South Africa falling behind in fostering innovation

10th July 2015

By: Duane Newman

  

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Somebody was questioning on Twitter recently whether the fax machine is now dead. It probably is, along with the ticker-tape machine, snail mail, CDs and DVDs, video rental stores and bank cheques, which are all heading the same way.

The reason for all this? Innovation.

Companies like Uber, Apple, Facebook and WhatsApp are massive successes. And yet, as a recent executive conference on innovation in Johannesburg was told, Apple owns no factories, Facebook creates no content, Uber owns no cars and WhatsApp owns no servers.

As technology, goods and ways of entertaining and communicating evolve, massive opportunities open up. But, if you snooze, you lose.

This is why I believe so passionately in the need for innovation, for research and development (R&D) and for staying ahead in the technological race for success.

For the same reason, I am worried that South Africa is falling behind its competitors in fostering innovation. As a country, we invest 0.76% of our gross domestic product (GDP) in R&D, with a goal to achieve 1.5%. We, therefore, need to double our investment in R&D.

Possible? Our competitor countries invest over 2%, and in some cases 4%, of their GDP in R&D. South Africa is, therefore, way behind the curve and falling further behind.

Take two giants in this field – Elon Musk and Mark Shuttleworth. Both grew up in South Africa, both now live abroad.

We need to robustly support proudly South African innovation, to grow and develop local and lekker talent. This way, we can stay in the race, creating wealth and jobs in the process.

So, what is being done? Well, there are government support programmes, with grants or tax incentives available to stimulate R&D. One is a government tax allowance incentive, known rather unsexily as the 11D, which is administered by the Department of Science and Technology (DST).

In theory, it is a 150% tax allowance, but in practice it becomes a 50% tax allowance, as there is already a 100% allowance on operating expenditure. So, if a company spends R1-million on approved eligible R&D, the net tax saving will be R140 000 – comprising R1-million × 50% (R&D tax allowance) × 28% (corporate tax rate).

This may seem attractive, but there are some drawbacks and, in particular, the average turnaround time once an application has been submitted can be quite long and unpredictable. In some cases, companies have been waiting since October 2012 for a decision. Over two-and-a-half years!
One of the main reasons for the delays is the need for Science and Technology Minister Naledi Pandor’s sign-off on every approval or rejection. We are the only country in the world where a Minister needs to sign off on an R&D application. It seems the DST had been expecting very few applications and, as I was recently told, a Minister is a politician and probably does not have the time to sign off on R&D applications.

The 11D incentive requires the submission of an application prior to the applicant conducting the activity, and a company cannot always accurately state upfront what activities will be conducted and what uncertainties will be experienced if they have not yet started undertaking the R&D.

South Africa is the only country in the world that has such an onerous preapproval process prior to conducting R&D. The process really needs to become much faster for it to have any impact on R&D in South Africa.

There have been endless changes to the legislation and the South African Revenue Service has been rigorous in auditing the incentives, which means companies may feel that the net tax benefit of 14% is not worth the effort.

There is also a lack of clarity. The quality of applications submitted to the DST by companies is poor, owing to the lack of guidance surrounding the definition of R&D and companies having to apply before they conduct R&D. Meanwhile, the questions in the application form are not all appropriate – the focus is commercial, as opposed to scientific or technological.

All sectors can apply for the R&D tax incentive. The table accompanying this article, taken from the DST’s 2013/14 Report to Parliament, indicates the uptake of R&D tax incentive preapproval applications submitted to the DST per industry for 2013/14.

The reality is that the R&D incentive is not generous enough to stimulate R&D. The process creates too many uncertainties and businesses cannot rely on the incentive, so they will not spend more on R&D. We must find a way for incentives to be more predictable, and maybe self-assessment is the way to go.

In addition to the 11D incentive, other funding is available for R&D activity, and companies should be encouraged to seek the very best advice to discover what other sources of support they can tap into.

As I review the latest Industrial Policy Action Plan, released in May by Trade and Industry Minister Dr Rob Davies, it is clear that R&D and innovation is part of the action plan. The DST and the Department of Trade and Industry are to work on innovation and technology support together and there are two big actions that I believe need mention.

Firstly, a comprehensive study is to be done to determine the links between R&D and industrial growth. It seems as if we are closing the barn door after the horse has bolted. Should not this study have been done many years ago, before any of the current R&D interventions were designed?

Secondly, a technology commercialisation strategy should be developed to accelerate the implementation of R&D. I strongly believe that this should be left to business. It is dangerous for government to get involved in commercialisation strategies. It needs to be involved only if there is a market failure of some sort.

I would also encourage corporate South Africa – collectively and individually – to engage with government on the scale and efficiency of R&D funding and to get involved in the above research projects.

This is a race our country cannot afford to lose.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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