While the incentive schemes are important, and the money is flowing, there is room for improvement. But no need yet for us to get incensed over the incentives, writes Duane Newman
AT A time when SA is experiencing low growth, high unemployment and a range of social challenges, the government has been trying hard to stimulate key industries. Incentives in the form of cash grants or tax breaks are important tools for this, and cost taxpayers tens of billions of rand a year. But do they work and are we meeting the targets that were set?
The annual report of the Department of Trade and Industry, published recently, provides useful data on how much is being spent, and how much is being claimed, across a number of incentive programmes. With a bit of number crunching it is possible to get a grasp of the level of support being given and to draw some conclusions.
The report shows the bulk of the department’s budget is allocated to incentives, with total expenditure in the year to March of R6.5bn, up from the previous financial year’s R5.7bn — a 14% increase.
The four major areas the department’s incentive unit focuses on are "broadening participation", "manufacturing investment incentives", "services investment incentives", and "infrastructure development support".
An area that deserves scrutiny is "broadening participation", which focuses on the small-business sector, stimulating enterprise development, equity and empowerment, and regional economic development. This category covers the Black Business Supplier Development Programme, the Co-operative Incentive Scheme and the Incubation Support Programme — all of which underperformed, with one-third fewer applications being approved than the target. It is also worth noting that the two research and development (R&D) incentives, the Technology and Human Resources for Industry Programme and the Support Programme for Industrial Innovation (SPII), are covered under the "broadening participation" programme, with SPII administered by the Industrial Development Corporation (IDC). These incentives have attracted much interest, and have been oversubscribed. In the year to end-March, SPII projects worth R75m were approved, against a budget of R43m.
The SPII programme has been around since 1993, and I find it worrying that the budget for this R&D programme is still so small relative to other incentives. Both industry and the government are well aware R&D is an important stimulant to industrial and economic growth, and instead of SA getting better with regard to resources devoted to R&D, there are signs we are slipping down the global rankings. A moratorium was placed on the SPII programme in December, as it is being re-evaluated, and it is most likely to move from the IDC to the Department of Trade and Industry.
This raises questions whether R&D incentives should be managed by the department, where they risk being crowded out by much more industry-specific programmes, such as the Automotive and Clothing Industry Programmes. It may be more apt to locate the SPII in the Department of Science and Technology, which manages another R&D incentive, the 11D tax incentive. Should the government not be making it easy for business to access the incentives? One way of doing so is by having one access point for programmes that stimulate similar types of behaviour.
The manufacturing investment incentives programme is arguably the most important, as it talks to the mandate of the department and therefore includes the largest incentive offerings of the Department of Trade and Industry. More specifically, these are the section 12I tax allowance, the Automotive Investment Scheme, and the Enterprise Investment Programme.
The total budget allocation for these programmes is R3bn, although it is important to note that the section 12I incentive is a tax incentive, which results in foregone state revenue. It is not a cash grant, so approvals under section 12I are not included in the R3bn. Estimated revenue foregone under section 12I in the 2013-14 year is about R1.3bn.
The Automotive Investment Scheme, which provides an incentive on capital invested in the industry, attracted significantly more applications than budgeted, 44% more than the target. It should result in R8.4bn of new investment, similar to the R9bn of investment from the tax benefits that will flow from applications approved under section 12I. The section and Automotive Investment Scheme focus more on stimulating investment than employment, as their combined direct job creation was a mere 3,800.
The Enterprise Investment Programme also had significantly more approvals than expected, exceeding its target for applications by 59%. The increased number of approvals equates to an additional R6.5bn of capital invested, and 7,500 jobs created on top of the initial target of 4,200. However, this programme was closed in September last year, and there is no replacement to assist small greenfield projects. This must be rectified urgently. During the year, the programme disbursed R1.1bn to manufacturers, 23% more than the previous year. Payments outstanding for the programme dropped from R4.1bn on April 1 last year to R3.5bn on March 31. This can mainly be attributed to the processing of payments and/or cancellations during the year.
The flagship Manufacturing Competitiveness Enhancement Programme (MCEP), launched to much fanfare in July 2012, is starting to assist a significant number of projects. While it initially targeted 300 approvals a year, in the year to March it achieved 365 — a disbursement of R991m. However, the lag between approval and payment by the Department of Trade and Industry is worrying. Some of the lag is because business applied for wish lists of projects that were approved but never claimed.
Business should reconsider this approach as it locks up funds that could be allocated to more deserving projects. MCEP was expected to pay out R1.5bn, but released only slightly less than R1bn. Though it is relatively new, the total for approvals that have not yet been paid ("contingent liabilities") was R3.1bn on March 31. As a result, concern has been expressed that the budget of R7bn will be exceeded in this financial year.
The service investment incentives unit, which handles the business process services (BPS) incentive and the film and TV production incentive, had a good year. Both attracted more applications than targeted. The BPS incentive attracted more than R500m of investment, while the film incentive supported movies and shows to the value of R2bn. Payments outstanding for the BPS and film incentive are about R850m.
The Infrastructure Development Support programme, which includes the Critical Infrastructure Programme (CIP) and the Industrial Development Zones (IDZs) and Special Economic Zones (SEZs), had a cumulative budget of about R1bn. Most of this was allocated to the IDZs — notably Coega, East London and Richards Bay.
The CIP incentive fell behind target, with only eight projects approved. But some were big, which meant investment achieved rose R4bn above target. With the blockages in infrastructure spending in SA, we would have expected the volume of approvals to have been higher than target. The SEZ fund has R450m allocated to infrastructure development, which should unlock further investment in coming years in areas such as the Dube Trade Port and others proposed in the platinum belt.
It is clear from its annual report that the Department of Trade and Industry is investing significant amounts of taxpayers’ money in businesses. This underpins its commitment to expanding the manufacturing and service base of SA. However, when I look at the R11.6bn in incentives that have been approved but not yet paid out to business, together with the expected accelerated approvals under programmes such as MCEP, I hope that the R19.5bn three-year budget is enough to meet these commitments, and that the rate of payment will accelerate. Business and the government have to work together to ensure these issues are addressed. Bridging the trust gap is a key factor in this journey.
While the incentive schemes are important, and the money is flowing, there is room for improvement. But no need yet for us to get incensed over the incentives.
• Newman is director of Cova Advisory & Associates, which advises businesses on government incentives, green issues and other aspects of sustainability.