TAX CUT SCHEME

Investors in dark over incentive for seeding industry

11 DECEMBER 2017 TUMELO CHIPFUPA

Members propose giving Minister of Trade and Industry Rob Davies powers to relieve indebted consumers.  Picture:  Russell Roberts

Members propose giving Minister of Trade and Industry Rob Davies powers to relieve indebted consumers. Picture: Russell Roberts

This country needs more jobs, and more investment is needed to create those jobs. I suspect this economic reality will resonate with all parties, from the Freedom Front Plus to the EFF.

However, an apparent lack of cohesion between the Treasury and the Department of Trade and Industry may be stifling investment instead of promoting it.

The government’s main incentive tool for promoting investment in industry — apart from the large targeted programmes for the automotive industry and for black industrialists — is a programme with the unimaginative name of 12i. The 12i scheme was introduced in 2010 and was due to have expired in December 2017.

Companies need to have their projects approved by Trade and Industry Minister Rob Davies to qualify for the incentive.

Davies can approve projects whose value collectively adds up to R20bn. The incentive cuts the tax paid by the investor, so with corporate tax at 28%, the government would forego tax income of R5.6bn if all the projects that Davies approves are established and profitable.

The advantage of this programme for citizens is that the state provides benefits to the investor only if the project is profitable and if it is proved to add value to the economy.

According to the department’s latest incentive report, the 12i scheme has been such a success that the cupboard is now bare. Bizarrely, this has not, however, led to the department closing applications for 12i.

Business executives can feel quite aggrieved if they make plans contingent on getting a fair consideration from the minister, only to be told that someone has removed the pot of gold from the end of the rainbow

In the 2017 tax amendment legislation, the Treasury decided to extend the period for 12i for another two years, to the end of 2020. With no budget?

We now have the situation where the department has not yet informed potential investors that they can’t apply, but the budget is exhausted. So, what’s the point?

The state appeared only to be approving applications where some of the previously approved projects were not being implemented by investors. It is uncertain what will happen next. Will more money be made available for 12i? And remember that applying for a government incentive is neither a trivial nor a cost-free exercise. It is fairly demanding in terms of information that has to be collected and packaged for the minister’s consideration.

Business executives can feel quite aggrieved if they make plans contingent on getting a fair consideration from the minister, only to be told that someone has removed the pot of gold from the end of the rainbow. We are therefore in a situation that it is difficult for people who are considering investing in large catalytic manufacturing projects in SA. This uncertainty about the incentive environment makes it difficult to reach decisions.

By contrast, the automotive sector is in a much better position. Despite the subdued domestic market in recent years, investment in motor assembly and manufacturing, targeting the export market has been at a record pace.

Fortunately for the automotive companies, their incentive environment has been quite stable. This allows the industry to plan and to invest with confidence. Unfortunately, it’s not the same with the rest of the manufacturing sector.

So why the delay in putting the 12i incentive back in business, in allocating a budget, in ending the uncertainty?

It is no secret that the Treasury is struggling to balance the books, and the situation will not be helped if President Jacob Zuma pushes ahead with idiosyncratic commitments with negative budgetary implications.

We hear that a Treasury decision on 12i is awaiting a study on the effect of the scheme, which would be strange. SA and other developing countries have used this kind of investment tax incentive instrument before, and there have been many reviews and debates in the past. It is not as if we are expecting to learn much new.

It seems more like a delaying tactic and less like a valid reason for creating so much uncertainty. The state is wary of unnecessary expenditure. But it would be folly to make cuts in a way that hurts SA’s long-term growth prospects. It must be a top priority to try to protect those areas from which future growth will burst.

This is how the EU approaches it, with the so-called smart-budget consolidation. This requires the nurturing of the innovation and research and development budget even as austerity is being imposed all round, looking after the essential areas while trimming the fat.

We, too, need to identify where growth will come from. So, even as we pare down budgets, we must protect and revive programmes such as 12i.

• Chipfupa is a co-founder of Cova Advisory