Research & Development Tax Incentive; DST 1st Quarter 2014 Performance

Meeting report

Performance and Financial report presentation by Department of Science and Technology (DST)
Dr Phil Mjwara, DST Director-General, explained that the government’s financial year ran from 1 April to 30 March, making their first quarter: 1 April to 30 June. He gave an overview of progress to date and what their plans were for the next quarter.  He said that the department is a unifying body that allows the fostering of science, technology and innovation. This is all under the framework of the National System of Innovation (NSI), which seeks to promote the introduction of innovation from the organisations and institutions involved. The two documents which are the strategic drivers of the NSI that outline how the department fulfils its mandate, are the: National Research and Development Strategy (NRDS), introduced in 2002, used to advance the policy management and development work, and the Ten Year Innovation Plan (TYIP), introduced in 2008-10, with the aim to make the country a knowledge based economy from a resource based economy with the target for completion of this process being 2018. The measure of success for these initiatives is based on the enhancement of productivity and determination of knowledge, which lead to economic benefits, enriching and improving the quality of people’s lives and fostering of socio-economic development.

He defined DST objectives and how they fit into the government's outcomes, such as a long and healthy life for all South Africans. He explained the purpose of each of DST’s five programmes: Administration; International Cooperation and Resources (responsible for regional and international partnerships with other countries, to strengthen the NSI initiative); Socio Economic Innovation Partnerships, Research Development and Support; and Technology Innovation.

Dr Mjwara explained DST had 65 targeted performance indicators for the year with at least 44 out of the 65 having been initiated and in progress and, of that 65, 3% have been completed within this first quarter. He identified specific challenges for some indicators and the reasons and action being taken to avoid risk in achieving the set targets. He explained that most of the targets can only be completed after the first quarter, hence it is still work in progress.  He noted that there are some targets that are outlined as moderate risks for achievement. This can be attributed to administrative delays; the need to have a synced timeline of delivery with other stakeholders like the Department of Trade and Industry (DTI); a change in scope and a shift to a different focus. An example of this is Marine and Antarctic Research Strategy project as they came back to present a change in perspective of their proposal which then means the project’s timelines are at a moderate risk. Another indicator at risk was. He made reference to the Technology Innovation Agency (TIA) and its management of hired interns as the process has yet to be completed. The indicator was 100 interns fully funded or co-funded in R&D of design, manufacturing and product development by 30 June 2014.

He explained the remedial actions taken to deal with such delays. The best way to avoid these risks is having the Deputy Director General of this programme have performance indicators that define how the target is on course and control its moderate risk.  The next would be to have an improved planning process, like with the DTI, so that the targets can be better met by having an intervention from the Deputy Directors General involved with that programme. To this effect, a meeting has been set up with the DTI for the execution of this strategy.

Dr Mjwara identified 1st quarter achievements per programme (see document).

He then gave an overview of DST finances, showing how the budget split per programme and per economic classification. They are on course in terms of funding. The bulk of the funding is made use of in the facilitation of Research and Development . The target expenditure for the quarter was achieved, showing that their cash flow is well managed as well as the finances from National Treasury and donors. In conclusion, he said 70% of the targets are on course with the rest being monitored to track their progress.

Discussion
The Chairperson thanked the speaker and said the department was of importance due to its cross cutting work. He mentioned the need to manage the competitiveness of other departments, such as in the case of Health and the resistance of antibiotics, and for the control needed to achieve their goals within the time frames they have. He pointed out that there are no demographics with regards to their researcher output as well as no acknowledgement of some of the donors.

Dr A Lotriet (DA) made reference to the challenge of how they manage their relationship with the other government departments like the DTI, especially how they manage the delays that come from other government departments.

Mr C Mathale (ANC) commended the efforts of the department and added he would like clarity on the issue raised by Dr Lotriet.

Dr Mjwara stated that they have a memorandum of understanding (MOU) between the ministries involved, for example, where they are both overseeing the rollout of pilots of projects between the two stakeholders. The Directors General involved will meet and will then have a facilitated working group that will be dealing with the terms of the collaboration. As a follow up, they have a meeting every three months to allow for the ironing out of any issues. From this, they also have a commercialisation strategy in place to ensure that they are in sync with their activity plan with the Department of Health. Using these methods, they have a seventy percent success rate. In future, they plan for Research and Innovation budget coordination where the systems set up will have the budget combined between the two government departments at the planning level. Another strategy is that of having a Science and Technology Innovation Act which will allow the resolution of any deadlock encountered between departments. This is being adopted from an international scale and they are trying to outline how the Act will work in relation to a local model.

