5 ways to cut government waste in business grants

Every year, the federal government dispenses more than $800 million in business grants. Evidence is mounting that much of this is wasted, so what will it take for these grants to give a stronger return on investment for the Australian economy?

by | 18 Oct, 2024

A waste facility worker looking at a pile of garbage at a recycling facility


Key points

  • Just 17% of grants are subject to any competitive or merit-based process.
  • More than a quarter of grants go to low-performing companies.
  • Research shows that business grants have a beneficial impact on employment levels, business performance and human capital efficiency.
  • There is the potential to significantly increase the effectiveness of grants with better targeting.

Landmark research analysing more than $4 billion in federal government grants has found widespread waste, as well as revealing the steps government could take to create a more effective system of business grants.

The Institute of Public Accountants-Deakin University Small and Medium Enterprise Research Centre tracked the performance of more than 140,000 firms that received grants from 2018 to 2022, finding that many of the grants did little to improve firm performance.

The Centre has released a white paper entitled Efficacy of Australian Commonwealth Business Grants compiling the key data from the research.

IPA-Deakin SME Research Centre Director Professor George Tanewski said the results were cause for concern.

What the data found

The research found that even though incalculable millions are wasted each year with poorly targeted grants, on the whole the grant program improves employment levels, business performance and efficiency for those firms that receive business grants.

However, the actual improvements vary widely depending on the size and maturity of the business and the type of grant.

One of the most marked impacts was improving employment levels, with grants having a significantly larger impact on helping newer businesses add new staff. 

One key insight from the research, however, was that grants are on average only effective in improving employment when open and competitive selection procedures are used.

More broadly, business grants tended to be more beneficial on small businesses than on larger businesses.

Importantly, the researchers found that grants are most effective when they are well targeted towards a specific size and type of business.

“Each individual grant scheme needs to be optimised and synchronised to the policy objectives it addresses,” Tanewski said.

Drilling down, grants targeted specifically at boosting innovation or research and development were found to generally be more impactful for larger businesses.

Tanewski said one of the most striking findings, however, was the fact that many businesses across the spectrum of size were recipients of multiple business grants – and that the almost two thirds of these businesses were underperformers, with low efficiency and productivity.

“[This suggests] current methods of supporting businesses with direct financial assistance might be problematic because it appears it can create incentives for companies to become ‘subsidy businesses’ and that providing grants to these businesses could be an unproductive form of support for businesses overall in the Australian economy,” he said.

The path forward

“Grants are given out because of market failures in finance,” Tanewski said. 

“For a small business, it’s very difficult sometimes to obtain finance from a bank. Given that 98% of businesses in this country are small- to medium-sized businesses, it makes sense that government tries to address the financial constraints that businesses have.

“However, given there are market failures, these grants should be linked to clear policy objectives.”

Merit-based grants

“Our results in this study do show that open and competitive grants are associated with better outcomes than other selection procedures,” Tanewski said.

The research report recommends that all commonwealth business grant selection procedures be comprehensively reviewed and replaced with open, competitive and merit-based processes by default. This is inline with previous recommendations from the Australian National Audit Office.

Benchmarks for success

A major challenge of improving the effectiveness of grants, the report states, is the need to be able to evaluate the success or otherwise of business grant programs.

“For the sake of accountability in the spending of billions in taxpayer funds, it is vital that systematic and rigorous assessment of the efficacy of grant programs be continuously undertaken,” the report states, recommending that governments additionally require business grant providers to publish specific criteria by which the success of programs can be evaluated and measured.

Impact evaluations

Recognising the low evidence base underpinning many grant programs, the report recommends laying the groundwork for evidence-based policy.

“The government should begin collecting data on non-grant recipients based on size, age and strategic objectives of business at least a year before launch of [a given] policy initiative.”

This would allow collecting ongoing data comparing performance of businesses receiving grants against those that are not.

Reporting requirements

“While many grants come with reporting processes for recipients – and some of these processes can be onerous and may disincentivise potential applicants from seeking grant assistance – there is no publicly available information on the success or otherwise of individual applications,” the report found.

To increase transparency, the researchers recommend requiring all grant recipients to publicly report on the success or otherwise of the grant spending.

Reassess supplying businesses with multiple grants.

Tanewski said the evidence showed that the current system of business grants risked creating businesses that were dependent on grants. 

“We tested whether these multiple grant recipient companies were, in fact, better performing or worse performing, and we found that they were worse performing,” Tanewski said.

“Accordingly, policy evaluators should review and assess the effects of providing multiple grants to single recipients, to ensure taxpayer funds are not wasted from year to year on subsidy-dependent businesses.”

Into action

Tanewski said the current state of Australian business grants came down the sheer number of government departments responsible for administering grants and low levels of synchronisation between them, as well as a broader sense of complacency around how grants are and have always been administered.

However, he said he was encouraged by the amount of interest some large government departments had shown in the report since its release.


Read the full paper, Efficacy of Australian Commonwealth Business Grants, HERE.

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