Africa Institute of South Africa Act Repeal Bill & The Research and Development Tax Incentive 2011/12 Report: briefing by Department; Committee Report on Department's Strategic Plan 2013

Meeting report

Department of Science and Technology (DST) on the Africa Institute of South Africa Act Repeal Bill [B6 – 2013]: Incorporation of AISA to the HSRC
Mr Phil Mjwara, Director-General: Department of Science and Technology presented to the Portfolio Committee on Science and Technology on the background to the reason for the incorporation of the Africa Institute of South Africa (AISA) into the HSRC. The HSRC Act of 2008 expanded the mandate of the HSRC to include a strong focus on public purpose research and stressed effective engagement with Africa and the rest of the world. In 2010, an Institutional Review of AISA enabled DST to identify a fundamental strategic mismatch in the role and functions of AISA, vis-à-vis DST’s core mandate. The Review recommended a substantive structural reorganization to give more emphasis to the research (core) business of AISA, rather than engage in the establishment of research networks in Africa and the dissemination of information. Whilst AISA had a historically-entrenched focus and internal bias on topics in the areas of diplomacy, politics, foreign relations, peace and security, and continental development policy, an emphasis on recent development on the continent was also required. DST believed that incorporating AISA into the HSRC as an in-house research institute would reduce unnecessary competition, strengthen AISA research capacity and enhance synergies in the research focuses and activities of the two institutions. All permanent employees of AISA would be transferred to the HSRC in accordance with section 197 of the Labour Relations Act, 1995 (Act 66 of 1995) on the same terms and conditions of employment, including remuneration and other benefits.

The consultation process involved the Minister meeting with the AISA Council on 3 June 2012 and sending the incorporation proposal to AISA and HSRC on 6 June 2012. AISA met with the Minister on 10 July 2012. HSRC was also consulted by the Minister.

The Draft Repeal Bill was gazetted for public comments on 24 August 2012 and cabinet approved it on 27 February 2013. It was certified by the State Law Advisors on 8 March 2013 and introduced to Parliament on 15 March 2013.

Discussion
Mr P Smith (IFP) said that while he was not opposed to the incorporation of AISA into the HSRC, the merits for the incorporation were not clear. He asked why, after the Ministerial-appointed committee had recommended to the Minister not to merge the two institutions, the Minister had chosen to take a contrary view. The Committee had previously asked the question but it had not yet been answered.

Mr Mjwara replied that the overlap was identified by the Institutional Review which was conducted by an external panel of experts on global best practices and not by DST itself. The overlap was also picked up by DST when the Annual Performance Plan and business plan of the entities were presented and the same research questions were being asked. The former Minister started asking questions around the same time that the Review was presented to DST.

Mr Smith said that in 2008 the HSRC Act was amended so that its mandate could cover a stronger focus on Africa but after five years, nothing had happened. He asked how the overlap existed when the HSRC had merely started a process of establishing an African desk, but had done nothing itself. It appeared that there was now a theoretical overlap, based on the assumption that the HSRC would continue in a certain line, but in reality there was no practical overlap.

Mr Mjwara replied that an honest conversation with the HSRC yielded that there was duplication and it was agreed with the Chief Executive Officer (CEO) and Chair of AISA that the Africa Programme would be incorporated as an AISA sub-programme within the HSRC. The Committee would have the opportunity to engage with DST on the Africa Programme.

Mr Smith said that it was mischievous of the HSRC to embark on a programme when the Bill was pending. He asked what the outcome was of the meetings between the DST, the Minister and AISA Council and what the attitude of AISA was to the proposals.

The Chairperson commented that the Chairperson of the AISA Board had said that AISA had not been consulted on the incorporation and perhaps the reason for the staff insecurity stemmed from their governing body not having been consulted.

