Duane Newman asks if government should be promoting single-site special economic zones, which is global best practice
I FIND there is often the need to don my deerstalker hat, pick up my pipe and violin, and do some high-powered deduction when trying to monitor the progress of the government’s various support schemes for manufacturing. The challenge is immense.
The latest job numbers show manufacturing is continuing to contract and to shed labour. Meanwhile, Finance Minister Nhlanhla Nene has warned of a low-growth trap, with annual economic growth limping along at 3% for the next few years.
Faced with this challenge, it is useful to closely examine the help government is offering to support and grow local business. I find it immensely useful to take a fine-tooth comb to government publications, such as budget documents — not because officials are trying to hide anything, but because the information often seeps out in them.
The last came recently, when Trade and Industry Minister Rob Davies launched an update of his support framework for industry, the Industrial Policy Action Plan, with an analysis of what has happened to date, and of how things will change.
I have a real concern that, while the challenge is great, the government may be lacking focus by seemingly seeking to support every single industry.
What the document shows is that where there has been focus, there has been success. However, when you have incentives that are open to a whole array of industries, the scale of achievement is much more muted. I am not a supporter of the one-size-fits-all strategy, but do believe that when there has been finesse, we have seen success.
Incentives are a vital tool in the government’s armoury of industrial support, as they are the major driver and lever the government can apply, using a carrot approach, to get companies to invest and expand when they might not otherwise do so. Another tool is the financing of new projects, with support from the Industrial Development Corporation and the Development Bank of Southern Africa.
The government has the ambitious target of getting incentives and finance to work together, with the aim of creating a mechanism so they can both function efficiently. But is that a bridge too far?
One serious drawback of the current approach is that support works by reimbursing firms for investments they have made. This means the applicant still first needs funding while the grant will only later be paid.
In the Industrial Policy Action Plan we learn the following about successes and setbacks, about winners and losers:
• A Department of Trade and Industry support measure, the Manufacturing Competitive Enhancement Programme grant, is completely distorted. Nearly 90% of total support goes to just two provinces — Gauteng and the Western Cape. However, there is a far better spread in another support incentive, the 12I tax allowance programme, which is better distributed across the provinces. Why is this? I suspect that the poor distribution of the Manufacturing Competitive Enhancement Programme may be because there are fewer projects in other provinces, or the delivery mechanism of incentives is poorer in other provinces, possibly due to a lack of consultants or promotion by government agencies.
• Regarding the very key tool of special economic zones, over the past year the major investments have been in two existing zones — Coega and the Dube Trade Port. In contrast, investment in zones at Richards Bay, East London and Saldanha Bay was minimal. We must ask how the revised special economic zone strategy of demarcating a number of new areas will overcome the lack of evenly spread assistance. Should the government be promoting single-site special economic zones, which is global best practice? Meanwhile, a major challenge with the Special Economic Zones Act and regulations is that there is no mention at all of black economic empowerment (BEE), which is bizarre. This needs to be re-examined to ensure co-ordination between these two focal policy instruments of special economic zones and BEE.
•The automotive sector clearly is still the major beneficiary of incentives, through the Automotive Investment Scheme and the Automotive Production and Development Programme. There remains a major opportunity for the automotive sector, as the focus intensifies on localisation and government procurement policies. Government is trying to design a National Industrial Participation Programme, which is automotive-industry specific, to ensure there are no overlaps between procurement policy and the incentive programmes.
• Metal fabrication, capital and rail transport equipment sectors are a large focus of incentives through the designation policy and local procurement and localisation strategies. The major challenge government will face will be aligning this with the Special Economic Zone and BEE policies.
• The Business Process Services incentive encourages offshore firms to move call centres and other back-office administrative hubs to SA. It has been a successful incentive, with more than 9,000 jobs created. The challenge with this incentive is aligning it with the BEE codes ultimately to attract large foreign investors.
•The Department of Trade and Industry made significant progress in the agro-processing sector, with total support of more than R1bn over five years. Looking forward, there will be significant focus on creating an agro-processing hub in SA, on the creation of small-scale dairy processors, and on accelerating the growth of the aquaculture sector. The poultry sector is a key sector, with challenges that need to be resolved.
There remains the huge challenge the government has set itself of fostering the creation of 100 new black industrialists. The Department of Trade and Industry needs to ensure that the current incentive programmes are used to accelerate the growth of existing black industrialists.
It is vital that the government engages with all stakeholders in business to tackle every review of its incentives — including consultations with the incentive consultant industry — as we have extensive practical experience in understanding whether the incentives make a difference.
And, finally, SA is falling behind its counterparts in supporting research and development, with different support schemes scattered between different government departments and agencies.
There is a compelling case for improving focus and co-ordination by housing everything in one place — preferably within the Department of Science and Technology.
The new Industrial Policy Action Plan document contains a lot of information and data from the past, and will help us to chart the way forward.
Let us hope for vision, logic, energy and focus in future so that we can meet the daunting challenges with which South African industry will continue to grapple.
And, most important, for a clear focus.
• Newman is a director at Cova Advisory and Associates, which provides advice on government incentives and green issues