Importance of investment incentives

by Duane Newman


OF COURSE there needs to be a robust debate on how to fund further education. A poorly educated workforce puts us at a major disadvantage against our competitors, not to mention the impact on individuals and on society. However, as those seeking extra funds for education – and all the many other spending priorities – bombard the Treasury for more and more support, it might be wise to reflect on one area of spending, which is little appreciated but immensely important – the disbursement of investment incentives.

The Department of Trade and Industry’s (dti) 2015/16 annual report was recently presented to Parliament, and possibly because nobody walked out or jammed cellphone signals, it went largely unreported. Which is a shame.

What the dti report shows is that, quietly and steadily, many billions of rand in public funds are being invested through grants and tax rebates into industrial development, preserving and creating jobs, building our industrial base, boosting exports and generating much needed tax revenues, which are collected through VAT, Paye, corporate income tax, and so on.

Table 1 shows how effective some of the bigger dti schemes have been in supporting more than 82 000 jobs – and we must not forget that other industrial support is being disbursed by the Industrial Development Corporation and by other government departments such as the Department of Energy and the Department of Science and Technology.

Backing

The report gives several examples of specific government support and the impact it has had. Not surprisingly, as it accounts for the bulk of state incentives, the automotive sector figures frequently. The list of multinationals, which have received recent backing includes BAIC, BMW, Toyota, Daimler, Goodyear, Ford, Volkswagen, Iveco-Larimar and Volvo.

It cannot be emphasised enough how cut-throat the competition is not just between car brands, but within individual companies. The South African team in each multinational is fighting for investment, and if it wins that will be at the expense of colleagues in other countries. Government incentives can act as extra muscle in these tugs-of war, gaining new medals for investment for South Africa.

Non-car firms, which have also announced important recent investments thanks to state support include Aberdare Cables, a new ice cream factory for Unilever, a new cooling plant for Angloplats, a chicory programme to supply Nestlé, and a tomato paste plant. Then there are the film incentives that attract Hollywood names to South Africa, including Sean Penn and our own Charlize Theron for the recent filming of The Last Face.

Boats and shipbuilding, fuel storage terminals, business outsourcing, and textiles have all also benefited.

Meanwhile, special economic zones (SEZs) continue to be rolled out, providing welcoming locations for new businesses, offering less red tape, a discounted corporate tax rate of 15 percent, and other advantages.

A backdrop to government support for business, and to its future evolution, is the determination to create new large-scale black Industrialists, and while the dti’s black industrialists programme is still in its infancy, already dozens of projects have won support, and the list grows by the week. Of course, the annual report would include a catalogue of achievements, and it is always worth taking one step back – and a few pinches of salt – to assess what is being done.

While the cash may be flowing, there are administrative bottlenecks in some schemes, and a worrying lack of transparency in others. The most important industry-wide support scheme, the Manufacturing Competitiveness Enhancement Programme (MCEP) has been frozen for a year for lack of funds. While a loan element of MCEP has recently been rekindled, we await the outcome of discussions between the dti and the National Treasury to see how much new support is forthcoming, and how soon the bulk of the MCEP scheme can get moving again.

The figures budgeted by the dti for 2016/17 include R108.2 million for SEZs and economic transformation, R1.7 billion for industrial development and R6.9bn for incentive development administration. These exclude tax incentives under S12I (total cumulative budget of R20bn); the car industry support scheme (the APDP), where annually duties of between R15bn and R20bn are foregone; the jobs fund (R9bn); and other non-administered incentives like S12L for energy efficiency and S11D for research and development projects. These are big numbers, but it is a big battle. Manufacturing can be the engine of our economic growth, and the government will have to spend wisely to ensure that we build and nurture the sector.

A question that does need to be robustly debated is whether we need more government incentives, or fewer? The mediumterm trend for the dti suggests that this funding will decrease over the next three years. It seems like the wrong trend to me if we really want to stimulate our manufacturing sector.

As always, there is every incentive to get it right.

Duane Newman is a founding partner of Cova Advisory, which advises firms on state incentives and on green issues.