Mr Mjwara said that consultation had been less than ideal. On 3 June 2012, the former Minister had met with the AISA Council Board at OR Tambo on a Sunday afternoon. Ms Nombuyiselo Mokoena, Deputy Director-General (DDG): Corporate Services, DST was present and possibly also Mr Brian Muthwa, the head of legal services. At the meeting, the former Minister shared the background to the thinking behind the merger at the time. Prior to the meeting she had expressed that her door was open for engagement on issues and for discussions with the Incorporation Committee that she had set. Mr Mjwara recalled that the Chairperson and CEO of AISA had asked for clarity on what ‘keeping the brand’ would mean and a further meeting was set up to respond to similar questions to those posed by the Portfolio Committee. It was important to separate whether meetings took place and whether the decision was accepted or not.

The Chairperson asked if the AISA CEO present in the current meeting could verify that the AISA Chair had not been consulted.

Mr Mjwara responded that he had a letter from the Minister thanking the AISA Chair for having afforded her the opportunity of the consultation on the 3 June 2012.

The Chairperson said that it was valuable for the letter to be circulated to the Committee for clarification of the facts.

Mr Smith said that since 1994 DST had attempted to reconceptualise AISA as an organisation whose research outputs and evidence-based policy briefs would inform South African (SA) policy on Africa. It therefore seemed contradictory that one of DST’s concerns was that there was an imbalance - not enough AISA emphasis on generating research owing to it generating policy intervention. The problem was not clear. He asked if AISA’s mandate would change in terms of the ratio of research output to policy intervention. It appeared that the problem was that AISA was too involved in a certain type of research - in policy output research. He asked whether the intention was for AISA’s role in policy briefs to diminish or to disappear altogether.

Mr Mjwara said that Members may recall that around 2008/9/10, enforcement of good governance was a focus which involved a huge undertaking by the DST. Time was then given for the organizations to settle before focusing on research performance. DST was not saying that the research should not be done, but AISA was not at the expected level of performance in terms of the number of journal publications compared to the HSRC. It was important to find mechanisms within the leadership and management which would enhance research productivity. This was one of the reasons that the HSRC was proposed as an option by the Institutional Review. 

The Chairperson recalled that AISA had had a number of problems since 2004 and historically had not functioned well. It had no administration for four years, with mostly acting officials over that period. After staff within AISA had approached parliament to complain about management, AISA was supposed to report to parliament but it had not done so, nor had the CEO apologized to parliament for not doing so. As far as parliament was concerned, AISA could not run its own affairs and needed to be incorporated elsewhere. He emphasized that he was referring to the management of the past. In fact, in the past, the Committee had recommended that AISA be incorporated into Foreign Affairs as it had then consulted on African affairs.

Mr Mjwara reiterated that DST would like AISA to enhance research activity so that evidence, with grass-root intervention for good quality research, could inform policy. There was an imbalance.
The Chairperson asked for clarification on how, aside from rental, the incorporation would result in cost savings. His office had received concerns that AISA employees felt insecure about their future job security though they would continue their research under the auspices of the HSRC.
Mr Smith said that the incorporation made sense when considering that ‘huge costs would be saved’, but the huge costs were not quantified or qualified. He asked whether cost saving would be overheads, staff salaries, or rental.

Mr Mjwara replied that in any organization, running parallel systems such as advertising, enterprise resource planning, HR and finance systems cost money. Detail on the economies of scale can be submitted to the Committee. Boards had to travel and have meetings. It all cost money.

Ms M Dunjwa (ANC) asked why AISA staff was insecure when they had been reassured that there would not be a change in remuneration.

Mr Smith said while the incorporation which would be in line with the Labour Relations Act, the time period that the salary packages would be in existence for AISA was not stipulated. Though he stood to be corrected, he assumed that the AISA packages were more generous than that of the HSRC and that there may be a discrepancy between the two packages.

Mr Mjwara replied that every two years in a particular sector, there were organizations which issued the pay median, which gave organizations an idea of pay packages for each level in a sector. Over time, the salaries of the two entities would be managed by the Board according to a pay median graph to ensure that resources were utilized effectively, according to output, within acceptable levels of payment within the sector.

