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NewIncentive scheme package

Posted On Friday, 16 March 2001 03:01 Published by
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There is broad-ranging agreement that investment incentives are far less important in attracting direct investment, domestic or foreign,

There is broad-ranging agreement that investment incentives are far less important in attracting direct investment, domestic or foreign, than the creation of an investor-friendly climate backed by strong economic fundamentals. For that reason, many economists regard incentives, both grant-based and tax-based, with some disdain. They argue that such mechanisms are not only ineffective but also undesirable, as they cause long-term distortions.
Yet others view business incentives as nothing more than 'social welfare for the rich', suggesting, too, that for developing countries the cost of these schemes often outweighs their benefits. Indeed, contemporary economic history is littered with examples of projects that have shut at the conclusion of the incentive term - in other words, the business plan was unsustainable without support from government. It is also strewn with examples of countries that, in their desperation, have embarked on what is termed a 'race to the bottom', offering packages and schemes that are entirely unsuitable.
However, in a world where emerging economies are competing aggressively for investor attention, governments and their promotion agencies have found incentives to be far more than a mere 'necessary evil'; they are often seen as critical selling tools.
Even the South African government, which is no great fan of incentive schemes, has come to accept that such packages are an important part of the promotion armoury.
This fact was re-emphasised last month, when Finance Minister Trevor Manuel made known that two new incentive packages would be made available for investors in large projects. Effectively, his announcement brought some degree of closure to the State's long-running struggle to sort out good incentives from bad, and positions it to begin a process of rolling-out schemes with which it is comfortable.
It was also fitting that Manuel, himself, made this statement, as he has been one of the most ardent critics of incentive packages. His scepticism and opposition spans back to his days as Trade and Industry Minister, when he was a key figure in fighting the World-Trade-Organisation-outlawed General Export Incentive Scheme, or Geis. And, since that time, he has also opposed a number of Department of Trade and Industry (DTI) suggestions on ways to augment the existing packages.
This said, DTI has, over the past six years, been moving progressively towards the creation of a far more targeted set of supply-side arrangements (although some critics have also argued that State support for business has, over the past few years, been parsimonious). This process was meant to culminate in September, when President Thabo Mbeki - who is staking his political life on economic success in South Africa and Africa - and Trade and Industry Minister Alec Erwin released details of new schemes designed to encourage enterprise development. However, the announcement was limited to incentives geared mostly towards small and medium enterprises, as Treasury had questioned the wisdom, and sustainability, of two other packages for bigger projects.
Since that time negotiations have been going on between DTI and Treasury to seek a solution, culminating in Manuel's Budget announcement.
The Finance Minister's statement appears to have finally closed any gaps that may have existed in the State's support for business - gaps which opened even further when the government was forced to abandon its earlier tax-holiday package. Indeed, when all the schemes are eventually laid on the table later this year, government will be in a position to argue that all aspects of business support have been catered for; from research and development, through to enterprise creation and expansion, skills enhancement and training, business-process improvement and competitiveness, export facilitation and promotion and even a wage incentive.
There is also little doubt that the new integrated package will be far superior to anything that has come before, as it has been designed to ensure the biggest bang for the taxpayer's buck.
This said, no package should be seen as a substitute for tackling fundamentals and improving the investor climate. Emphasising this, the chairperson of the parliamentary committee on trade and industry, Dr Rob Davies, stresses that 'climate issues' - such as security of investment and personnel, competitive economic infrastructure and improved macro- and microeconomic conditions - remain paramount. He argues, too, that the newly-released investment packages have to be seen as climate-building, rather than being mere subsidies for business.
Undeniably, the sustainability of these schemes has been emphasised, and a number of safeguards have been built-in to prevent the 'grasshopper' mentality of some investors - those businesses that hop from one location to the next in search of better and better incentives.
This is being achieved in three key ways: shifting the emphasis from demand-side to supply-side schemes; placing more stress on critical infrastructure than on spatial requirements; and widening the scope of the package to include non-traditional recipients, such as the information, communication and technology sector, and tourism investors.
On the second point, it appears that government has learned its lessons from apartheid failures with regard to promoting business development using territory, rather than an economic rationale, as the basis for incentives. Under the previous regime, a number of businesses sprang up in and around the former homelands and closed just as smartly as State support dwindled.
Deloitte & Touche business incentive specialist Pieter du Plessis says much more importance has been attached to the schemes that encourage sustainable enterprise development. Government, he says, has been quite wise in the way it has structured the package, as no project will fly based only on the incentives on offer.
