It was only 18 months ago that Australia, with its tiny listed IT sector and a telecoms sector still dominated by an inward-looking majority state-owned company, was being castigated as an "old economy", one still dependent on mining and agriculture to drive its exports.

A report written by one of the prime minister's advisory groups* said it had been "dismayed" at the views put to it concerning the fragile state of the country's ICT training infrastructure, that there was no "concerted national effort" to build a significant ICT sector and that research and development was seriously under-funded.

The OECD, meanwhile, in its 2001 country survey, described Australia's innovative capacity as "one of its most pressing weaknesses". At the beginning of 2002, however, despite the "tech wreck" and slowdown in the global economy, the situation appears less gloomy.

The listed sector may be even tinier - the ASX S&P 200's IT sub-index has a capitalisation of just A$3.1bn, down from some A$20bn at its height. But, because the listed sector was anyway small, investors have been less burnt than elsewhere by the slump in tech stock valuations. As for Telstra, the conservative partially-privatised former monopoly and Australia's largest company, there is now relief that, unlike many of its international peers, it did not embark on an overseas acquisition spree, over-pay for internet-related businesses or load itself up with debt.

Above all, perhaps, there is greater appreciation, both at home and beyond, that the winners from advances in ICT will be those that use new technology to the best effect, not only those that produce it.

Productivity

"It used to be fashionable to say that there is no point in being only a user of IT, you should be a producer," Richard Alston, Australia's minister for communications and IT, said recently. "But you have a much more dynamic and productive society if you find the use and application of IT being pervasive between the traditional industry sectors." "You can get huge productivity gains from mining, for example, if you are using IT in a much better way than you would if you tried artificially to create a new industry sector," he concluded.

Such productivity gains have been a key factor behind the Australian economy's remarkable performance in the past decade - it has consistently been one of the two or three strongest growing in the OECD. And it is estimated that, of the 4.1 per cent improvement in productivity between 1996 and 1999, 1.3 percentage points came from application of ICT.

According to the Australian Information Industry Association, until the slowdown of the past 18 months, the country's ICT sector had been growing at an average rate of 12 per cent a year since the last recession in the early 1990s and is now a A$70bn-a-year industry.

Penetration rates for mobile telephones and the internet are among the highest in the world and about 200,000, or 2.7 per cent of the working population, are employed in the core ICT industry with another 400,000 employed elsewhere in the economy for their ICT skills.

Australia, says Rob Durie, the AIIA's executive director, also has the advantage of being Asia's third largest ICT market after Japan and South Korea.

Indeed, Singapore Telecommunications said last year that, even if Australia's growth rates were lower than in much of Asia, the size of its market - US$12.5bn a year in telecoms alone - justified its A$15bn takeover of Optus, the country's second carrier.

Nevertheless, says Mr Durie, more needs to be done to build up the local ICT industry if Australia is to continue its rapid take-up and deployment of technology and develop complementary innovations specific to its needs.

"We need to be more aggressive in attracting investment, like our competitors in Asia. This is a matter of urgency," he says.

The country's weakness on the production side is reflected in its large and growing trade deficit in ICT. With only A$3.3bn of exports, the deficit soared to A$15.8bn in 2000-01, equivalent to about 2.5 per cent of GDP, after increasing at a compound annual rate of 11 per cent since the present centre-right government took office in 1996.

According to the OECD, Australia also falls down on its rate of spending on R&D and education, leading to fears that it is storing up problems for the future. Although the gap has narrowed since the 1980s, Australia invests the equivalent of just 1.5 per cent of GDP on R&D, against an average among OECD members of 2.2 per cent.

As for education, by 1999 Australia had fallen to 20th out of 28 OECD countries in the educational levels of 25 to 34-year-olds while government spending on higher education had dropped from 1.5 per cent of GDP in 1975 to about 0.8 per cent.

"With funding in decline for 20 years, it has been really hard to get new areas up, such as new IT schools, salaries are uncompetitive and student to staff ratios in IT are often 50:1 when they should be 15:1," says Prof Alex Zelinsky who, until joining the private sector in 2000, was head of the department of systems engineering at the Australian National University. As a result, he says, many of the country's best IT brains continue to move overseas. After cutting R&D in its early years, the government responded to criticism it was not doing enough to foster the "Knowledge Nation", to use the opposition Labor party's term, with its A$2.9bn "Backing Australia's Ability" initiative.

Launched in January last year, the five-year programme includes: an extra A$736m, or a doubling of the funding, for competitive grants allocated by the Australian Research Council; an increase of A$583m in research infrastructure funding; and A$151m for universities to create 2,000 additional undergraduate places mainly in ICT, mathematics and science.

The government also agreed to adjust immigration rules to attract more ICT professionals and, to help overcome the fragmentation in the technology sector, set aside A$176m for two centres of excellence, one in IT, the other in biotechnology.

Although a cluster of sorts has developed in North Ryde, a Sydney suburb, or "Silicon Gully" as some call it, Australia's IT industry has been hampered by its lack of a clear centre. Companies are spread around the country and the competition between state governments has sometimes been counter-productive.

Although the government also reversed its earlier cuts to tax relief on R&D spending, those working within the sector say a lot more needs to be done to make Australia's tax arrangements internationally competitive.

Its policies on the funding side, however, have met with greater approval."The government has been smart not to take a one type of grant approach," says Simon Cant, a partner at Tinshed, a Sydney-based investment house backed by a group of business angels. "It has been careful to spread the money between four or five schemes, to try several different strategies."

Mr Cant believes that, in time, Australia can develop an IT sector with critical mass. But, like others, he says a critical challenge is the shortage of good managers to run emerging technology companies. Finding financing in Australia, he says, is probably easier at present than it is in the US, partly because of the government grant schemes and because the once small local venture capital sector has grown strongly in recent years.

"It was always possible for established businesses with, say, turnover of A$10m to raise funding to finance their next stage of growth," says Su-Ming Wong, managing director of Champ Ventures, a leading local technology venture capital firm. "The missing link was for the smaller companies, at the stage before that. For them, until just five or six years ago, it was hard to raise even relatively modest sums of A$2m or A$3m."

The jury is out, however, on where Australian companies with global aspirations should base themselves. Early pioneers such as LookSmart, the internet directories group now based in California, had little option but to move offshore to be closer to the big markets, says Mr Wong. One of his investment criteria remains whether, in time, a company will be able to migrate to the US.

On the other hand, says David Leslie, technology analyst at Deutsche Bank in Sydney, there is increasing awareness of the advantages of manufacturing or carrying out R&D in Australia, where costs are often far lower than in the US or parts of Europe.

"People in the know are aware of our capabilities and multinationals doing R&D here have generally been very pleased with the results," says Mr Durie at the AIIA.

"What Australian IT lacks is a 'brand', the international awareness that countries such as India or Ireland have managed to create."

That awareness should be stimulated next week when Adelaide hosts the World Congress on IT 2002, from February 27 to March 1. The biennnial event is preceded by a two-day IT Business Forum.

* Australia's ICT Research Base, Prime Minister's Science, Engineering and Innovation Council, November 2000