Part 2: The Grants for Private Sector Research and Development scheme

2.1
In this Part, we:

• provide an overview of the GPSRD scheme, including information on our audit sample; and
• discuss our findings from the applications and grants we audited.

Overview of the Grants for Private Sector Research and Development scheme

2.2
The GPSRD scheme is part of the TechNZ programme administered by the Foundation. TechNZ aims to increase the ability of firms to adopt new technology, and apply technological learning and innovation for business growth.

2.3
The purpose of the GPSRD scheme is to increase the level of private sector investment in research and development in New Zealand. It targets small and medium-sized private firms that are planning to make a new investment in research and development.¹ Under the scheme, the Foundation provides partial funding of up to one-third of the total research and development costs of an approved project, up to a maximum contribution of $100,000 (including GST).

Our audit sample

2.4
Our GPSRD audit sample was chosen from applications recommended for funding approval between 1 July 2003 and 30 June 2005. During this period, there were 270 approved GPSRD applications where payments were made by the Foundation. These payments totalled $16.6 million (including GST).

2.5
We audited 40 grants involving payments. This sample was equivalent to both 15% of the 270 approved grants with payments, and 15% of the total value of the payments made. Our sample included grants for completed projects, approved but incomplete projects, and grants terminated by the Foundation after some payment had been made to the recipients. We also examined 5 of the 21 applications rejected by the Foundation during the same period. Our audit sample is summarised in Figure 4.

Figure 4
Audited Grants for Private Sector Research and Development

*Total number and value assessed by the Foundation between 1 July 2003 and 30 June 2005.
** Including GST.

Ministerial criteria for awarding Grants for Private Sector Research and Development

2.6
The Foundation must comply with criteria provided in a Ministerial direction issued by the Minister for Research, Science and Technology. The Ministerial direction covering the GPSRD scheme sets out:

• the criteria for characteristics of grant recipients;
• the criteria the Foundation should assess applications against when making funding decisions; and
• how funding should be allocated.

2.7
The Ministerial direction requires the Foundation to target private “technologically aware” New Zealand-resident firms with an annual turnover of up to $50 million. For the purposes of the scheme, the definition of “firm” excludes sole traders, partnerships, and Crown-owned entities. “Technologically aware” firms are defined in the direction as –

…those firms that, in the Foundation’s view, have developed a basic set of competencies in the area of technological innovation and recognise that increased investment in research and development can lead to improved performance.²

2.8
All grants we audited met these criteria on the characteristics of recipients.

2.9
The Ministerial direction requires the Foundation to fund projects that best meet the following criteria:

• the application should have a clear link to a business strategy focused on developing markets, processes, or services with reasonable commercial potential;
• have the potential to create an enduring wealth-creating capability;
• have the potential to create an enduring increase in technological capability in the firm; and
• are likely to start sooner and complete earlier with the scheme’s support.

2.10
These criteria were routinely applied to the applications we audited, except for consideration about whether a project would be likely to start sooner and complete earlier with the funding. This criterion was rarely addressed.

2.11
The Ministerial direction for the GPSRD scheme stipulates the Foundation is to only fund up to 33.3% of the total research and development costs a firm will incur in undertaking a project, up to a maximum contribution of $100,000 (including GST). All audited grants complied with this requirement.

The approval process

2.12
The Foundation has designed GPSRD to be a predominantly web-based scheme. Applications and approved grants are mainly administered using a TechNZ website, with grant recipients given secure access rights to the site.

2.13
The Foundation contracts Economic Development Agencies throughout New Zealand to act as local agents for the scheme. Agents guide applicants through application procedures, and the Foundation expects agents to assess applications against criteria set by the Foundation. Applications that meet assessment criteria are then validated in the website, by agents, for formal assessment by the Foundation. Business managers in the Foundation review validated applications, and submit applications with recommendations to an Investment Sub-committee of the Foundation Board for approval. The approval process is summarised in Figure 5.

Figure 5
Approval process for Grants for Private Sector Research and Development

2.14
We assessed compliance with the requirements of each phase of the approval process shown in Figure 5 for each grant we audited.

Application phase

2.15
For the initial application phase, agents have a detailed user guide from the Foundation on how to assess and validate GPSRD applications. The user guide specifies information that should be included in validated applications, including assessment criteria additional to the criteria in the Ministerial direction. The required information includes:

• clearly summarised objectives and outcomes of a proposed project;
• research and development budget analysis for the applicant firm;
• other budgeted costs associated with the proposed project;
• information on the applicant firm, including GST registration, and number of employees;
• evidence a proposed project is not business as usual for a firm; and
• capability of the firm to realistically undertake the project.

2.16
There was widespread compliance with the provision of this information in the validated applications we audited. An exception was that several validated applications did not state clear, measurable, objectives and outcomes of the proposed projects. A less significant omission, in our view, was the omission of data in some applications on the number of employees.

2.17
Agents we interviewed said they were well-supported by the Foundation throughout the application process.

Assessment, approval, and contract formation phases

2.18
All audited GPSRD grants complied with the requirements of the assessment, approval, and contract formation phases of the approval process. Validated applications were routinely reviewed by Business Managers in the Foundation and, in some cases, also peer reviewed. We found several instances where reviewers had sought clarification from agents about aspects of applications that were unclear, or if they were concerned that funding criteria had not been addressed. This indicates active involvement by the Foundation’s reviewers, and demonstrates effective procedures are used to review assessments made by agents.

