Research & Development Tax Incentive Programme & other DSI initiatives to stimulate R&D
Higher Education, Science and Innovation
18 September 2019
Chairperson: Mr P Mapulane (ANC)
The Committee was briefed by delegates from the Department of Science and Innovation (DSI) on the research and development (R&D) tax incentive programme and other initiatives of the DSI to stimulate R&D in the country.
The Department’s annual statistical report provided the latest data on the gross expenditure on research and development (GERD), which was estimated at R35.6 billion in 2016/17. Five sectors were responsible for this R&D expenditure -- government, science councils, higher education institutions, the business sector and the non-profit sector. Members were made aware that government was in fact the largest performing sector in R&D, contributing 46% to GERD, compared to the business sector’s 39%. This was not a surprise, as in other developing countries, the public sector was the major investor in the R&D programmes, whereas in advanced economies, businesses tended to provide a larger contribution of the investment. While Members were satisfied that the government’s contribution to GERD had increased, they were disappointed that the business sector’s contribution had been steadily declining.
The DSI said it had introduced the tax incentive programme to encourage more companies to contribute to GERD. To date, 941 companies had been approved for an R&D project and had received support through the tax incentive programme. However, companies had previously had difficulty obtaining the tax incentive, as South African Revenue Service (SARS) officials had not been well briefed on the programme. Recommendations arising from an impact evaluation study had assisted the Department in administering the incentive. It was also finalising the rollout of an online submission system which would enable it to administer a fully functioning and efficient application system for interested companies.
The DSI said it had changed the approval system for the tax incentive -- from a retrospective system, to a pre-approval system. This allowed companies to submit their applications in advance for scrutiny and pre-approval by the Department.
The Committee was told that South Africa’s investment in R&D currently stood at 0.8% of gross domestic product (GDP). Members asked what was required for the country to increase its investment to the targeted level of 1.5% by 2030. The DSI said there were a number of programmes in place to support R&D and technological innovation, such as grants, loans, public-private partnerships and tax breaks, under the oversight of the Department. It was agreed that for R&D investment to increase, there had to be broad cooperation between the government and the business sector to create a better economic environment that would stimulate greater investment into R&D.
R&D tax incentives: Department of Science and Technology briefing
Mr Godfrey Mashamba, Chief Director: Department of Science and Technology (DST), said the purpose of the presentation was to brief the Committee on the levels of private sector research and development (R&D), the uptake of the R&D tax incentive by companies, and its impact on the development of new products and processes. It would cover the Department of Science and Innovation’s (DSI’s) administration of the R&D tax incentive. He would also to brief the Committee about the 2017/18 report of the R&D tax incentive programme, as required in terms of Section 11D (17) of the Income Tax Act (1962) as amended.
Mr Mashamba first touched on the trend of gross expenditure on research and development (GERD) in South Africa. The latest data showed that GERD in South Africa was estimated at R35.6 billion in 2016/17. GERD aggregates the in-house R&D expenditure in five sectors -- government, science councils, higher education institutions, business sector and the non-profit sector. In nominal terms, R&D expenditure had expanded over the past two decades, but closer examination of the data from 2006/07 to 2016/17 showed an average annual growth rate of 1.4%, which was a modest long-term growth, especially when compared to the Medium-Term Strategic Framework (MTEF) targets and the GERD performance in comparable economies. The GERD:GDP ratio stood at 0.82 in 2016/17, and had increased for a fourth consecutive period -- under slowing conditions of the gross domestic product (GDP) growth rate. The government and the business sectors were the largest sources for funding for R&D, contributing 46% and 39% respectively in 2016/17. Foreign sources funded 12.9%m while other local sources funded 1.8%.
Business expenditure on research and development (BERD), which measures the amount of R&D spending by the business sector in an economy, was a widely used measure of business investment in technological innovation. R&D in business increases competitive strength by improving the capability for producing new technology or absorb external knowledge. Business R&D also tends to be more susceptible to competition for investment, hence the increased use of R&D incentives and their generosity.
The business sector remains the largest R&D performing sector in South Africa, contributing 41% to GERD in 2016/17, but this had reduced compared to 2006/07 where it stood at 56%. The business sector includes both the privately-owned companies and the state-owned companies. State-owned companies’ (SOCs’) in-house R&D was about 17% of BERD in 2016/17. Just over 80% of BERD was from privately-owned companies.
