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Revocations to this notice were published on 3 October 2018, Notice No. 2018-go4863 and Notice No. 2018-go4864.

Notice Type
Departmental
Notice Title

Direction to Callaghan Innovation—Criteria for Assessing Proposals for Funding

Under section 103 of the Crown Entities Act 2004, I direct Callaghan Innovation to give effect to Government policy as specified in this direction.

Introduction

In this direction I set criteria for Callaghan Innovation to adhere to for assessing proposals for R,S&T funding. This notice uses the following format:

  • R,S&T Funding decided by Callaghan Innovation.
  • Criteria to be applied.
  • Administrative processes.

R,S&T Funding Decided by Callaghan Innovation

Funding allocated by Callaghan Innovation may be allocated from any of the following multi-year appropriations:

  • Research and Development Growth Grants (for Research and Development Growth Grants).
  • Targeted Business Research and Development Funding (for Research and Development Project Grants and Research and Development Student Grants).

Criteria to be Applied

Callaghan Innovation must make funding decisions in accordance with the:

  • Public Finance Act 1989;
  • parameters specific to the business-led R&D tool; and
  • criteria specific to each initiative within the tool, which are:
    • policy objectives;
    • eligibility criteria;
    • judgement criteria (if applicable); and
    • parameters specific to the initiative (if applicable).

In addition to the criteria listed above, Callaghan Innovation must take into account the overall mix of relevant investments. Detailed criteria specific to each initiative are set out in more detail in the following pages.

Administrative Processes

Callaghan Innovation will:

  • market the tool and provide easy to access public information explaining its features;
  • actively seek out applicants from inside and outside the group of businesses it currently works with;
  • develop and implement processes for vetting and auditing businesses to ensure that claimed research and development is legitimate;
  • ensure that applicants and recipients of grants have access to complementary advice and services where appropriate;
  • gather data on applicants during and following the grant period to support programme evaluation; and
  • monitor funded businesses’ activities during and after the grant period and seek to claw-back (recover) funding as appropriate. Callaghan Innovation is expected to implement claw-back mechanisms.

Callaghan Innovation may issue standing or periodic calls to generate proposals for consideration. The calls for proposals will be consistent with the criteria in this direction, and will provide guidance for applicants. This guidance may include, where applicable:

  • the area(s) of investment in which a funding decision is required;
  • more detail as to how the criteria in this notice apply to the area of investment;
  • the tool (or initiative within the tool) to be used;
  • the amount of funding available;
  • specific outcomes sought for a given investment process or decision; and
  • other timeline and process information.

Calls for proposals will be published on the Callaghan Innovation website

www.callaghaninnovation.govt.nz

Revocation of Previous Notice

The notice entitled Direction to Callaghan Innovation—Criteria for Assessing Proposals for Funding, published in the New Zealand Gazette, 31 October 2013, No. 146, page 3990, is revoked.

 

Criteria Specific to the Business-led R&D Tool

Overall Policy Objective

The objective of this tool is to increase New Zealand businesses’ investment in research and development to support long-term economic growth.

Initiatives

Three initiatives sit within the business-led R&D tool:

  1. Research and Development Growth Grants.
  2. Research and Development Project Grants.
  3. Research and Development Student Grants.

Business Eligibility Criteria

To be eligible for funding under this tool the following criteria must be satisfied together with the eligibility criteria relevant to the specific initiative:

  • Only businesses are eligible to receive funding via this tool. A business or group of businesses may nominate a representative to receive funding.
  • The business must be one of the following entities:
    • A company registered under the Companies Act 1993;
    • a limited partnership registered under the Limited Partnerships Act 2008; or
    • a Māori incorporation or a trust established under Te Ture Whenua Maori Act 1993, a trust established on behalf of Māori claimants to receive and manage assets as part of the settlement of a claim under the Treaty of Waitangi, a Māori statutory body, or a business that is controlled by one or more of these types of Māori entities.
  • Businesses may not be an entity listed in Schedule 1 of the State Owned Enterprises Act 1986 or listed in Schedule 4A of the Public Finance Act 1989 or an entity established under or governed by the Education Act 1989, Crown Research Institutes Act 1992, Local Government Act 2002, Local Government (Auckland Council) Act 2009, the New Zealand Public Health and Disability Act 2000, or the Crown Entities Act 2004, or an entity that is 50 per cent or more owned by one or more of those types of entities.
  • Callaghan Innovation must be satisfied that providing an R&D grant to the business would not bring the reputation of Callaghan Innovation or the R&D grants programme into disrepute.