2.19
An Investment Sub-committee of the Board formally considers applications with recommendations from Business Managers. All decisions to approve or reject validated applications that were made by the Investment Sub-committee were recorded in meeting minutes. These decisions were consistent with the recommendations of Business Managers.

2.20
In the applications we examined, rejected applications were rejected for failing to meet all of the funding criteria for the GPSRD scheme.

Documentation

2.21
Because GPSRD is a web-based scheme, most of the information on funded grants is stored electronically. There is minimal paper documentation for approved grants. Agents are required to get a signed Statutory Declaration from applicants before validating their applications, which is then held on file. Applicants declare that they have provided true and accurate information in their applications, and accept the terms and conditions under which the Foundation may grant funds.

2.22
Completed application forms submitted by agents to the Foundation become part of the legal funding contract between the Foundation and grant recipients. They are also held on file.

2.23
Paper documents (including the signed declarations and contracts) for grants were well organised and maintained by the Foundation. Check sheets contained in each file were used to ensure that all the required documentation was included in the file. In all cases, and throughout all regional offices visited, we could easily locate important documents, and were able to follow the processes and decisions made, from the initial application through to the approval and completion of funding of projects.

2.24
The web-based system used by the Foundation for administering the GPSRD scheme was also well organised and easy to use.

Monitoring Grants for Private Sector Research and Development

2.25
The Foundation requires GPSRD recipients to submit quarterly progress reports electronically to receive funding instalments. (GPSRD grants are normally paid in equal quarterly instalments, based on the total approved value of the grant and the project’s duration.) The quarterly reports must include information on the achievements of the project during the quarter, and the results and actual costs of research undertaken.

2.26
Business managers in the Foundation review the progress of projects against the project plan contained in the original application. If there is variation between planned and actual research and development work on a project, the Business Managers may adjust the quarterly payments. This electronic reporting system works well, with several cases observed where quarterly payments had been adjusted because of the review. In one case, a claim for funding of work that was not part of the approved project was declined by reviewers.

2.27
Grant recipients are required to submit a final report at the end of their projects. The final quarterly instalment is not released by the Foundation until the final report is submitted and reviewed by Foundation staff. This system works well.

2.28
The Foundation aims to audit 15% of approved GPSRD grants a year. This is to ensure that validation procedures are correctly and accurately followed, and that grant funding is used for its intended purposes. The audits are completed by either a private accountancy firm, on a contracted basis, or the Foundation. This approach works well, using a selection methodology that enables coverage both throughout regions and among Business Managers responsible for different grants. In 2004-05, the Foundation exceeded its target for auditing GPSRD grants.

2.29
Issues identified in individual audits are reported to the recipient and relevant Business Manager for comment. Audit issues are assessed quarterly, and formal reports are given to the Chief Executive and the Board on a regular basis. The Foundation keeps an audit issues register, which summarises any issues found in the audits, and can be accessed by relevant staff.

Evaluation of the Grants for Private Sector Research and Development scheme

2.30
It is important that grant programmes (or component schemes of them) are evaluated to assess their effectiveness. A range of evaluation work has been done on the GPSRD scheme.

2.31
GPSRD recipients are required to complete an evaluation questionnaire as part of their final report for their grant, and before the final grant instalment is paid by the Foundation. These questionnaires get information from grant recipients on how the completion of the research and development project, partially funded by the GPSRD, will benefit their operations. The evaluation questionnaire had been submitted for all but one of the completed grants we audited. The potential withholding of the final payment gives grant recipients a clear incentive to provide the Foundation with useful grant evaluation information.

2.32
The Foundation’s business processes for the GPSRD scheme say that agents should be prompted online to visit grant recipients for an evaluation report on completion of a project. However, it was not possible to tell from the electronic records or paper documentation whether these visits had occurred. Interviewed agents indicated that they try to undertake site visits, but visits usually occur informally and irregularly, and are not structured specifically for evaluating a completed project.

2.33
An independent evaluation report of the GPSRD scheme, commissioned by the Foundation, was released in September 2004. The short review provided an overview of outcomes, such as the:

• size and characteristics of companies and industrial sectors receiving grants;
• research and development activity undertaken by grant recipients; and
• effect of the grants on sales growth of companies.

2.34
The Ministry of Research, Science and Technology (MORST) is planning to undertake an evaluation of the TechNZ grant schemes, which includes GPSRD. This evaluation will report on the effects, benefits, and barriers to growth of TechNZ.

1: Small and medium-sized firms are defined in the Ministerial direction to the Foundation about the GPSRD scheme as firms with annual turnover of up to and including $50 million.

2: Hon. P. Hodgson MP (2003), Notice of Amendment to Ministerial Scheme Under Section 8A of the Foundation for Research, Science and Technology Act 1990 – the Grants for Private Sector Research and Development Scheme.

3: Economic Development Agencies are independent entities associated with local authorities that promote economic development initiatives.