JOHANNESBURG - This week sees the 2018 Manufacturing Indaba, an annual gathering which brings together government officials, business representatives and a host of others with an interest in boosting the South African manufacturing sector.
In the last decade there have been worrying negative trends, with manufacturing falling from around a quarter of gross domestic product to a feeble 13percent with some investment incentives falling, and those remaining being targeted on a chosen group of target sectors.
So, it is interesting to see the status of perhaps the most valuable incentive for manufacturers - which goes by the unglamorous title of the 12I Tax Allowance/Incentive.
Although this incentive, which covers the whole spectrum of manufacturing sectors, is a vital tool, its R20billion budget has been spent, and the Trade and Industry Department (dti) faces a tough battle in winning a top-up from the Treasury.
A new, delayed, dti report (for the period up to March 31, 2017) to Parliament on 12I has just been published, and it makes interesting reading.It defines 12I as “as one-off allowance for capital investment in manufacturing buildings, plants or machinery, (with) an additional allowance for skills development and training.”Between April 2011 and March 2017, R65.8bn of investment was attracted to the local manufacturing sector, thanks to this incentive, but just R10.7bn of this came from offshore.
While it is admirable that local companies invested in South Africa, it is worrying that the incentive only attracted R10bn from foreign multinationals. We need significantly more foreign investment to reignite the manufacturing sector in South Africa.
The report confirms the cupboard is bare - by the end of March last year, R19.9bn of the R20bn - 99.5percent of the total - had been approved. This covered 103 projects, with the creation of 8434 direct jobs.
While the cupboard is bare, we have seen a worrying trend of aggressive policing of the incentive to try and release funds back into the cupboard. This is making current approved investors rather uneasy.
Looking ahead, the dti notes that the uptake of the incentive was “quite significant”, amounting to “a significant contribution to the economy, and the programme is currently being reviewed to determine its relative costs, benefits and perceived successes.”
It also notes that applicants are encouraged to comply with BBBEE in their projects, even though there is no “provision to enforce it.” We do expect this to change in future versions of S12I.
Clearly, the dti is keen to see the programme extended, and is looking at ways to top-up the piggy bank.
The report reads: “Although 99.5percent of the budget has been committed at March 31, 2017, new applications will be considered when funds become available due to projects being cancelled or savings realised due to lower project investment.”
I believe it is vital that it is topped-up to create certainty for the process of approval. Currently, the programme is being advertised as “open for business”, but the approval process has slowed down, waiting for existing projects to release funds back to the dti. This is not an ideal way to attract investors. Investors need certainty.
“Cancelled allowances amounting to R6.2bn and savings amounting to R250m made it possible to approve new applications within the maximum budget of R20bn.”
So far, so good.
Reading between the lines, and based on a few public comments from dti officials, it is clear that a negotiation is under way between the dti and the cash-strapped National Treasury.
While allocated, but unspent, cash is being returned to the pot, there is clearly an appetite by the dti to extend and expand 12I.
Trade and Industry Minister Rob Davies may get lucky, though. He might secure a deal by tapping in to President Cyril Ramaphosa’s "New Dawn" vision.
The President has set a very public target of attracting $100bn in new investment in South Africa, and has appointed a team of respected envoys, including seasoned politician turned businessman Trevor Manuel, to sniff out the dosh.
The country now has a series of One-Stop-Shop centres, designed to cut through the red-tape facing foreign investors. In one place, they can interact with dti officials, those responsible for environmental legislation, home office officials and others.
This red-carpet concept has the clear aim of fast-tracking investment, of getting new projects, new jobs, new exports, new growth. I encourage any initiative to reduce red tape and create certainty for investors.
Meanwhile, the Special Economic Zones (SEZ), which should offer tax breaks and other incentives to investors - local and foreign - are being rolled out. Just last week, cabinet gave the green light to the Atlantis SEZ on the outskirts of Cape Town, a cluster which will focus on green technology projects.
There are still gaps between the package of assistance which companies are led to expect when they invest in SEZs, and what they actually receive. However, once these have been ironed out, they should be a big draw-card for Ramaphosa’s investment dream.
Of course, it would be naive to suggest that all potential investors are converts just yet. As the President and his investment Sherpas are no doubt told every time they meet a potential recruit, the outside world is looking nervously at the current debate on land seizure.
No board of directors anywhere in the world is going to approve an investment unless there is a cast-iron guarantee that the investment will be safe from arbitrary expropriation.
We need a clear, transparent and certainty-enhancing resolution to the question of land expropriation without compensation, and we need it speedily. To achieve this, every ounce of the President’s persuasive powers and leadership skills will be needed.
If he succeeds, it will be much easier to reach his $100bn new investment target; if he fails, the entire economy will suffer.
In the meantime, the President must also look carefully at the 12I incentive - an overall review of the state’s basket of incentives is currently being conducted by government - and he should instruct the Treasury to top-up 12I.
He has an important instrument to achieve his investment ambitions; he just needs the courage to persuade the Treasury to write another cheque.
Duane Newman is a co-founder of Cova Advisory, which is a sponsor of the 2018 Manufacturing Indaba.