Mr Mashamba indicated that more than 90% of BERD comprised applied research and experimental development, as opposed to higher education institutions, which spend more on basic research. These differences point toward the importance of connections between private sector and public sector driven research. There had been shifts in the composition of BERD per major industrial categories over time, mostly in line with the broader changes in the structure of the economy. The financial intermediation and business services R&D now dominated, contributing about 44.3% of BERD in 2016/17. This sector’s R&D spend had surpassed that of the manufacturing sector since 2011/12. Manufacturing R&D constituted 27% of BERD in 2016/17. Mining R&D expenditure had been declining for the three consecutive years leading to 2016/17.
A recent study using the National Treasury/South African Revenue Service (SARS) panel data had revealed the level of concentration of R&D-active firms within a small number of larger and older firms in manufacturing, mining, utilities and business services. It had also found that the R&D-active firms allocated a relatively small share of their resources to R&D, compared to firms in Organisation for Economic Cooperation and Development (OECD) countries; and that the estimated return on R&D in South African manufacturing firms was high, compared to OECD countries.
Mr Mashamba outlined both the efforts to stimulate R&D and the factors hampering private sector R&D. Efforts to stimulate R&D include:
- Measures to improve the investment climate;
- Government support for innovation;
- R&D incentives;
- DSI partnerships with the private sector on innovation programmes;
- Intellectual property policy certainty;
- New drivers of growth, such as digitalisation, bioeconomy, etc.;
- Human capital development and scientific infrastructure.
The factors hampering private sector R&D include:
- Slow demand conditions;
- Investor uncertainties;
- Inadequate human resources;
- Generally slowing private rates of investment;
- Tight fiscal conditions (public sector); and
- The general state of technological development in the country.
Providing an overview of the R&D tax incentive, he said that companies undertaking R&D in South Africa qualified for a 150% tax deduction on their R&D expenditure in terms of Section 11D of the Income Tax Act (2962), as amended. At a corporate tax rate of 28%, the incentive translates into a benefit of 14 cents per rand spent on R&D, reducing the user cost of R&D. For a company to benefit from the incentive, it must be an incorporated entity, recognised as a company under the Income Tax Act, and engaged in eligible R&D activities within South Africa.
On this matter, he added two more points. The first was that R&D was generally expensive and risky. Secondly, he outlined the programme logic, which was:
- With reduced tax liability, companies could be encouraged to make the investment at times, making such investment sooner or at a larger scale or involving other partners in the national system of innovation.
- R&D builds capacity for new products, processes etc.
- R&D from private investment may have a positive spill over to the rest of society through knowledge transfer and skills development.
Mr Mashamba said that in the period from March 2018 to February 2019, the DST had received 115 R&D tax incentive applications containing 388 projects from 91 companies, of which 50 (54%) were first-time applications. The applications had involved an estimated R3.3 billion in R&D expenditure.
The DSI’s strategic plan sets a target of providing a decision within 90 days of receiving R&D tax incentive applications. The turnaround time had improved gradually over time to an average of 94 days in 2018/19. The quality of information provided by applicants enabled efficient processing of applications and the Department provides information and guidance to applicants to achieve this. Of the total applications, manufacturing makes up 47%, followed by financial and business services, which together make up 30% of the total. Manufacturing had the highest approval rate while the financial and business services had a higher rate of non-approvals. Applications from big companies tended to receive more approvals than applications from smaller-sized companies.
Mr Mashamba described that the procedure followed in the case of non-approval of projects. A process consistent with the Promotion of Administrative Justice Act (PAJA) was followed in case of likely non-approvals. An applying company was given 15 days to make further representations before a non-approval recommendation was made to the Minister. Reasons for non-approval were:
- Information provided failing to demonstrate the resolution of scientific and technological uncertainty to meet the requirements of section 11D (1).
- Envisaged outcomes on the project could reasonably be achieved by a competent professional in the field using existing knowledge.
- The proposed activities not meeting the definition of R&D as outlined in the Act.
