Strategic Industrial Projects, Thrip and Spii Programmes: Department briefing

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
13 June 2007
STRATEGIC INDUSTRIAL PROJECTS, THRIP AND SPII PROGRAMMES: DEPARTMENT BRIEFING

Acting Chairperson: Mr D Oliphant

Documents handed out:
Briefing on Strategic Industrial Projects (SIP)
Presentation to the Portfolio Committee on Trade and Industry on the THRIP and SPII Technology Programmes
 
Audio Recording of the Meeting

SUMMARY
The Department of Trade and Industry briefed the Committee on its Strategic Industrial Projects. The Department noted that Strategic Industrial Projects were encouraged by Section 12G of the Income Tax Act, which gave an additional industrial investment allowance of R10 billion before tax, and this had applied from 1 August 2001 to 31 July 2005. The qualifying industry sectors were manufacturing, computer and research and development activities. The mandatory requirements and the point system were set out and explained. There were currently 25 projects, with investment of R9.8 billion, involving 12 018 jobs. A review of the Projects had been conducted in February 2004, and the results were tabled. Although only a small percentage had applied, these were mostly from the chemicals and metals sectors, were local investors, mostly capital-intensive and showed positive results. The design, processes and reporting safeguards were independently judged as sound. Members asked questions on the applicable allowances, the point system, agro-processing involvement, the reason for so few foreign direct investments, how projects related to the second economy. The Department emphasised that this Project was never intended as a main intervention into the second economy but focused instead of job creation. Members criticised the projects as not being applicable to rural or township areas and not sufficiently benefiting the marginalised communities. They asked for concrete examples of future programmes, and asked also for clarity on the local investors, on job creation and the need to stress training. .

The Department then briefed the Committee on the three schemes employed by the Support Programme for Industrial Innovation, being the Matching Scheme, the Partnership Scheme and the Product Process Development Scheme. The statistics for each were tabled and explained. The scope and findings of the external reviews were tabled. The Technology and Human Resources for Industry Programme was then explained. It was noted that this was administered by the National Research Fund and guided by an advisory Board. It operated on a cost sharing basis with industry and supported research collaboration focusing on technology needs of participating firms. It aimed to improve competitiveness by supporting research and development and enhance the quality and quantity of appropriately skilled researchers, particularly emphasising black and female students following technological and engineering careers. IT aimed to pass knowledge down to the small enterprise sector. The ratios and statistics were outlined. A review of the programme had recommended its retention, under a single body, and participation by small enterprises should be encouraged. Some suggestions were made to improve disbursement of funds. Specific projects of Bread for Africa, which aimed to develop a brown bread that was more affordable, with less sodium to decrease blood pressure, and Changing the Face of Crime, to identify suspicious internet behaviour, were described. Members expressed their appreciation of the programmes, asked for comparison with other international programmes, noted that they seemed to be supportive of black empowerment and hoped they could extend to rural areas. The Department explained that there were other priorities besides job creation, and establishing linkages was a prime feature. The geographical spread was questioned.

MINUTES
Briefing on Strategic Industrial Projects (SIP) by Department of Trade and Industry (dti)
Ms Francisca Strauss, Chief Director, The Enterprise Organization, Department of Trade and Industry, briefed the committee on Strategic Industrial Projects (SIP). She noted that these were encouraged by Section 12G of the Income Tax Act, which gave an additional industrial investment allowance of R10 billion before tax, and this had applied from 1 August 2001 to 31 July 2005. The qualifying industry sectors were manufacturing, computer and research and development activities. The mandatory requirements included investment in new qualifying assets of more than R50million, no substantial displacement to production or jobs, long term commercial viability, and promotion of employment and production. Companies receiving the benefit could not be benefiting at the same time from other incentives. The point system was tabled and explained. The administrative process was set out, and it was noted that this included a recommendation by Adjudication Committee, approval by the Minister of Trade and Industry and publication in the Gazette. Graphs on approvals by sector, provincial breakdown and types of projects were tabled. There were currently 25 projects established, with investment of R9.8 billion, involving 12 018 jobs. Special mention was made of the monitoring-processes and the fact that processes were linked to specific time frames.

