Put more thought into incentives to lure manufacturing investors

16 AUGUST 2018 - 12:48 DUANE NEWMAN

Patrice Motsepe’s Batho Bonke stuck with Sanlam after its agreement matured and he is now expanding his footprint with African Rainbow Capital. Picture: ARNOLD PRONTOPatrice Motsepe Picture: ARNOLD PRONTO

It’s an ambitious target, but let’s hope it’s a realistic one. President Cyril Ramaphosa has set himself the target of winning SA $100bn in new investment over the next few years. In recent weeks, we have seen $10bn from Saudi Arabia, matched by the United Arab Emirates with a further $10bn and, most recently, the Chinese with $14.7bn.

Mercedes-Benz and Sappi have also announced billions of rand in expansion, but others are hesitating. Many are waiting for legislative clarity, especially in the automotive and energy sectors, with misgivings also around the Mining Charter and land expropriation.

The effect of these challenges should not be underestimated, as they do affect the manufacturing value chain.

So, where should the president’s planned investment bonanza be targeted?

SA’s spade work is paying off and more investment is on the way — but bolder reforms will be needed for it to properly gain momentum

Billionaire businessman Patrice Motsepe told a Brics meeting recently that the government should go the extra mile by extending bigger tax benefits to manufacturing.

"A step further involves introducing tax holidays, tax incentives and tax dispensations that allow significant investments like we used to do in SA for the mining industry," he was quoted as saying. "You’d spend the first five to 10 years without paying any tax because you write off your capital."

Certainly, mining has done extremely well in the past, with a cosy tax regime that has allowed investors to write off their capital expenditure in year one. Motsepe is best known as a mining (and soccer) magnate, but his business activities are more diverse so he has a credible track record. He should be taken extremely seriously.

Recently the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development, under a programme with the Organisation for Economic Co-operation and Development, released a draft toolkit to help governments anticipate and limit the cost of mining tax incentives. It is part of wider efforts to address some of the challenges developing countries face in raising revenue from their mining sector.

For many resource-rich developing countries, mineral resources present an unparallelled economic opportunity to increase government revenue. Base erosion and profit shifting, combined with gaps in the capabilities of tax authorities in developing countries, threaten this prospect.

One of the ways multinational mining enterprises may seek to avoid taxes is through the use of tax incentives. Many governments of resource-rich developing countries are under pressure to offer tax incentives to attract mining investors. However, these incentives may significantly reduce government revenue, especially when investors use them in ways that exceed the tax benefit initially intended by the government.

A key question is whether the manufacturing sector can learn from the lessons of the mining sector by using this draft toolkit. In my view, Motsepe is in effect saying that the current tax regime for manufacturing is not good enough.

The special economic zone (SEZ) incentives of a 15% corporate tax rate, accelerated tax allowances and customs and VAT benefits are not enticing enough — for him or for other large investors.

If we are serious about attracting many billions of dollars of new investment, we should be more flexible. Why do we not see single-site SEZs — which have been hugely successful in other jurisdictions such as India — right where they need to be, instead of located far away from the target market? Any investor — local or international — wants a manufacturing plant to be set up in the right place, based on the market, infrastructure and availability of a skilled workforce.

Is the National Treasury listening to these inputs and those of others who are calling for proper analysis of SEZ tax benefits and also for recapitalisation of the section 12I incentive, which provides additional tax allowance for large manufacturers? I would argue that far more thought should go into the establishment of the SEZs.

The reduced corporate tax benefits (under the section 12R incentive) were made effective only in July after the finance minister signed them into law. It is amazing that it took so long to make the benefit effective.

It is obvious that mining receives a much better deal than manufacturing, but what are the costs of this generosity to mining? The manufacturing sector has declined sharply in recent decades, falling from about a quarter of GDP to today’s 13%. Manufacturing normally writes off assets that have passed their useful life. The life of a plant could be four or five years or longer. In mining, assets have a 10-30 year life, so there is a big difference between the useful life of assets and the tax deduction you get. Mining is perceived to be high risk, and the speedy tax deduction helps to overcome some of this early-stage risk.

Trade and industry minister Rob Davies, who also played a prominent role in the recent Brics events, has frequently bemoaned the underdevelopment of the SA economy, with far too high a proportion of our mined materials being exported and far too little beneficiated into higher-value products within our own borders.

A key question we must ask in SA is whether, with manufacturing dropping as much as a percentage of GDP, the perceived risk in manufacturing has increased to the extent that tax allowances need to be looked at. Should they be more in line with those offered to mining?

Manufacturing is doing much better at getting across its views than in the past. We see the Manufacturing Circle holding regular discussions with key decisionmakers in government, while the Manufacturing Indaba is an important platform, which has expanded way beyond Gauteng. However, there is still a dilution of the message with so many diverse forums for business. The championing of a review of this issue by someone as influential and well-connected as Motsepe could be a major breakthrough.

Ramaphosa is planning to convene an investment conference before the end of 2018 and it is important that the current suite of incentives be bolstered to assist with attracting this $100bn to SA.

Newman is a co-founder of Cova Advisory.