- The proposed activities seeming to be aimed at overcoming a technical problem, rather than a technological solution.
- R&D activities not undertaken within the Republic of South Africa.
- R&D activities completed before the DST receiving the application.
Mr Mashamba said that in cumulative terms, from November 2006 to February 2018, a total of 1 141 companies applied for support, and 941 had received it -- 478 under the pre-approval system and 628 under the retrospective system. It was the case that certain companies had benefited under both systems. In the same period, about R50 billion in R&D expenditure had been supported by the incentive since November 2006 -- R24.6 billion under the pre-approval system and R25.4 billion under the retrospective system. The incentive had provided most of its support in industrial policy action plan (IPAP) priority areas.
Of the 941 companies that had received support from the incentive up to February 2019:
- 41.8% were small and medium enterprises (SMEs) with a latest year turnover of R40 million and below.
- 36.2% were very large enterprises -- turnover of R100 million and above.
- 12.6% were large -- turnover of R41 million to R100 million.
- 9.4% did not disclose their turnover size.
The 941 companies included the 478 that received support under the pre-approval system, and 628 under the retrospective system.
Mr Mashamba said that it was important for the Committee to know that 93% of the supported companies were in three provinces -- Gauteng, followed by the Western Cape and then KwaZulu-Natal. The rest of the companies were spread across the other six provinces. He added that this profile was generally in line with the provincial distribution of BERD as reported in the national R&D survey.
A memorandum had been approved by the Minister for the tabling of the 2017/18 report at Cabinet. 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 through this incentive towards economic growth, employment and other broader government objectives. The 2017/18 annual report tracks the activities of the incentive based on identified performance indicators, such as:
- Uptake, profile and provincial distribution of participating companies.
- Number of applications processed.
- Amount of R&D expenditure supported.
- Tax revenue foregone.
- Contribution to industrial policy priority areas.
The 2018/19 annual report was still being processed in the Department, and would be presented to the Portfolio Committee once approved.
Mr Mashamba said there were a number of programmes in place to support R&D and technological innovation, such as grants, loans, public-private partnerships and tax breaks, under the oversight of the DSI. These include:
- Sector innovation funds.
- Public-private partnerships (PPPs).
- Technology for new industry development.
- Small Business Innovation Fund (forthcoming).
- Activities of the national intellectual property management office (NIPMO) in providing policy certainty on intellectual property (IP) matters and technology transfer.
- Private sector could also access the support of agencies such as the Council for Scientific and Industrial Research (CSIR) on their R&D.
- The DSI also created opportunities for domestic private sector firms to participate in international platforms for innovation, capacity building, R&D resources.
The Chairperson asked Mr Mashamba to speak on the annual statistical report, and whether it should be submitted to Parliament or published for the general public. He needed clarification, as there was a Cabinet memo and the report had already been published on the government site.
Mr Mashamba responded that the legislation on the annual statistical report (section 11, 17 of the Income Tax Act) must be tabled in Parliament. As there was a schedule for producing the report, part of the steps was a presentation to Parliament, and a submission to Cabinet would follow. After approval by the Cabinet, it would be brought back to Parliament before it was published for the general public. In this instance, the Department had decided to publish the report before presenting it to Parliament, as it was aware that at some stage it would be presented to Parliament.
Mr Imraan Patel, Deputy Director General: Socio-economic Innovation Partnership, DST, added that due to the change from the 5th and the 6th administrations, the Department had to follow a different process. It had first presented the annual financial report to the economic sectors, investment, employment and infrastructure development cluster. The government cluster then gave approval for the report to be taken to Cabinet, but the Cabinet did not sit by the time the report arrived. Now that there was a newly assembled Cabinet, the Department could take a revived version of the annual report to Cabinet. Once Cabinet approved, the report would be brought to Parliament in order to get the report published. He repeated his earlier point that because this was an election year, the process had been altered. The next report was under preparation. Normally the Department presented the report to the cluster by November; after which they receive comments from members of the cluster. The Department then factored those comments when writing a revised report, and submits it to Cabinet before the end of the financial year.