Claw-back Provisions

Businesses may be expected to return some or all grant funding, during or following a grant agreement, to Callaghan Innovation, if:

  • The business breaches any grant agreement, misappropriates funding, provides incorrect information to Callaghan Innovation, or claims ineligible expenditure;
  • the business enters into a contract or arrangement (including change of ownership) that materially reduces the current or future planned research and development activity in New Zealand; or
  • the grant fund is unspent and for which contractual liabilities have not yet been incurred.

Criteria relating to each initiative are set out in the following sections.

 


1. Research and Development (R&D) Growth Grants

Policy Objective

The objective of this initiative, in addition to the overall policy objective of the business-led R&D tool, is to provide a rules-based, market-led incentive for increasing R&D investment in businesses that are experienced in investing in R&D.

Eligibility Criteria

In addition to the Business Eligibility Criteria stated earlier, to be eligible to receive funding a business must:

  • have had at least $300,000.00 in eligible R&D expenditure (stated below), excluding any R&D funded by Callaghan Innovation, Ministry of Business, Innovation and Employment and other New Zealand central and local government funding sources, in each of the two most recent years;
  • have had eligible R&D expenditure of at least 1.5 per cent of revenues in each of the two most recent years;
  • meet financial and management due diligence requirements sufficient to justify three years of funding; and
  • provide Callaghan Innovation with an R&D plan including an estimate of R&D expenditures over the next three years. Businesses must compile the R&D plan to a level of detail and clarity sufficient to assess progress in the businesses’ R&D programme over time.

Alternatively, a business that has not previously received an R&D Growth Grant may be eligible under the transitional eligibility criteria (stated below).

For R&D projects that were partially funded by government grants, the funding for the project that came from non-government sources is considered eligible R&D expenditure for the purpose of determining business eligibility.

While eligibility requires that applicants submit an R&D plan, the merits of the R&D programme described in the plan will not influence eligibility.

Entities that conduct or commission R&D activities mainly for other persons or businesses are likely to be ineligible due to insufficient eligible R&D expenditures.

Parameters Specific to This Initiative

All eligible applicants will receive an R&D Growth Grant for three years. Grant holders will receive up to 20 per cent of all eligible R&D expenditures incurred over the grant period up to a maximum of $25 million of eligible expenditures per business per year (maximum grant funding of $5 million per business per year).

Businesses will be required to submit annual updates to their R&D plan and estimates. These plans must continue to be sufficiently detailed and clear.

Any business receiving an R&D Growth Grant that is found to be wilfully misreporting R&D expenditure at any point will be immediately removed from the initiative and will be ineligible to reapply for three years.

Parameters Specific to This Initiative – Extensions

Two years into the grant period, grant holders will have the option of applying for a two-year extension on the grant. Grant holders will receive an extension if:

  • the business’ reported expenditure over the previous two years is found to meet the definition of eligible R&D expenditure (stated below);
  • the business continues to meet the eligibility criteria; and
  • the business has maintained or increased eligible R&D expenditure over the two years of the grant period as compared to the two years prior to the grant period.

If the business has reduced eligible R&D expenditure but meets the other requirements, the Callaghan Innovation Board may still choose to grant the business an extension at its discretion. The Board should only do so in exceptional circumstances.

Businesses may continue to apply for, and receive, extensions every two years provided they continue to meet the requirements.

Businesses that fail to receive an extension will receive a final year of grant funding and subsequently exit the initiative. Businesses that exit the initiative are not eligible to apply for another R&D Growth Grant for two years.

Eligibility Criteria (Transitional)

Transitional eligibility criteria will only apply for a business that has not previously received an R&D Growth Grant. No funding is payable by Callaghan Innovation unless the business actually reaches both the intended spend levels of at least $300,000.00 per year on eligible R&D expenditure and at least 1.5 per cent of revenues per year on eligible R&D expenditure within the first year of the grant.

Notwithstanding the above Eligibility Criteria for R&D Growth Grants, and in addition to the Business Eligibility Criteria stated earlier, a business may be eligible to receive funding if the business:

  • intends to spend at least $300,000.00 per year on eligible R&D expenditure (stated below);
  • has the necessary finance to spend at least $300,000.00 per year on eligible R&D expenditure;
  • intends to spend at least 1.5 per cent of revenues per year on eligible R&D expenditure;
  • meets financial and management due diligence requirements sufficient to justify three years of funding; and
  • provides Callaghan Innovation with an R&D plan including an estimate of R&D expenditures over the next three years.

