TO THE outsider it may seem that government is providing the right platforms and support for companies to conduct research and development (R&D) in South Africa.
I have just attended a new gathering – the Innovation Bridge – which aimed at bringing innovators, venture capitalists and consultants together to develop partnerships, in order to arrange R&D funding and government support.
The ultimate goal is to develop new or improved products, services and processes for the local and international markets.
Two government departments – the Department of Science and Technology (DST) and the Trade and Industry Department (dti) – provide a range of measures to support and encourage companies to become more innovative.
These are the R&D tax incentives (S11D), which fall under the Income Tax Act, the Support Programme for Industrial Innovation (SPII), the Technology and Human Resource Programme (Thrip) and the Manufacturing Competitiveness Enhancement Programme (MCEP).
At first sight, these amount to an impressive suite of support mechanisms being made available to companies and innovators.
But in reality, I fear that the majority of these government-run support mechanisms are broken.
South Africa’s R&D as a percentage of gross domestic product (GDP) has shown a worrying and constant decline – to 0.76 percent in 2010/11, from 0.93 percent of GDP in 2007/08.
In December 2014, the government announced that it had set a target of 1.5 percent of GDP by 2018. However, seeing that we have yet to reach the 1 percent of GDP target which was set in 2008, are we not setting ourselves up for failure and disappointment?
Reluctant
Let’s examine S11D. Since its inception back in 2006, it has not enjoyed the uptake or the success that was expected.
The application process and custodianship of the incentive moved to the DST on October 1, 2012. In July, the DST announced – during the last S11D update session – that only 51 percent of pre-approval applications had been successful.
Companies are becoming more reluctant to submit S11D applications due to this low approval rate.
On top of this is a lack of technical clarity on eligibility, extremely slow turnaround times of up to two years, a burdensome application process and low net benefit (only net 14 percent of the R&D costs).
Given all these hurdles, which are confronted when companies apply for the S11D incentive, you might think that companies could seek support through other measures, such as the SPII or the MCEP?
The plain and simple answer is that this is unlikely to be of much use.
The SPII programme was suspended in November 2013. Its relaunch under the supervision of the dti is imminent, but the R50 million in expected annual funding is tiny, and cannot have much impact.
The MCEP has not really worked since its inception in April 2012, and the consensus is that the programme is poorly administered, with delays of 180 days or more in securing a decision once an application has been submitted.
So, in reality, the support mechanisms that government has introduced to stimulate innovation and R&D have not worked, as is illustrated in the drop in R&D as a percentage of GDP.
In addition to this data, what is also worrying is that in July 2014 the Global Innovation index (led by Cornell University, Insead and the World Intellectual Property Organisation) ranked South Africa as only the third most innovative country in Africa, behind Mauritius and the Seychelles.
In order to attract investment and to encourage innovation and R&D in South Africa, government needs to put its money where its mouth is – by making R&D funding and tax breaks more lucrative.
While, in theory, we have the right funding mechanisms in place, what is lacking is a simple and streamlined process to make it easier to apply for and to secure R&D grants.
Let’s devote bigger resources to the challenge, and show a red card to all this red tape.
Justin Arnesen is reasearch and development Tax and Incentive Specialist at Cova Advisory