The Chairperson said that was quite unusual that this report had been published before it was brought back to Parliament for the Committee to review it before publication. He indicated that the legislation required that the annual statistical report must be tabled in Parliament before the end of September. It was a procedure that had been outlined in the law -- that the Minister must table the annual report of the Department to Parliament before the end of September. If there was a failure to table the report, the Department must provide Parliament with reasons as to why the report could not be tabled. He repeated that he did not understand why this procedure had been different to other procedures. A report must be tabled to Parliament so that it was able to interrogate its contents. To gain further clarity, he asked Mr Patel what the intention of the Department had been in not following proper procedure.
Mr Patel said the notion of this annual report had been misunderstood and needed to be clarified in the legislation. This was an annual statistical report and not an annual report that followed the same processes as other government reports. He and Mr Mashamba would verify this and would clarify it for the Committee, so as not to mislead the Committee. He said that there were no time frames. The purpose of handing in the annual statistical report was to assist Parliament with its oversight responsibility. There were two issues. The first was that it was an annual statistical report and not an annual report that required processing. It was more for noting. Even when the report was taken to Cabinet by the Department, and as the statistical agency was independent, Cabinet could take note but could not have a say on the statistics.
Before he could continue on the second issue, he was interrupted by the Chairperson, who said that he was not satisfied with the response. He did not want generalities. He wanted Mr Patel to give the Committee a direct and accurate response about why the Department did not follow the proper procedure required when tabling annual reports. If Mr Patel did not have the required information, he should not provide a response. He asked Mr Patel to follow up on the information, and that he should put in writing for the Committee. He explained that the intention of tabling reports was to provide information for the relevant Committee. Once that was done, the Committee would have to deliberate on the report. This applied to all reports tabled to Parliament. It was not a technical exercise -- it was an exercise that was in keeping with the responsibility of Parliament as an oversight body.
The Chairperson asked how much tax that was supposed to go to the state, had been foregone. The government had invested R1.5 billion, and the tax that had been foregone was not indicated in the presentation. He asked that this be clarified by the Department so that the Committee had an idea of how much pressure was being placed on the private sector by the government to invest in research development.
He said that the National Development Plan (NDP) places an injunction on the country to increase levels of investment in research and development to 1.5% of the country’s GDP. What was it that was required for the country to increase its investment from 0.8% to 1.5%. Would this require government to increase its investment? Or would it require government to offer more incentives for the private sector to increase its investment? He would like Mr Mashamba to explain to the Committee what government should do to increase the investment in R&D.
Ms J Mannaniso (ANC) referred to the trend in business expenditure on R&D (BERD) and its contribution to GERD, and asked for clarity on the factors of why business sector investment had decreased, as it had previously been the highest investor in R&D.
What was the status quo in regard to administration in R&D? Was it affected by a lack of governance, maladministration, or issues of corruption?
What was the process/method that the Department used to conduct the sampling surveys? Did it use a desktop survey, or were the companies represented asked to be a part of the survey?
Lastly, it had been mentioned that the Department would be working with the Departments of Small Business Development and National Treasury with regard to small business innovation development. She wanted clarity on the involvement of other departments and whether the DSI was in partnerships with other departments on their initiatives.
Ms N Mkhatshwa (ANC) asked why there was a difference in the levels of support for companies in Gauteng (57.9%) and in Limpopo (0.1%), and if there was a way to increase the number. She was also interested in farmer development support, as several young women had voiced their interest in participating in the agricultural sector. She asked how many women were involved in the programme.
Mr P Keetse (EFF) said that the Committee should welcome the report. However, it was extremely technical and not easily understandable for the ordinary individual. He would like the information to be more accessible and understandable for Members of the Committee at the next sitting.
He said the importance of R&D in South Africa would increase due to the 4th Industrial Revolution. He wanted to know if there was something concrete in regard to investment by the companies, as this investment needed to be of benefit to the economy so that there could be an improvement in the delivery of basic services. The presentation had not contained information that would outline what results the investments into R&D had produced. He wanted more statistical information on the state of development in sectors such as mining, agriculture and textiles. Research was important in collecting this information.
He wanted to know why the Department had decided to provide incentives mostly to the companies in the three economic hubs provinces, Gauteng, Kwa-Zulu Natal and the Western Cape. What happened to the companies in the other provinces? The fact that the Department did not focus on providing tax incentives to companies based in the other six provinces, made it seem as if these provinces were not interested in R&D.
