Picking winners? Smothering in red tape

The Commonwealth government should be commended for putting a great framework for Indigenous business in place. The framework will only deliver if funding reaches those it’s intended to help.

By Nyunggai Warren Mundine AO

The big political announcement last week was the tenth Closing the Gap Report. Another big Indigenous affairs announcement got much less attention: the release of the Indigenous Business Sector Strategy (IBSS).

The Indigenous-owned business sector is growing faster than the rest of the economy. This is good news. Increasing Indigenous economic participation is the only way to close the gap. We need more Indigenous people running their own businesses, especially in regional and remote areas where Indigenous people make up a higher proportion of the population and are poorer than urban Indigenous populations and where people often have to create their own jobs.

The IBSS outlines a ten year roadmap for growing the Indigenous business sector with several new initiatives including Business Hubs, increased micro-finance and capital funding. I particularly like the pilot of Community Development Program (CDP) providers as small business incubators. We’ve had forty years of CDP busywork while demand for goods and services in those communities goes unmet. CDP can be a platform to launch businesses to meet that demand.

There’s one piece missing. How to get more business funding out more quickly, especially in remote and regional Australia.

I’ve been all over Australia in the past 12 months talking to Indigenous people about business.  Accessing business finance is the greatest impediment to Indigenous people setting up a new business in remote and regional areas. Many aspiring business owners have no business track record or assets like a home to put up as security and are coming off welfare. They can’t meet the lending criteria of commercial banks. I’ve met people ready to go with the skills and demand for their supplies; some even have contracts lined up. But they can’t raise funds even for things like equipment.

Government programs like the Indigenous Entrepreneurs Scheme (IES) and Indigenous Business Australia (IBA) exist to plug this gap. But decision-making is slow. Some people wait months with no decision and no certainty as to timeframe. And the process seems just as complex whether someone applies for five figures for secured equipment finance or millions for a large project.

I believe part of the problem is decision makers are terrified of funding a business that fails. They’re trying to pick winners. They shouldn’t be.

Initiatives like IES and IBA are targeted at people who haven’t been participating in the real economy – who live in remote areas with no developed economy; who’ve been long term welfare recipients; who don’t have business experience or own assets. Since mainstream financiers won’t fund them, it doesn’t make sense to apply the same kind of criteria mainstream financiers would apply, one of which is confidence the enterprise will succeed or offers higher returns in return for higher risk. By their nature, these programs are funding enterprises that have a higher prospect of failure and low or no returns for investors.

So what. Government isn’t doing this to make returns. The purpose is to give Indigenous people a start in business, get funds flowing through commercial enterprises in Indigenous communities and increase Indigenous economic participation through entrepreneurship. Even if a new business fails, the experience of setting up and operating a business is valuable and positions the business owner more strongly for a future job or another business attempt. The funding has still achieved its primary purpose of increasing Indigenous economic participation.

The key criteria for funding decisions should be whether the applicant has the capability to provide the goods or services (eg if they want to start a business as a bobcat operator, do they have the licences and qualifications to operate a bobcat) and whether there is demand for the goods or services. Demand should be deemed if the applicant has a supply contract lined up, if the goods or services are not currently available in the community or if current suppliers are located a long way away. For example, if an electrician has to be flown in, there’s demand for an electrician in that community.

Business administration, including financial bookkeeping and compliance, is also important. But this can be sourced externally from a service provider or business support hub. There’s plenty of support for new Indigenous businesses and the IBSS will create more.

The government made funds available through initiatives like the IES and IBA to kick start new businesses. It can spend that money paying bureaucrats and service providers to pick winners. Or it can get more funds out more quickly. The second pathway is a far more worthy and beneficial use of the funds and, frankly, far less wasteful.

The Commonwealth government should be commended for putting a great framework for Indigenous Business in place. The framework will only deliver if funding reaches those it’s intended to help.

This article was first published in the Australian Financial Review on 19 February 2018

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  1. Hello what I and understanding as much as possible there many of indigenous people who are being swept under the carpet this is very common and not good give people a go there experience and knowledge is priceless it needs to reach those intended to help

    Thanking You


  2. Lance Smith says:

    Thank you Warren!
    I applied for a grant through IES in conjunction with a loan with IBA on 10 August last year.
    I was told that the approval process would take three months.
    The entire application was for $190,000 with the IES portion being $50,000.
    IBA approved the loan portion in December (still taking 4 months, not 3) and I have just learned today, after 6.5 months, that IES has declined my application.

    Interestingly, this decision has come only three working days after I sent an email to Nigel Scullion’s Chief of Staff to express my disapproval that a decision on such a small amount, which had been approved and endorsed at a local level, could take over six months to with no outcome.
    Based on having no income while I waited on the decision, and the opportunity cost of three months trading income I estimate that he and his department has cost me about $50,000.

  3. Thanks so much for the post.Really thank you! Keep writing.

  4. Thank you for this post. Its very inspiring.

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