He added that donor funds are just short of three quarters of a billion rand with R500 million coming from the European Union and the rest coming from a number of countries that have interests in the research and development activities in the country. There are also some philanthropic donations like that from the Gates Foundation and this being directed towards the research on sanitation and health. In terms of demographics, close to 42% are women and based on race, close to 70% are white which shows that there is a lot of work in driving the importance of R&D. He added that the students do have a good turn out and at times the numbers are affected and this is due to their leaving the programmes. He said that the National Research Foundation would be in a better position to clarify why this is so and how it can be controlled in the future.

The Chairperson asked if they have a strategy to simplify the operations of the department as it is key driver for transformation. He mentioned the ‘one China’ policy - why it has to be the port of call for most of the international models that are adopted whereas there are countries like Taiwan and South Korea which have thriving economies but do not have some of the resources that we as South Africa have. He asked if it was a case of the department ‘biting off what it can’t chew’. DST will not meet their targets because they have a lot of work to do and targets to meet. He suggested that having research institutes as the key driver for the progress made would be an ideal place to start.

Dr Mjwara outlined how the budget is the key indicator for a project’s timelines and resource allocation. These have been noted to define the project’s weight. Once the resources are there, they can push to try and achieve more from the set-out mandate and also in response to the projected outputs given to the ministry. There is a lot of potential for having projects rolled out locally but the only hindrance is lack of participation. Once a project has been researched and piloted, its progress is then limited by the lack of interest from manufacturers. He gave examples of the pilots for power facilitation for a village clinic, school and housing as well as the mesh networks to provide communication to remote villages. He said that the important thing is to have the acceptance of the work that we do and also having more researchers on board that match up to Taiwan and Korea’s standard then we would be producing faster results. However, it is no easy feat to train them to be that competent due to the financial implications attached to sending them overseas. If local acceptance and awareness increases, then the reports will have better results due to the progress being noted in some of these ventures outlined.

The Chairperson reiterated the point about the one-China policy. He made reference to how growth in Malaysia is sufficient because they manufacture things that are necessary to them. If there is growth in the product, then there is a higher rate of export because of product performance. This was a clear sign of patriotism as policies on local manufacturing would foster more development due to promotion of the local brand. 

Research & Development Tax Incentive presentation
Mr Godfrey Mashamba, Chief Director, Science and Technology Investment, DST, noted the aligning of strategies brought about by the tax incentive. Companies undertaking R&D in South Africa qualify for a tax deduction in terms of Section 11D of the Income Tax Act, as amended. The incentive is part of a package of policy instruments to promote economic growth and enhance competitiveness. Through this incentive, the government wants to encourage increased R&D in the business sector, by firms of any size or industry. This is important in order to:
- Increase the overall investment in R&D.
- Promote innovation, i.e. development of new products, processes and services.
- Promote technological advancement and competitiveness.
- Secure innovation spillovers and retain R&D workforce.

The incentive is a generous one compared to other countries as it gives 150% in tax deductions. To be eligible for the incentive, a company’s activities must be approved by the Minister of Science and Technology (applicable from 1 October 2012), a company must:
▪ Be an incorporated entity and recognised under the Companies Act, (Act 71 of 2008). Individuals, non-profit organisation and trusts are not eligible.
▪ Be engaged in eligible R&D activities within the Republic.
▪ Incur R&D expenditure on or after the date of receipt of the application by DST, and such R&D expenditure must be incurred in the production of income.

Mr Godfrey Mashamba  explained why government supports private sector R&D. It allows more private sector involvement in creating products and innovation. It also enhance the success of the innovative companies so smaller players get recognition as they may have their intellectual property right being swallowed by bigger companies in having to source funding from the big players, whereas they could have developed and patented the products themselves.

Mr Mashamba said the incentive has been growing since 2006. He showed uptake per industry sector and per size of company. The industry sectors that are 80% dominant are manufacturing, financial intermediation, real estate and software development. Small and medium enterprises (SMEs) make up 46.7% (383) of the total number of participating companies. The percentage of SMEs has increased since the October 2012 amendments.   The department continues to monitor the progress of the SMEs so as to note if any changes are needed.