It was important to know the breakdown in the racial, gender and age demographics of the leadership of each company of the companies involved in R&D.
Mr Keetse referred to the statistical report, which mentioned that in terms of investment, the state-owned entities fell under the private sector. He wanted clarity on what the total investment of the private sector was into research, if one excluded the contribution of state-owned entities.
Ms D Sibiya (ANC) referred to the presentation slide which mentioned that ‘some companies had benefited’ from both the pre-approval and retrospective systems. She wanted to know which companies had not benefited. She also did not understand what was meant, in describing the companies supported by provincial location, that “provincial location, in this presentation, refers to the physical address of the applying company, and not necessarily the location where the R&D activities were performed”.
The Chairperson first addressed Mr Keetse’s earlier point -- that the presentation should be less technical -- and said that he himself did not find the presentation to be technical and difficult to understand. He commented that it had to be technical, because it was dealing with statistical matters.
Mr Mashamba first addressed the first question asked by the Chairperson -- how much tax that was supposed to go to the state, had been foregone. He pointed out that the estimates on this matter were usually published by National Treasury, using the data generated by SARS. The current data that was available was only until the 2016/17 financial year. When the Department added the amount of tax foregone, it amounted to R5.2 billion, but this did not include 2016/17 to 2019/19. At the time of publishing this statistical report, the data had not been collected.
Mr Patel added that this R5.2 billion was the tax foregone since the start of the R&D programme.
The Chairperson asked how much of the investments into the R&D programme this R5.2 billion had amounted to.
Mr Mashamba said that the investments which had been supported by both government and the private sector amounted to R50 billion. It was R5.2 billion of R50 billion. He acknowledged that the questions from Committee Members had made it apparent that they needed to be clearer in the following report for the next annual report, so that they were easily understandable for the Members.
Mr Patel agreed that they could always improve the reports, but the Department would find it difficult to break down the statistical data into annual cycles, as the R&D projects were multi-year. To determine at the impact of the tax incentives, the Department had looked at the beginning of the tax incentive programme so that they could assess the collective information, as some companies applied late and there were other delays. For the R5.2 billion that the government had lost in tax revenue, the private sector had invested R50 billion into the R&D programme, and would not likely have done so if there was no tax incentive. The Department was currently working on a detailed impact report. He asked Mr Mashamba to explain to the Committee what this detailed impact report on the tax incentive was.
The Chairperson suggested that Mashamba should answer the questions and that Mr Patel should respond to questions that Mr Mashamba had not answered, so as to prevent the presenters from going back and forth. There were still several questions that needed to be answered by the presenters.
Mr Mashamba addressed the Chairperson’s question on how to increase investment expenditure in the R&D programme from 0.8% to 1.5% of the country’s GDP. He said there was a need for both the government and the private sector to increase their contribution to R&D. It would be beneficial if international actors could also increase their investment into the R&D programme. The target of GDP investment of 1.5% was dependent on the state of the country’s economy. The Department wanted to see the intensity of investment in R&D increase in the environment of a growing economy. The Department had noted that total investment of R&D was dependent on the state of the economy. When the economy had higher levels of growth, the total GDP investment into the R&D programme increased as well.
He outlined how government could persuade business to increase its investment into R&D. Because the private sector was a large contributor of investment in the R&D programme, the government had to encourage more private sector investment through certain policy measures. These policy measures must create greater levels of economic activity in the country as well as creating a space where public sector institutions like universities and science councils could better support the private sector investment in the R&D programme.
Mr Mashamba said that the science-intensive departments had been requested to work with the DSI on developing on what the department referred to as sector R&D plans. This was to ensure that the Department was clear on what investments were needed for the Department of Science and Innovation and other government departments’ R&D programmes, and what the particular projects the departments had in place to contribute to R&D investment. The DSI was planning on having a formal investment plan for government’s contribution to the overall investment in R&D, and this was being worked on in the implementation of the new White Paper.
The Chairperson interrupted Mr Mashamba, and asked if the Department did not know how increase R&D investment to 1.5% of GDP.
