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Last week I attended a public consultation on the government’s proposed $1.3 billion Green Car Innovation Fund. The fund is part of the “New car plan for a greener future” which provides $6.2 billion to support Australia’s automotive industry.

In summary, the fund is a grant scheme which offers $1 for every $3 funding provided by the applicant. To qualify for a grant, the project must be aimed at developing ways to significantly reduce the greenhouse gas emission of passenger vehicles. It covers R&D, proof-of-concept, early-stage commercialisation and pre-production activities. Full details of the fund cab be downloaded from the Department of Innovation, Industry, Science and Research website.

This initiative is basically a good thing, as it recognises that with the right policies, going green can be a boost to Australia’s economy, rather than a drain on it. However there are a couple of glaring problems that I suggest the government should look at before the fund kicks off.

Size of the fund

The Fund will provide $1.3 billion over ten years from 2009, or an average of $130m per year.

This is not a lot of money to support the greening of Australia’s biggest export earning manufacturer. To put the size of the Fund in perspective, this represents about 1% of fuel excise collected.

In the light of the present world economic situation the total fund should be significantly increased, perhaps drawing on part of the government’s recently announced economic stimulus package.

Merit critera
The key criterion is reduction of greenhouse gas emissions. But at the public consultation in Sydney, it was stated that only the emission of the vehicle itself are relevant to this criterion,  factors such as embodied energy of the vehicle would not be taken into account in assessing the merit of an application.

This is clearly a fundamental oversight. To be consistent with the stated objective of greening the industry, the total greenhouse gas emissions must be reduced by the proposed technology, including for example the carbon footprint of fuel production and transportation. I fear, however, that because this fund is part of an automotive industry package, and not a climate change initiative, this is unlikley to change. Expecting the car industry to put the environment before profits is akin to asking the tobacco companies to remove the addictive chemicals from cigarettes.

Funding formula
The proposed funding ratio of 1:3 is the fund’s biggest problem. It was explained at the consultation that the rationale for this low ratio is that this will result in a multiplier effect for the government’s investment – $1 of grant resulting in a total of $4 worth of innovation.

This logic is seriously flawed.

Only companies with existing revenues or a strong capital base will be able to find the matching funding, and these companies would carry out the project whether or not they receive a grant. For them, the fund will just represent a nice 25% “icing on the cake”.

Small companies, individuals, university researchers and the like, simply cannot raise the money required. To make matters worse, the fund pays retrospectively, so the grantee actually needs to find 100% of at least the first few months of the project cost themselves. This represents a significant practical cash flow barrier for small innovative and efficient developers.

The government says it has fixed the funding at 1:3 because it wants to get the best bang for its buck. However the exact opposite will result. The biggest returns will come from the small research projects, not the big ones. With the minimum grant being $100,000, it also dictates that the minimum project size is therefore $400,000. We are aware that some of the most innovative work being carried out in Australia at the moment in the field of electric vehicles is by small companies who would have neither the management bandwidth nor the cash flow to execute a project of that size.

Giving a hundred inspired individuals $100,000 each with no strings attached is much more likely to produce some new groundbreaking technology than giving a car manufacturer a $10m cashback on a $40m project.

A better solution would be to calculate the funding ratio on a sliding scale, so that small projects receive 100% funding (removing the impossible matching funding barrier) and large ones be funded at 1:4.

Funding should also be paid in advance, tranched against a projected cashflow.

Otherwise, the scheme will, by its very design, eliminate the target organisations it seeks to support.

This post was also published by the Sydney Morning Herald.