Businesses must compile the R&D plan to a level of detail and clarity sufficient to assess progress in the businesses’ R&D programme over time; and commit to and provide three-monthly progress reports to Callaghan Innovation against the R&D plan for the first two years. If the business does not achieve the intended spend levels within the first year of the grant, it will receive no funding and exit the initiative. The business will be ineligible to reapply for another R&D Growth Grant for two years.

Definition of Eligible Research and Development Expenditure for R&D Project Grants

Eligible R&D expenditure is defined as those meeting the New Zealand Equivalent to International Accounting Standard 38 (NZ IAS 38) definition of research and development and expensed under that standard.

The NZ IAS 38 definitions of R&D are:

  • Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
  • Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.

Clarifying Principle

If necessary, when seeking to distinguish R&D from non-R&D, the further advice provided by the New Zealand Financial Reporting Standard 13 (NZ FRS 13) should be applied:

  • R&D is distinguished from non-R&D by the presence or absence of an appreciable element of innovation. If the activity departs from routine and breaks new ground it is normally R&D; if it follows an established pattern it is normally not R&D.

General Exclusions

The following types of expenditure are not eligible for the R&D Growth Grants initiative:

  • any expenditure that is capitalised as an intangible asset under NZ IAS 38;
  • R&D undertaken outside of New Zealand;
  • R&D funded through an enforceable levy paid by another entity;
  • enforceable levies for R&D paid to another entity; and
  • any R&D funded by a grant or other payment provided by an entity that is not part of the same consolidated group of entities as the applicant. However, R&D funded by the R&D Growth Grant, an R&D Project Grant that the business receives for a collaborative R&D Project or an R&D Student Grant is eligible. Expensed funding for R&D contracted out by the applicant to another entity is also eligible.

Specific Exclusions

To provide further clarification on the definition, some specific activities are excluded. This list is not exhaustive. Activities not specifically excluded are only eligible provided they meet all other features of the definition. Specific activities excluded are:

  • Engineering follow-through in an early phase of commercial production.
  • Activities related to the construction, relocation, rearrangement or start-up of facilities or equipment other than facilities or equipment solely used for the businesses’ R&D (which may be included).
  • Routine, on-going efforts to refine, enrich, or otherwise improve on the qualities of an existing product or process, or to make cosmetic or stylistic changes to it.
  • Routine design of tools, jigs, moulds and dies, or seasonal or other periodic design changes to existing products. However, expensed design activities involved in developing a new product or process are eligible.
  • Activities involved in ensuring that existing products or processes comply with statutory requirements or standards, and quality control, routine testing or trouble-shooting during commercial production. However, testing in search of significant product or process improvements is eligible.
  • Adapting an existing product or process to a particular customer’s need or site.
  • Supporting, de-bugging or making minor improvements to existing computer software.
  • Market research or surveys, market testing, market development or sales promotion, management studies, efficiency surveys or the routine collection of information.
  • Any costs involved in protecting, licensing, selling or defending intellectual property or of acquiring or using external intangible assets (e.g. patent licences).
  • Interest expenses or lease payments of any kind, and any overheads that are not closely linked to R&D activities. Eligible overheads include finance, personnel, training, travel, administration and library activities associated with R&D, and reasonable R&D-related transportation, storage, cleaning, repair, maintenance and security activities.
  • Prospecting or exploring for minerals, petroleum, natural gas or geothermal energy.
  • Research in the social sciences, arts or humanities.

 

2. Research and Development (R&D) Project Grants

Policy Objectives

The objectives of this initiative, in addition to the overall policy objective of the business-led R&D tool, are to:

  • support greater investment by businesses in R&D activities and generate wider benefits to the New Zealand economy; and
  • develop businesses with less established R&D programmes into stable and substantial R&D performers.

Eligibility Criteria

In addition to the Business Eligibility Criteria stated earlier, to be eligible to receive funding under this initiative, the general rule is that a business must not currently be receiving an R&D Growth Grant or must not be eligible to receive an R&D Growth Grant (under the non-transitional eligibility criteria). The exception to this rule is if the business is undertaking a ‘collaborative’ R&D project.

A collaborative R&D project is one where:

  • at least two businesses (that are independent and not within common control) are undertaking a joint project for mutual benefit (each party is expected to gain value);
  • each business is contributing substantially to both the financial and technical requirements of the project; and
  • the project structure indicates the project has shared responsibility and decision-making.
Parameters Specific to This Initiative

Definition of Eligible Research and Development Expenditure for R&D Project Grants

R&D Project Grants fund research and development using the following definitions:

  • Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding.
  • Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.