Mr Mashamba responded that the Department did know how to do so. That was why it had created tax incentives to generate more private sector investment. He repeated that the Department engaged with other departments on a continual basis on what the practical projects were that they had in place to invest in the R&D programme. Regarding estimating the amount of expenditure that was required to get to 1.5%, the DSI was revising the estimates in line with the new MTFS targets that were being adopted in terms of planning for the next five years. This was still under discussion within the Department.
The Chairperson asked that the Department submit a document which contained the revised estimates at the next Committee meeting on 20 November. It would be useful for the Committee to have the document.
Mr Mashamba agreed.
Mr Mashamba answered Ms Mannaniso’s question on whether there was corruption or maladministration in the R&D programme. He said that there was no corruption or maladministration that delayed the process, and that it was rather about the volume of applications. In one month, there had been a substantial increase in applications, but this had been solved. The Department was now engaging with the firms and providing them with information on the R&D programme, and the processes for application.
This process had begun in 2012, when they changed from the retrospective system, to allowing companies to submit applications to be approved by the Department. In October 2006, there had been a large number of applications compared to 2012. At the beginning of this year, it had been difficult for the Department due to capacity challenges, but presently these challenges had been solved. It had been engaging with new firms that were interested in the R&D programme. The Department’s officials provide information on the application procedures for the tax incentive programme. At the moment, the committee within the Department was adjudicating on which firms should be chosen from the application pool.
The Chairperson asked who exactly was on that committee.
Mr Mashamba said there were representatives from SARS and National Treasury, who were appointed by the Minster of Finance. The committee also included a representative from the DSI, who was appointed by the Minster of Science and Innovation.
The Chairperson asked whether the secretariat who chaired this committee was part of the DSI.
Mr Mashamba said that the DSI did provide the secretariat who chairs the Committee. Currently, the chairperson of the committee was Mr Mashamba himself. The previous chair was a National Treasury official.
The Chairperson asked who else was involved in the committee.
Mr Mashamba said that the officials he listed were the only ones involved in the committee. The secretariat was supported by a panel of external experts who review the content of the applications. The reason why the Department used external experts to review the content of the applications was because of the lack of technical skills within the Department. With this panel, it was able to access individuals with different expertise.
Regarding the sampling methods used, he said that the companies submit progress reports to the Department, and it uses the data drawn from the progress reports and then provides the details. It was updating the analysis to cover 2017 as well. The Department conducts a desktop survey. Annually, the Minister meets with the business sector to have a discussion on the R&D tax incentive. This meeting had been ongoing for some years, but it had not happened this year due to the change in administration. The Department was still hoping to have that meeting this year as it was important. The meetings were addressed by officials of National Treasury, SARS and the Department of Science and Innovation. The officials from both SARS and the Department of Science and Innovation give an outline on the government’s tax policies. This meeting is important because it brings both the government and the business sector together in order for government to understand how it could assist the private sector in investing in the R&D programme.
Mr Mashamba answered the question about the involvement of other departments and whether the DSI was in partnerships with other departments on their initiatives. He said it did work together with other departments. The concept of the National System of Innovation (NSI) was the guiding principle which directs the Department to interact with other relevant actors in the space. For example, projects that involved issues of agriculture would involve the Department of Agriculture, as well as the Agricultural Research Council, which was a key player in that sector. It would also include researchers from universities who had technical expertise to add to the space, as well as businesses and other actors within the agricultural industry. There were different formations in the composition of these projects.
He said that the difference in the level of support for Limpopo and Gauteng was partly a reflection of the economic activity in both areas. However, this was also related to the question raised by the Member regarding the addresses of head offices of the different companies that had applied to the R&D programme. For example, if a company was based in Sandton, that would not necessarily be where the R&D activities were performed. He accepted that the Department needed to improve on the methods used to capture this information.
Regarding whether there were concrete results from the investments by the mentioned companies, he said that the DSI and National Treasury were working together on an impact evaluation study. A report on this process was being finalised and would be presented to the Committee at an appropriate time, to reflect what the progress on the R&D programme’s objectives had been.
The Department had not focused on research into the demographics of owners of the companies. It would look at this information, as it was available, and would return with the facts on this matter.