The Chairperson commented that a problem may emerge where there was a skills disparity associated with the salary.

Mr Mjwara replied that DST would try its best to explain the origins of the decisions and how they would be contained in a consistent manner going forward. Ring-fenced mechanisms would allow research to be maintained.

The Chairperson asked if the AISA Board would be dissolved.

Mr Mjwara replied that the activities of AISA would be overseen by the HSRC.

Mr Smith said that Bill did not in any way give a sense that AISA would operate as a quasi-autonomous unit within the HSRC.

Mr Brian Muthwa, Head of Legal Services, DST, replied that the Repeal Bill provided for repeal of the AISA Act and dissolution of the entity. It further relates the consequences of repeal, but cannot go further than that. AISA would cease to exist as an entity and the business of AISA would be transferred/incorporated (normally referred to as AISA would be incorporated) into the HSRC as there would no longer be AISA. In order to retain the brand, the business of AISA would be given the same name and retain the brand. The Repeal Bill could not provide for the incorporation of AISA. This would happen outside of the Bill process as AISA would no longer be a legal entity with jurisdiction but a programme or institution within the HSRC.

Mr Smith said that he was not in the least surprised by the above response. Essentially, it was a promise that something would happen. The Bill stated that the disestablished AISA would have its brand within the HSRC but there was nothing to substantiate that. A few weeks earlier, the HSRC undermined that very intent by establishing its own Africa desk where there would be no AISA. If that was correct, there would be an amendment to the HSRC Act to say that the ‘HSRC was hereby establishing’ such an entity. Until he was convinced that the disestablishment was matched by some corresponding move for the brand to continue, he was fairly suspicious because the Bill did not currently speak to the whole picture.

Mr Mjwara thanked Mr Smith for his input. DST had looked at the possibly of whether there was a need to amend the HSRC Act to deal with the issue and had discovered that the HSRC currently had a range of institutes which were not set up for in the Act. It was an anomaly to have a specific entity within the HSRC which was set up by an Act.  This was the explanation of the legal aspect for not amending the HSRC Act. He also explained how in 2004/5, Treasury enforced that all entities set up in trusts had to be shut down and incorporated into formal Public Finance Management Act (PFMA) compliant entities. A case study was the Laser Centre being incorporated into the Council for Scientific and Industrial Research (CSIR) with ring-fenced budget items and retaining its brand within CSIR for 13 years without any problems whatsoever. The Bill ensured that the brand and funding dedicated to the entity would be retained.

Ms H Line (ANC) asked what was implied by the merger reducing unnecessary competition and if there were challenges between the two institutions, how the merger would deal with the challenges.

Mr Mjwara replied that indeed competition was not a bad thing, but the aim was to strengthen research capacity and ensure evidence-based policy. The HSRC had the capacity to manage the indicators for AISA research output generated.

Ms A Kloppers-Lourens (DA), in absentia, submitted the following questions and comments which were read by the Committee secretary:
Since AISA had functioned independently as a research institute with evidence-based research pre-94. Why had attempts been made to change it post-94 and what would its new status be after reconceptualization?
The nature of the mismatch in the role and functions of AISA identified by the 2010 review was not clear.
It appeared that the change was ideological rather than a scientific focus change.
Merger and incorporation should not be used interchangeably.
It appeared that the HSRC mandate expansion had created the clash. She asked if the idea had always been to merge the two institutions.
(The answers to the Member’s questions would be submitted to the Committee in writing).

Research and Development Tax Incentive Programme
Mr Godfrey Mashamba, Chief Director, DST, presented an overview of the Research and Development Tax Incentive Programme to the Committee. Through this programme, government wanted to encourage increased research and development (R&D) in the business sector by firms of any size or industry. This was important to increase overall investment in R&D; promote innovation and technological advancement and competitiveness. SA was amongst the countries that offered generous R&D tax incentives, offering up to 150% in tax deductions. Between November 2006 and February 2012, 477 companies had submitted claims for the tax incentive, with small and medium enterprises (SMEs) constituting 45% of those companies. The total number of claims forms received was 1026 - companies were required to submit claims every year. Annual data on uptake was revised as new submissions were received.