So what is the new package on offer to local and foreign direct investors?
The three incentives that were announced last year include the Small and Medium Enterprise Development Programme (SMEDP), the Skills Support Programme (SSP) and the Critical Infrastructure Programme (CIP), while those announced in the Budget were an incentive for strategic projects over R100-million and a wage incentive.
The SMEDP, which is now viewed as the flagship incentive for small and medium business, could provide significant impetus to investment of less than R100-million.
Du Plessis also believes that, by raising the threshold to R100-million, government has taken cognisance of the fact that it is really only investments of that size that have the critical mass to encourage job-creation spin-offs.
In effect, SMEDP provides for a tax-free grant paid out quarterly over three years. The support is based on a sliding schedule, providing for 10% a year for projects of less than R5-million; 6% a year for projects with a value of between R5-million and R15-million; 4% for projects between R15-million and R30-million; 3% for projects of between R30-million and R50-million; 2% for developments between R50-million and R75-million; and 1% for projects in the R75-million to R100-million range.
The entire scheme is subject to a number of qualifying criteria, including: a labour-usage criteria of 30% labour value-added and an increase in the values of production equipment and turnover. Under the scheme, a foreign investment grant is also available to companies relocating new equipment to South Africa - the specification of new equipment emphasises that government is keen to encourage business that can be sustained beyond the period of the incentive.
The grant is also subject to annual review and it is estimated that the programme will cost the fiscus about R1-billion after three years.
The SSP, for its part, is a joint initiative between DTI and the Labour Department, designed to close the skills gap in the economy through facilitating the skills levy.
Government has made it possible for money raised from the skills levy to be directed to the National Skills Fund, which will provide the funding mechanism for the SSP. It can cover up to half of the operating costs of skills training for three years. The grant, which is paid on a performance basis, will be capped at 30% of the annual wage bill and requires an approved training programme. The scheme also makes provision for a capital grant of up to R3-million for the creation of new training facilities, and a further grant of up to R3-million for the development of training courses.
The CIP scheme, meanwhile, applies to new projects or expansions worth more than R100-million where infrastructure is required. It is available to the private sector as well as municipalities. It is likely that government will aim to use CIP to subsidise the creation of that infrastructure, particularly in the proposed Industrial Development Zones (IDZs), which it will do to the tune of up to 30% of overall cost.
Manuel's announcement, meanwhile, involves a tax incentive for companies embarking on approved strategic industrial projects and an amendment to tax depreciation rules for small businesses in the manufacturing sector.
He has stated that R3-billion would be set aside over the next four years for incentives targeting 'strategic' industrial projects which meet agreed criteria, particularly job creation. It appears that a tax allowance of either 50% or 100% of an approved investment will be granted to companies undertaking strategic projects. The allowance will be calculated with reference to the cost of the investment undertaken. The National Treasury, South African Revenue Services (Sars) and DTI will finalise the details of these incentives before the end of the month, including the criteria against which projects must be assessed.
This incentive for strategic projects is expected to dovetail with the CIP scheme.
Manuel also announced a R600-million wage incentive to encourage job creation by reducing the cost of hiring new workers and of offering learnerships. Sars and the National Treasury will develop a tax measure over the next few months, which government hopes to introduce from October.
Du Plessis says the incentives should be welcomed by business, but he warns that companies should not forget about some of the existing schemes, which may be more applicable to their businesses.
There are between 30 and 40 of these incentives available, ranging from incentives for basic research, administered by the Department of Arts, Culture, Science and Technology, through to export promotion schemes, as well as a plethora of incentives in between.
A key challenge for government now will be to market and administer both the old and new incentive packages in a way that supports local business and promotes foreign investment. To support this process, DTI has set up a new division, known as the Enterprise Organisation, to administer the schemes.
Medical practitioner Dr Mahlape Mohale has been appointed to head up the agency, which has the single largest budget of all divisions within DTI of about R700-million a year; much of this budget currently goes unspent.
Mohale is already on record as saying that significant operational changes to the way the schemes are administered will be made in the coming months.
She says she plans to simplify and consolidate the schemes where possible, promising greater interaction with the private sector as well as far-reaching marketing of the schemes.
The Enterprise Organisation will also be revising application forms, as well as revamping its information technology systems to improve the flow of information and to speed up the disbursement of incentives.
In the final analysis, it appears that government has gone some way on paper to incentivise business.
It is now up to government to market and implement the plans effectively and for business to be pro- active in pursuing the opportunities the incentives present.

Publisher: Engineering News
Source: Engineering News
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