With regard to SOEs’ investments falling under private sector investment, the DSI was using international guidelines on what it called R&D performing units. The purpose of placing SOE investment under private sector investment was for comparative purposes, so in comparing with other countries it was clear how much South Africa’s government was investing in the programme compared to the United Kingdom and how much investment South Africa’s business sector was providing. He pointed out that in the business sector, there were state-owned and privately-owned companies. The reason was that the output of these organisations was placed on the market, whereas the government did not necessarily sell. This was to draw a distinction between government and business. An analysis had been done on the SOEs’ contribution to the R&D programme. This report had been presented to the cluster and the Cabinet in 2017. A follow-up report was being finalised, which was looking into how SOEs organised their R&D and what their specific contributions to R&D were.
The Chairperson asked if the Department had totalled the government’s investment with the inclusion of the SOEs investment into the R&D programme. If so, this clearly indicated that government’s investment into the R&D programme was substantially greater than that of business.
Mr Mashamba agreed that government’s expenditure on the R&D programme was far greater than business. He conceded that there were mistakes in the document handed out to the Committee, and that the correct figure of investment by government was 46%, and business 39%. The public sector was a major investor in the R&D programme in South Africa. This was not a surprise, as in other developing countries, the public sector was the major investor in the R&D programmes, whereas in advanced economies, businesses tend to provide a larger contribution of the investment. As a developing country’s economy expanded, the contribution of business R&D investment also tended to increase.
The Chairperson commented that while South Africa was not a developmental state in the real sense, it had similar characteristics, in that the government invests more into R&D than the private sector.
Mr Mashamba said that the DSI had observed that even though there were departmental budget cuts, which had decreased the government’s investments into the R&D programme, investment by the government was still greater than that of business. The budget cuts had stalled the growth of the R&D programme as a result -- a slight decline in government investment had a great effect on R&D funding. However, some of the countries in the OECD had managed to grow government investments even during the 2008 financial crisis, so the DSI was looking into the particular strategies of the governments of those specific countries.
Mr Mashamba said that from November 2006 to February 2019, there had been two different systems used to approve tax incentive support for companies that were investing in R&D. The previous incentive administration approach had been retrospective, and in 2012 it had been changed to a pre-approval process. And as a result, some companies who had received approvals during this process had been able to benefit under both programmes.
Mr Patel said that he would provide three final comments to the Committee. The first was that as part of the responsibility of the DST, it presents a number of statistical reports to the Committee which collectively provide a better sense of the R&D, innovation environment and technology transfer environment. The report which had been presented today was the R&D tax incentive report, and was part of a range of reports compiled by the Department.
The data on the investment levels of both government and business came from the R&D survey. The Department had another survey which looks at government funding of science and technology activities. These surveys and statistical reports would give people a much better sense of what was happening in the R&D space. He reminded the Committee that all of these reports were annual. He was confident that in the next five years, the Members of the Committee would have a better understanding of the data, as the Department would have had several opportunities to present the data, and Members would be able to see the trends.
The Department did have some challenges with the data that cuts across government departments, and there had been recent Cabinet decisions which were compelling the DST to disaggregate the data available. It was not a simple task to disaggregate the data, but the Department was on the right track. It was working to ensure that future reports would include this data, as this would give a clearer picture of the R&D space. All of the reports could be accessed on the DST website, and it was working on gathering data on the status of the R&D programme within the provinces. This would help give greater insight into the R&D programme at all levels.
Mr Patel said that for GDP investment into R&D to increase from 0.8% to 1.5%, there would have to be broad-based cooperation. By this, he meant that the DST needed to look into the relevant sectors within the broad categories of the public sector and private sector. He gave the example that in the private sector there were big, medium-sized and small firms. In government there were national, provincial and local departments. To increase investment would require all sectors within the two broad categories of business and government to play their part. There had been an agreement in the economic cluster that the DST must have meetings with those different sectors. He gave an example of the Department of Health, which had agreed to allocate a share of their R250 billion budget towards R&D. The Health Department had set a target of 1.5%, but this had not been monitored effectively, and the programmes were not working effectively. It was important that this Portfolio Committee worked with other portfolio committees on their various programmes, so that it could establish what other government departments had committed to their R&D programmes.