R&D is distinguished from non-R&D by the presence or absence of an appreciable element of innovation. If the activity departs from routine and breaks new ground it is normally R&D, if it follows an established pattern it is normally not R&D.

R&D undertaken outside of New Zealand is not eligible for co-funding, except in limited cases where Callaghan Innovation expressly permits it. In deciding whether to co-fund R&D undertaken outside New Zealand, Callaghan Innovation will consider the benefits to New Zealand and whether similar expertise or facilities are available in New Zealand.

Co-Funding Rates

Callaghan Innovation will determine the co-funding rate according to the following rules:

  • R&D Project Grants will typically provide funding for up to 40 per cent of the eligible R&D expenditure of a project;
  • any eligible R&D beyond the first $800,000.00 of eligible R&D expenditure of a project (or projects if the business is receiving multiple R&D Project Grants simultaneously) will be funded at 20 per cent;
  • if a business has previously received an R&D Growth Grant then they will receive 20 per cent funding of eligible R&D expenditure for the entire Project Grant;
  • if a business has previously received R&D Project Grants totalling more than $800,000.00 of funding they will receive 20 per cent co-funding for the entire Project Grant; and
  • collaborative R&D projects will typically receive co-funding for up to 40 per cent of the eligible R&D expenditure of the collaborative project. However, if a business with an R&D Growth Grant contributes to a collaborative R&D project they will only receive co-funding for a maximum of 20 per cent of their eligible R&D expenditure on top of their R&D Growth Grant.

Judgement Criteria

Callaghan Innovation must assess proposals against the following criteria:

A. Private Investment Returns

B. Pathway to market (commercial outcomes)

Key question: Assuming the project is successful, what are the potential commercial returns to the business (or group of businesses)?

Key question: Assuming the technical aspects of the project are successful, how capable will the business (or group of businesses) be at successfully commercialising or implementing the results?

C. Ability to deliver (R&D outputs)

D. Develop R&D Programme

Key question: How capable will the business (or group of businesses) be at successfully delivering on the technical aspects of the project?

Key question: To what extent will the project be a technical stretch for the business (or group of businesses) and/or contribute to the development of a more stable and substantial New Zealand-based R&D programme within the business (or group of businesses)?

E. Grant Impact

F. Benefits Outside the Business

Key question: How strong will the impact of grant funding be on the delivery, scale, quality or commercial success of the project?

Key question: How much potential is there for benefit to accrue outside the business (or group of businesses) to other New Zealand businesses or society?

  • Criteria A–F must be the basis upon which Callaghan Innovation determines whether to provide a grant for a project.

Information Specific to This Initiative

  • R&D Project Grants are targeted at businesses that cannot receive an R&D Growth Grant, for example, businesses with smaller research and development programmes and businesses new to R&D.
  • A business may receive multiple R&D Project grants (each grant for a distinct project).

 

3. Research and Development (R&D) Student Grants

Policy Objective

The objective of this initiative, in addition to the overall policy objective of the business-led R&D tool, is to support New Zealand undergraduate and postgraduate students to gain and develop their technical skills in a commercial research environment, while bringing capability into New Zealand businesses.

Eligibility Criteria

In addition to the Business Eligibility Criteria stated earlier, to be eligible to receive funding under this initiative, a business must:

  • Have an active R&D programme.
  • Ensure that the student(s) that the grant relates to:
    • is a science, technology, engineering, design or business student from a tertiary education institution;
    • is studying a degree at NZQA Levels 7–10 or equivalent; and
    • has appropriate immigration status at the time of application (or an application in progress that is subsequently approved).

Definition of Eligible Expenditure for R&D Student Grants

The eligible expenditure that may be incurred is limited to the wages and salary of the student, a tax-free stipend for the student, a tertiary administration fee and, when the business is located a significant distance from the tertiary education institute, a travel allowance for the student.

Judgement Criteria

Callaghan Innovation must assess proposals against the following criteria:

A. Student Exposure to R&D

B. Student Professional Development

C. Benefit to the Business

Key question: How will the involvement of the student within the business expose them to technical work that is relevant to their degree? This should be in the form of a defined R&D project.

Key question: Does the business have a credible plan for the professional development of the student, and what resources has the business committed towards this?

Key question: How will the involvement of the student within the business support the business’ internal capability development?


Dated this 1st day of December 2015.

Hon STEVEN JOYCE, Minister of Science and Innovation.