Pandor raises concerns over SA spending on R&D

Naledi Pandor (image courtesy of the World Economic Forum)

SA’s spending on research and development (R&D) has dropped slightly in terms of GDP for the second year running.

Science and technology minister Naledi Pandor told journalists at parliament on Thursday that while R&D spending rose in nominal terms, from R18,6bn in 2007/08 to R21bn in 2008/09, gross spending as a percentage of GDP slipped from 0,93% to 0,92%.

“We are worried that this percentage of GDP, which is the most widely accepted indicator of competitiveness of a country’s economy, is not growing at the level that we wanted to,” Pandor said.

Her department has set an R&D target of 1% of GDP. The figures are contained in the 2008/09 National Survey of Research and Experimental Development, tabled by Pandor at the media briefing.

In terms of GDP, spending on R&D rose steadily from 1997 (0,60%) to a high in 2006 of 0,95%, but has dropped over the past two years.

The survey notes that “few OECD [the international Organisation for Economic Co-operation and Development] countries have a GERD [gross expenditure on R&D] equivalent to less than 1% of GDP”.

A table in the document issued by the department shows spending by Sweden, Finland, Japan and the US on R&D exceeds 3% of GDP.

Pandor said R&D spending in SA needed to increase by R1,7bn to reach the 1% target.

The survey results would now be probed “to establish why we’re not meeting that 1% target and to look at where it is we may be falling behind”.

She said SA’s skills shortage was a “major problem” in this regard. Another key constraint was the low proportion of researchers in relation to the total employed population.

According to the survey, SA has 1,4 researchers per 1 000 workers, compared to China (1,9), Argentina (2,9), Australia (8,5) and Japan (11), among others.

Of the R21bn spent on R&D in 2008/09, the bulk — R12,3bn — was spent by business. In nominal terms, this was an increase of about 14,8% over the previous year. — Sapa

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Greg

The government needs to incentivise R&D – the worldwide trend is offering tax breaks for R&D projects; the ZA government introduced a really crap form of this a few years ago, whereby it wasn’t a real tax break, rather a deferral of tax until the project started making money. Not much of an incentive. Government needs to create an environment where it makes sense for companies to hire staff for the express purpose of working on non revenue generating R&D.

They need to do some R&D on R&D inventives.
http://www.is.co.za Brian Pinnock

I think the criticism of the R&D incentive is a bit harsh and to my knowledge not 100% factually correct. The amendments to the Income Tax Act (1962) -Section 11D took effect in 2006. R&D expenses can now be deducted at the rate of 150%. There is also an accelerated depreciation of R&D assets allowed.

So it’s not bad in theory. But there are several criticisms as to its practicality for any business doing R&D:

1. What qualifies as R&D by SARS and what most businesses would term R&D are not the same. For example, we have people engaged in market research when doing product development and that part of the effort doesn’t qualify as R&D according to SARS. So most big companies (where most of the big R&D in SA gets done) need the services of an auditing firm to try and unpack what is and is not qualifying R&D spend. That’s a cost that also needs to be offset by the tax break.

2. Once you have figured what’s in and what’s out, you need to track it (unless you want to keep paying auditors). This can become costly and tedious. It will be hard to get R&D people to unpack their efforts because R&D business units and the people in them are usually incentivised on a revenue or a net profit basis so an overall tax break won’t really drive people’s behavior on the ground. That’s a challenge for corporates to resolve though and not government.

Government can help by just widening the definition to what is more intuitively R&D so you don’t need a manual to account for every R&D activity.
Greg

@Brian My company used the R&D incentive as my company, a 25-employee SME, is half coding house, half incubator, so is the prime target for the incentive. For 2 years we enjoyed really nice tax breaks, and then got informed that they’re due. We were rather shocked, because we were also under the impression that they were just straight 150% deductions (we probably were a bit over-eager and heard what we wanted, when our accountant explained it to us and approved to use it), but sadly this was not the case. I have a GIGANTIC SARS transfer to prove it. I wish you were right. I’d like nothing more than to be wrong here!

What qualifies as R&D wasn’t a problem for the engineers to untangle, and you don’t actually need to prove anything, unless (randomly?) chosen and approached by CSIR who seemed to be invovled on the auditing side of the project. We decided internally that it’d have taken 1 or 2 people about a week to compile such a report. It’s really just breaking down the claimed cost into cost centers and allocating it to your staff and equipment.

I’m sure my assesment isn’t 100% correct, but the gist definately is. It didn’t save us one cent, it just deferred the tax payment for 2 years.

Pandor raises concerns over SA spending on R&D

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