The DST would convene a meeting to establish what it would take in rand terms to increase investment from 0.8% to 1.5% of the GDP by 2030. It had set a target of 1.1% by 2024, which fell within the five-year term of this administration. The Department was looking to develop an agreement with the e-sector, and the health, education and public works sectors, that would allow the DST to assist them with improving R&D programmes. It would present the outcomes of the efforts between those departments and the DST to the Committee in November. It was important to recognise that it was not the case that departments were not unwilling to cooperate, but rather that they had been preoccupied with other commitments.
Although the DST did not have the full data, it assumed that the there had been a decrease in SOE investment into the R&D programme. A big contribution to this decline was the termination of the PPMR, which was a big R&D project. SOEs that used to invest heavily, such as Eskom and Transnet, had decreased their level of investment into the R&D programme. The Department would disaggregate the available data, which would give better context to this particular matter. This work was already being done by a small team that was managed by Mr Mashamba, and it would be asked to provide more research on the reasons for a decline in SOE investment into the R&D programme.
Mr Patel commented that the administrative weaknesses were not due to corruption or maladministration, but were rather because of the change in the system in 2012. Prior to 2012, private sector firms used to incur R&D expenditure and then the firms would able to apply to SARS for the tax returns. At times, their applications were rejected, which caused confusion among those companies as they indicated that SARS did not understand that their applications for tax returns were based on the R&D tax incentive programme. He admitted that the Department had not anticipated that there would be several technicalities affecting the tax incentive programme. When the system was changed in October 2012, the Department had received 200 applications all at once and at the time, they did not have an adjudication committee, a panel experts and guideline documents that indicated what project would qualify as an R&D project. The approval of applications had been an extended process because there was a misunderstanding between officials of SARS, National Treasury and the DST on what qualified as an R&D project. That was no longer the case, as the administrative processes had been strengthened and were more efficient.
Applications for R&D programmes, through the new system, were received by the Department and then sent to an expert who looked at the content of the application. The expert creates a report which is sent to the adjudication committee, which makes a recommendation. Once the Department receives the recommendation, it is taken to the Minister, who then either approves or disapproves it. The Department was consistently looking at methods to further improve the efficiency of the administrative process for the R&D programme.
The Chairperson said that it was unfair that Ms Pamella Madula, Deputy Director: R&D Tax Incentive Unit, had not yet addressed the Committee. He asked her to address the Committee on her involvement in the Department.
Ms Madula thanked the Chairperson for the opportunity to address the Committee. She said she would touch on the administrative progress that had been made in the Department. For example, it had worked on digitising the application process, which had remained a manual format. The Department had approached the external users to test the system, and once this was successful, the online system would go live. She anticipated that this would happen in the next month and would improve the application process. The recommendations outlined in the impact evaluation study would also assist the Department in the way it would administer the tax incentive. Through the online system and recommendations from the impact evaluation study, the Department would administer a fully functioning and efficient application system for interested companies.
The Chairperson said that it was important that Ms Madula had updated the Committee, as this was valuable information.
A meeting had been scheduled for 20 November. The Committee would like the Department to present on the Decadal plan, which was a plan that would operationalise the White Paper on Science and Innovation. Part of the briefing must include the R&D investment that had been mentioned at this meeting, so that the Committee could discuss possible interventions that would ensure that the government would reach the 1.5% touted by the NDP by 2030.
The Chairperson said that based on the report, it was clear that government’s contribution to R&D was far greater than the private sector’s contribution. It seems to be that the private sector was on an investment strike, as it was not investing in initiatives or the economy as it should. It was worrying, because the private sector had the capital that was needed to create economic growth in the country. However, he was confident that the National Economic Development and Labour Council (NEDLAC) and other forums would challenge the private sector to invest more. He asked the Members of the Committee to also assist NEDLAC and other forums to challenge the private sector to provide more investment into the economy.
He reminded the presenters that the DST had to give a date on which they would submit the annual report so that it abided by the legislation on the procedures.
The meeting was adjourned.
Mapulane, Mr MP
Keetse, Mr PP
Mananiso, Ms JS
Mkhatshwa, Ms NT
Ngcobo, Mr SL
Sibiya, Ms DP
Yabo, Mr BS
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