During 2011/12, 311 claims were received and of those, 130 pertained to R&D expenditure during that same period. Total R&D expenditure for November 2006 to February 2012 was R12 billion, of which R10 billion was eligible for the R&D incentive. For the 2011/12 period, total R&D expenditure was R985 million, of which R699 million was eligible expenditure. Additionally, companies reported that they made additional R&D investment of R347 million which could not have been invested without the incentive. The list of contributors to R&D in specific economic sectors was presented. (see attached presentation). The manufacturing sector was dominant in terms of the number of beneficiary companies and R&D expenditure, with 48% of all submissions and 61% of the R&D expenditure. This sector was followed by the business and financial services sectors. Over R5 billion of the R&D expenditure supported through the incentive was in sectors prioritised in IPAP version 2010-2012.
Amendments to the incentive effective 1 October 2012 required companies to apply for pre-approval of their R&D projects in order to qualify. Between October 2012 and 31 March 2013, DST received 235 applications from 221 companies.

Discussion
Mr Smith said that in the previous year the Minister had stated that expenditure on R&D over the past decade had increased from R5 billion to R21 billion per annum. If the figures were correct, he asked how that had impacted on the DST’s tax incentive programme. In the 2011/12 period, R985 million for the R&D tax incentive programme expenditure of the R21 billion meant that less than 5% of the country’s expenditure went to the programme.

Mr Mashamba agreed that this was a small proportion of the total R&D expenditure but that the programme supported a small proportion of companies in the country. However, the challenge which DST was addressing was establishing the total amount that had been submitted to SARS and until DST had resolved the totality of claims, it could not establish the amount.

Mr Smith asked if the cost to SARS was R2 billion, based on the R12 billion claimed and R10 billion. He asked what taxes had been foregone.

Mr Mashamba replied that since 2006, R2 billion of taxes had been foregone and this was published by Treasury in the Budget Review Document. The challenge was that bank figures since 2006 were factored in and therefore not consistent with the time-line of the programme but going forward they would be accounted for on a daily basis. 

Mr Smith felt that the imposed amendment for pre-approval of projects would suit large companies but would be retrogressive in terms of increased rolling out to the SMEs.

Mr Mashamba replied that companies would spend on R&D and then claimed when submitting their tax returns the following year. There was no rule in place to make them claim during the period that they spent on R&D. Both small and large companies complained about the new system, primarily because they did not know for sure that their claims would yield success. DST had to motivate with Treasury and SARS to assert that companies should apply up front. The amendment also included the need to assess the challenge of the changes to the SMEs. There were also direct funders who funded upfront. Small and start-up companies were responding and close monitoring by DST would enable further proposals to be enacted.

The Africa Institute of South Africa Act Repeal Bill [B6 – 2013]
Mr Muthwa briefed the Committee on the Bill which addressed the disestablishment of AISA and transfer of assets and employees of AISA to the HSRC. The HSRC would become the owner of all assets previously owned by AISA and become the litigating party, the contracting party, as well as the accountable party. All employees would be transferred to the HSRC on the same terms and conditions as those of AISA. The Board would be disestablished and dissolved, effective from the date of repeal of the Act. AISA’s funds would be ring-fenced for the MTEF period commencing from the date of repeal of the Act in order to cater for its current operational budget.

