To be a leader in 4IR, SA must do more to boost research

It seems every day we hear news of a new presidential advisory panel, or a top ministerial dialogue with business, or a summit on technology. Are we substituting talk and analysis, promises and dreams, for action?

Take research & development (R&D), the fundamental technological building block for economic growth and the fourth industrial revolution (4IR).

Certainly, there is no lack of awareness of the way in which the world is changing, or of the threat to traditional jobs from the technological tsunami, but also of the opportunities this change will bring. Revolutions, after all, can bring huge benefits as well as significant disruption. President Cyril Ramaphosa told a 4IR summit in July that SA has the potential not just to follow the new technological revolution, but to lead it.

“SA is positioning itself not as an adopter but rather as a leader and driver of the 4IR worldwide,” he said.

While such statements are welcome, it is vital to explore not just what is being said, but what is being done. The government has a longstanding commitment to boost R&D spending in SA to 1.5% of GDP from the current 0.68% (which is for the period ended February 2018). It is concerning that the actual spending percentage has dropped from prior years, placing us well below the Organisation for Economic Co-operation and Development average. That we are way behind our competitors is not just an unfortunate numerical issue; it has a direct effect on jobs, growth and exports.

Between November 2006 (when the R&D tax incentive was launched) and February 2018, R46bn of the R&D expenditure incurred by eligible companies was supported. The programme has received 2,893 applications, with 1,575 from the retrospective submission system (received between November 2006 and October 1 2012) and 1,318 applications under the preapproval system (from October 1 2012 on). There is a decreasing trend in the number of applications received, a great concern.

Of the 1,212 applications that were considered in SA from October 2012 until the financial period that ended on February 28 2018, almost 60% were approved. The rejection rate of 40% is rather high. Is this perhaps because the programme rules are not clear enough? For a programme to be successful, we recommend there should be a 90% approval rate.

A crucial recent improvement has been in the way the government administers the incentive. In the early days there were lots of administrative problems. Huge delays meant it could take years to get a decision, with the result that some firms were deterred from applying.

A recent study by management consultancy Ayming in the UK shows SA is the only country in the world where it is only a minister who can sign off on R&D tax incentive approvals. This must change if we want to stimulate R&D spending.

The latest target is to have a turnaround in 90 days, and the department of science & technology has reported to MPs that it has recently cleared the backlog of applications.

The tax incentive can make a big difference to R&D as it gives a 150% tax deduction to qualifying R&D expenditure. The Davis tax committee found in 2017 that, thanks to the incentive, companies spent a total of R1.83 on R&D for every rand foregone by the fiscus. The tax incentive is available to companies of all sizes and to all industries. About 80% of applications have come from manufacturing, followed by the finance sector. Meanwhile, the overall economy stands to benefit from the supported technological advancement, and boosted competitiveness and employment.

SA IS THE ONLY COUNTRY WHERE ONLY A MINISTER CAN SIGN OFF ON R&D TAX INCENTIVE APPROVALS. THIS MUST CHANGE IF WE WANT TO SPUR R&D

Looking forward, we need to see a renewed commitment by the state to R&D funding support. The tax incentive scheme expires in October 2022, and the Treasury is considering whether it should be extended beyond then.

We need a decision as soon as possible to give certainty and confidence to our companies and our researchers. We also need better awareness of the tax incentive and how it works, as some firms seem to fear that the application process is too complicated.

There is now an online application process, which could still be improved, but which has brought benefits.

If the president’s vision of us spearheading the 4IR is to materialise, our research base needs to be supported and expanded. The way in which the R&D tax incentive is handled will be a litmus test for the government’s commitment to transforming its dreams into reality — with SA truly leading a new technological revolution.

● Ismail specialises in government grants and tax incentives at Cova Advisory.