising its space sector as it channels millions of dollars to spur development in space-related industries. This approach is both promising and dangerous—promising because it may yield transformational change, and dangerous because it may distort markets.

A comparison with New Zealand’s approach highlights the potential dangers of the path Australia is taking. New Zealand, like Australia, recently established a space agency. But it is designed to facilitate business activity while Australia’s is intended to cultivate business activity. These two approaches lead to fundamental differences in the agencies’ missions and in their decisions on how and to whom they provide support.

The New Zealand Space Agency focuses on enabling businesses by minimising compliance costs and ‘unnecessary’ prescriptions. Its purpose, in other words, is to help firms do what firms want to do. The mission of the Australian Space Agency involves ‘transforming’, ‘coordinating’, ‘leading’ and ‘inspiring’. Its purpose is to guide firms to do what government wants them to do.

These mission differences manifest themselves in support mechanisms. The NZ Space Agency refrains from providing firm-specific support and focuses on regulatory activities, most notably by accepting overseas licences as fulfilling New Zealand requirements. As a result, Rocket Lab, a US-based company with a subsidiary in New Zealand, can use licences from the US Federal Aviation Administration to launch in New Zealand. The Australian Space Agency provides support through large financial incentive schemes—the $15 million International Space Investment initiative, the $19.5 million Space Infrastructure Fund, and the $150 million Moon to Mars program.

There are more differences in the agencies’ preferences for firms they support. The NZ Space Agency prefers helping companies with strong business cases; Rocket Lab, for instance, with ties to customers in the US government, is a promising firm. The Australian Space Agency, on the other hand, prefers supporting companies that align with government priorities, which include small and medium-sized enterprises, specific space industries and ties to the US space sector. To access incentive schemes, firms must show they align with these priorities.

Some of these differences have implications for the future trajectory of Australia’s space sector. Australia’s mission focus on coordination implies that business growth will concentrate in industries the agency supports,  in terms of both domestic business and overseas business coming into Australia. The focus on financial incentives implies that there will be more government-financed firms than there otherwise would be, and that growth will depend more on government financing. The preference for supporting companies that align with development plans implies that they will learn to specialise in accessing financial incentives, and that those that don’t align with government plans will face difficulties.

In short, Australia’s approach could distort markets. Firms might alter their business plans to access subsidies, and then become dependent on those subsidies. Subsidies tend to grow and require maintenance, which in turn has the troubling effect of stymying the government’s fiscal flexibility.

Subsidies and strong government intervention can be done right, but that requires a careful balancing act.

These are possible outcomes, but it is by no means certain that Australia’s space sector will develop in these ways. Nor is it clear which country’s approach is better.

That said, as Canberra commits millions of dollars to build Australia’s space sector, it should consider ways to mitigate potentially negative effects, and it makes sense to consider shifting towards New Zealand’s approach. That would mean adopting a mission stance that’s more focused on facilitating than coordinating business activity. The general mindset about the agency’s role would need to shift towards enabling firms to do what they want to do, rather than influencing them to do what the agency wants them to do.

It would entail focusing more on regulatory activity than on financial incentive schemes. The agency would aim to reduce transaction costs rather than create subsidies. The recent reductions in launch insurance requirements are a good example of this; they reduce transaction costs in the launch industry. The agency could take similar steps to reduce transaction costs in other industries.

Moving towards the New Zealand approach would mean supporting firms with strong business cases rather than those that align with government plans. The agency could change its requirements to emphasise strong business cases more than specific business areas, as long as applicants are working in the space sector.

To be clear, and lest cross-Tasman rivalries cloud receptivity to these suggestions, this entire line of thinking can be turned around. When compared with Australia’s, New Zealand’s approach to developing its space sector also has some negative implications. For example, it is arguably less likely to bring about transformative change, and companies may engage in activities that are at odds with other government policy objectives. To avoid such negative consequences, New Zealand could consider ‘Australianising’ its mission, mechanisms and preferences.

The space sectors of Australia and New Zealand have the potential to occupy a similar niche in the global economy, if for no other reasons than their close ties to Washington and their similar geographic positions, which are appropriate for certain types of launches.

Industry leaders from both countries should continue robust dialogue to ensure cooperation continues. In the difficult economic times ahead, the global space sector will likely experience winnowing. If Australia and New Zealand compete to occupy the same niche, they may end up undermining each other.