Parliamentary Legal Advisor on The Africa Institute of South Africa Act Repeal Bill [B6 – 2013]
Mr Michael Prince, Parliamentary Legal Adviser, said that in principle there were no problems with the Bill. Clarification was however required on clause 2, dealing with the disestablishment of AISA, and clause 2 in relation to clause 3 and clause 5. Transitional provisions, where certain assets and employees would be transferred, were subject to a date provided by the Minister (clause 3). However, disestablishment of AISA would be subject to the commencement of the Act (clause 5). This was an issue of timing. If the Act commenced before clause 3 issues had been sorted out, there would be a problem. The same applied for clause 4, where transitional arrangements would need to be sorted out before the Act was repealed.

Mr Muthwa replied that the Bill indicated that operational issues, including transfer of business, staff, assets and liabilities would be undertaken sequentially and would include the relevant issuing of notices by the Minister. The work taking place outside of the legislative process would inform the timing of the transfer. It would not be undertaken after the disestablishment of AISA. Secondly, in terms of the Proclamation Act, the President could provide for provisions coming into operation by a certain date to enable timely sequencing of dates.

Mr Prince added that it was a mere observation that a staggered approach was necessary for the clauses to flow sequentially.

He asked if sub-clause 3 and 4’s referral to ‘all employees’ included the CEO of the current council. The current AISA Act, clause 6 and 12 of 2001 dealt with the appointment of the CEO which was subject to section 14.1b created the impression that the CEO was treated as an employee.  The question was whether the Bill intended the CEO to be included as an employee or member of the council.

Mr Muthwa replied that in terms of the Bill, the CEO was a member of staff. Transfer of employees included the CEO.

Mr Prince said that while clause 3 (sub-clause 5), dealt with disestablishment and dissolution of the council, regulations pre-established in the original Act section 4 sub-clause 10 set out the manner in which the council would be dissolved. Thus there was disjuncture between the original Act and the Bill.

Mr Muthwa replied that all Acts provided for the power of the Minister to dissolve a council if it was not effective. However, this was secondary to the power of parliament, which could dissolve a council at any time, despite the power of the Minster.

Mr Prince said that in clause 3 (sub-section 6), Memorandum on the Objects of the Bill, one of the parties that was consulted and which would have expressed a view on ring-fencing of funds was Treasury. He asked if Treasury’s view could be shared with the Committee, with permission of the Chairperson.

Mr Muthwa replied that his understanding was that Treasury was consulted and the notes on communication thereof would be provided to the Committee.

Ms Dunjwa questioned whether the Parliamentary Legal Advisor should be involved in the discussion when the Bill involved the State Law Advisor. Members deliberated on the role of the two advisors with regard to the Bill and the issue was cleared.

Mr Smith asked why there was a separate provision for dissolution of the AISA council when it was included as part of the AISA institute and why there was disestablishment of AISA and yet disestablishment and dissolution of the council.

Mr Muthwa replied that the wording provided for all legal gaps to be closed.

Mr Smith asked if the employees to be transferred were all permanent staff.

Mr Muthwa replied that everyone employed by AISA would be transferred on the same terms of contract of employment.

Mr Smith asked if ring-fencing of funds was limited to three years and if, thereafter, the HSRC would have discretion over funding of AISA. In theory, the example of the Laser Centre in the CSIR would not apply in this case, since the Laser Centre appeared to operate in a semi-permanent way.

Mr Muthwa replied that the three years provided for in the Act could not be exceeded as there was no guarantee of allocations after that.

Mr Smith queried the wording that the ‘institute’s parliamentary budget obligation must be exclusively reserved for the institute’s operational activity within its council.’ He suggested that this should not even be stated as it would be meaningless once the institute was dissolved. The decision for the AISA brand to continue operating within the council was not provided for in the Bill or the HSRC Act and was therefore a political decision - an assumption – and not law. All that was being provided for was the transfer. There was nothing that stipulated what would happen after that. Thus, Clause 3 (sub-section 6) was problematic.

Discussion and Consideration of Committee draft report on Annual Performance Plan and Budget of DST
The Committee scrutinised the Committee draft report and made the necessary changes. Mr Smith proposed to adopt the report and was seconded by Ms Dunjwa.

The meeting was adjourned.