From the R3.2 billion government contribution to this incentive, the amount of R&D leveraged is R35.1 billion. It provided a table of tabulated results derived from the R&D supported by the incentive with the proviso that these results of R&D are a simplified aggregation of administrative data available to the DST, as reported by companies. They are in no way show a complete picture of the effect or impact of the incentive. This is so because some of the results of R&D take several years to materialise. Further work is necessary to appropriately quantify the impact of the incentive. To begin this process, the data between the DST and SARS need to be reconciled (to address timing differences and stages of data points), e.g. number of beneficiary companies, R&D expenditure and the actual deduction allowed by SARS.

Appropriate methodologies can then be applied in estimating the impact at different levels, such as additional / incremental R&D as well as second and third order effects.

Section 11D(17) of the Income Tax Act requires the Minister of Science and Technology to report to Parliament, annually, on the direct benefits of the R&D activities encouraged by the incentive programme in contributing to economic growth, employment and other broader government objectives. The 2013/14 report is being finalised within the DST and will be submitted for tabling to Parliament upon approval.

Discussion
The Chairperson thanked the presenter and expressed concern that people might not be aware of such measures that benefit research and development in the country. He requested clarity on industry awareness of the incentive and how international companies benefit from this scheme.

Ms N Louw (EFF) asked how marketing is done to target smaller businesses and how do they monitor the progress that they make. Is this based on smaller businesses getting some time as a form of leeway, like a year, to get started and then present results?

The Chairperson made reference to products being taken by other countries and treated as their own which takes away our intellectual property rights.

Dr A Lotriet spoke of a meeting with the NRF where it was mentioned that the tax incentive process is cumbersome. She asked if steps were being taken to simplify the process so that it is less cumbersome. She asked how is this extended to benefit other industries such as electricity and water and why focus is not being shifted towards those areas. 

Mr Mashamba mentioned that awareness has been done to advise companies of this incentive from 2008 to 2010. Of late,  they had scaled down to focus on SMEs. With regards to specific sectors, including water, electricity and gas. They work with DTI to promote this to all sectors across the board, to the different industrial associations, together with other departments such as the DTI. They had used flyers and the website. He conceded they needed to do more. They also make use of surveys questions to gauge awareness and if a company has participated in the scheme. In 2012, they changed the process of application to be a prospective (rather than a retrospective) approach before the company invests in R&D so DST can assist it in simplifying the process of application and for prospective applicants to establish earlier whether they will qualify. This accommodates the concerns that had been raised. This is being facilitated to reduce risks and have a more defined outcome.

He said that multi-nationals associated with research in the country are recognised so that they can also benefit from the scheme if the process is being conducted in the country. They can bring spin-off benefits such as the spill-over effects of the technical transfer they bring in diffusing new knowledge and pushing new frontiers. However, this must be monitored to ensure they bring what is anticipated from the benefits of international R&D. The amendments were drafted to make corrections to the administrative process and its limitations. Since 2012, annual progress reports are required for companies that have applied up front and have been approved. This improves the monitoring process.

Mr Strini Perumal, DST Deputy Director: R&D Fiscal Incentive, mentioned marketing the process to tax consultants who then assist in furthering this information to the smaller firms and the multinationals that can benefit from the incentive. With regards to monitoring, when the tax returns are submitted, a comparison of the work done with the amount that is being claimed is done.  So in terms of evaluation, they are pretty stringent on that front. He said that they are trying to get more companies applying for the incentive from the water, gas and electricity sectors.

Ms N Louw mentioned that there are cases where the project is not feasible or shows signs of potential failure. What are the measures that can be used to test for the competence of the research in question?

Mr Mashamba defined the risk element of R&D. The issue here is that R&D incurs expenditure. If it does not work, you have still employed people in the country and have pushed development in that field. If this can be justified with the expenditure, then the company qualifies for the incentive being provided.

Dr Mjwara commented that if a firm needs to do some research, the government has another scheme called the Support Programme for Industrial Innovation (SPII) done by the DTI. This assists companies that have research projects that have not yielded results yet. DTI takes the research proposal and submits it to experts in the field to assess the feasibility of the proposed research. If it is feasible, the scheme provides you with some support. And then if you have incurred costs for R&D, then this incentive would apply and so you get support on two aspects. Then on the water, gas and electricity  innovation, he agreed that water is going to be the next biggest challenge and they need to innovate. They are working with the Water Research Commission to develop a road map especially to develop water technologies.

The Chairperson repeated that simplicity of the tax incentive process is necessary so as to get more companies involved. . He welcomed the comments about the multi-nationals, but this must be done according to South Africa's needs. Also it was necessary to create awareness early in the education system for the need for science and maths to enable technological innovation. On this note, he adjourned the meeting.