Critic of govt's approach to R&D subsidies accepts Callaghan grant

Michael Whitehead has drunk from the river.

His Auckland based software company Wherescape, which helps companies analyise mountains of customer data, is one of 15 companies in the latest round of R&D funding grants from Crown agency Callaghan Innovation (see full list below).

Economic Development Minister Steven Joyce named the companies in the new round late yesterday. Between them they'll receive up to $13 million in grants.

When it came to power in 2008, National began a process of reassessing government R&D subsidies. 

Mr Whitehead threatened to move Wherescape to Australia if the new government scrapped Labour's 14% across-the-board tax credit in favour of pick-a-winner grants to selected companies.

National did scrap the R&D tax credit, and created Callaghan Innovation to consolidate and expand direct grants. Wherescape's main operations remain in NZ. (Another company that raised similar concerns in 2008, Endace, went on to accept around $11 million in government grants. Endace was sold to US company Emulex for around $156 million in a deal that closed in 2013; its R&D remains in Auckland and Hamilton, even if the profits generated by its intellectual property now benefit mostly American shareholders).

This morning, Mr Whitehead, who is travelling, sent NBR a brief statement on his company's Callaghan Grant, saying "It's good for the company, shareholders and NZ Inc. We are creating jobs in New Zealand and earning export dollars. The grant encourages and enables us to invest more and sooner."

The Wherescape boss could be a genuine Callaghan convert, or simply taking a pragmatic approach, not dissimilar to that of  entrepreneur Sam Morgan. The Trade Me founder says three companies he invests in have accepted government grants, despite his fierce opposition to state subsidies, which he sees as naive, inefficient and often gamed by companies who have hired former MBIE insiders to write their proposals. Mr Morgan says if the government is dumb enough to put the money on the table, he would be negligent in his responsibilities to shareholders not to take it.

Another inclusion in the new round of grants will also raise eyebrows: Chatham Rock, a company whose future hangs on a Environmental Protection Authority decision, yet to be delivered, on whether it can mine seabed off the east coast of the South Island.

The 15 latest companies to qualify for Callaghan growth grants are (the Crown agency doesn't supply any detail on how much money each applied for or what R&D it will be used for exactly. The descriptions in brackets are mine):

• Arrowhead Alarm Products (alarm systems/security products)
• CerebralFix (computer games for kids) 
• Chatham Rock Phosphate (seabed mining)
• Crown Equipment (electric forklifts)
• Electropar (power transmission)
• Fiber Fresh Feeds (nutrition for calves)
• Flintfox International (software to manage trade promotions)
• Frogparking (app for finding free carpark spaces)
• i-lign (project management software)
• Kahne (real-time animal health monitoring technology)
• Mastip Technology (plastics)
• Mesynthes (wound/tissue repair)
• TCS (control systems for industrial equipment)
• Wherescape Software (software/data warehousing)
• Wyma Engineering (vegetable processing and packaging) 

The three-year Growth Grants administered by Callaghan allow recipients to claim back 20% of eligible R&D spending, capped at $5 million a year, implying annual R&D spending of up to $25 million.

To qualify for a grant, a business must commit to spend at least $300,000, and at least 1.5 percent of revenue, a year on R&D in New Zealand.

“These grants are helping a large number of innovative companies that produce world-leading, high-value products and high-quality jobs for New Zealanders to invest in innovation, boost growth and increase exports."

Callaghan does not reveal the amount each company applies for, or what it will be spent on.

A total of 125 hi-tech companies have so far been awarded Growth Grants to a total value of $309 million. The grants were introduced in the 2013 budget and replaced Technology Development Grants, which 16 companies are receiving.

The Growth Grant scheme was created in the government's 2013 Budget and will allocate $566 million in total over four years.

Mr Joyce has publicly rebutted criticism from Endace founding CEO Selywn Pellet, and others, that grants are too often followed by a company selling itself offshore, taking the intellectual property created by those grants with it. Any applicant who will generate more R&D activity in NZ, even if they're foreign-owned, is welcome, he's said.

But behind the scenes, change has taken place, with the Mr Joyce recently revealing that the latest recipients have to repay Callaghan grants if they are sold to foreign buyers within two years.

ckeall@nbr.co.nz

Follow @ChrisKeall

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