Mr Godfrey Mashamba, Director, The Enterprise Organization, dti, reported that a review of the SIP had been conducted in February 2004. This had examined perceptions on marketing and promotion of SIP, the impact of SIP on investment decisions of firms, an assessment of the suitability of the selection criteria and perceptions around administrative processes. It was found that only seven of the eligible 38 projects applied, most being from the chemicals and metal sectors, which matched the industrial upgrade criteria. Most were local investors who could exploit the tax allowance soon after project implementation. SIP had influenced the investment decisions of 66% of projects. It attracted more capital-intensive than labour-intensive projects, because of the minimum R50 million investment requirement. In the long term the additional tax revenue to be received from SIP projects would more than compensate for the short-term allowance. Further investigations needed to be done as follow-ups. Further incentives could be structured differently. Independent studies had concluded that SIP was sound in design, had transparent processes and there were adequate reporting safeguards, including regular reporting to Parliament.

Discussion
Mr L Labuschagne (DA) asked for clarity in regards to the R600 million applicable allowances for companies qualifying through gaining six or more points being gained and asked how the taxation system worked in practice

Prof B Turok (ANC) wanted to know the difference between the current scheme and the previous income tax deduction scheme.

Ms Strauss explained that the allowance was deductible from the taxable income of a company, thereby decreasing it. In referring to Section 37(e) of the Income Tax Act she commented that this was known a “tax holiday” which meant that after the tax was calculated no tax was payable for a period of six years. An allowance was easier to control and also to determine what the cost to government was. Although the act only referred to R10 billion of additional Industrial Investment Allowance, Government in fact would forgo 29% of the R10 Billion.

Prof Turok commented that agro-processing was a very high priority for the government and wanted to know why there was so little mention of this in the report.

Prof Turok enquired why SIP only attracted three out of nineteen Foreign Direct Investments (FDI).

Ms Strauss commented that when a company was approved under the Greenfields projects it was given four years in which to establish. On average it would take another three years to become profitable and by that time the amount of allowance received might not make it worthwhile. She conceded that was an issue that needed to be revised.

Mr Mashamba noted that statistically 28% of grants went into these projects, and in fact they received the largest support.

Ms F Mohammed (ANC) asked for an explanation of how the point system was determined. She enquired how many black people were using the facility, and asked how effective the SID advocacy was in filtering its information to grassroots level.

Ms M.B Ntuli (ANC) enquired whether objectives were being met, and how many of the local investors that SIP intended to encourage were in rural and disadvantaged areas. She also asked for a geographic spread of the upgrading of industries. It was her impression that few of the projects run by the dti benefited the previously disadvantaged and she asked how projects by SIP related to the second economy.

Mr Mashamba highlighted that was important to look at SIP not in isolation but as part of a package of industrial support measures, which included projects such as the Small and Medium Enterprise (SME) Development Programme. SIP was never intended to be the main intervention into the second economy but should be seen alongside other small business initiatives. He emphasised that in SIP’s programme design a huge weight was given to job-creation, and the point-scoring was designed to promote issues such as job creation by giving high scorings to companies that made these issues a priority.

Ms N Khunou (ANC) asked for elaboration why only seven out of the eligible projects had applied.

Ms Khunou asked how small companies would benefit, as SIP seemed to attract more capital-intensive than labour-intensive projects.

Mr Mashamba gave the example of a project in Port Elizabeth where an investment of R21 billion had had a huge impact on the whole area and surrounding cities by creating jobs and benefiting certain SMMEs. SIP was intended to have an indirect impact on the second economy and was not a direct initiative for it. SIP also had no explicit requirements for black economic empowerment (BEE) but in many of the projects there had been a very strong BEE participation.

Ms Khunou wanted to know why investments were especially low in the Limpopo and Northern Cape regions.

Mr Ebrahim Baloyi, Director, Innovation and technology, dti, commented that the nature of manufacturing industry mainly seemed to be focused in the Western Cape, Natal and in Gauteng but highlighted that other provinces had also received projects.

Mr D Oliphant (ANC) reminded the delegates from the dti that the constituencies represented in this Committee were mostly rural and poor people and that it was worrisome that very little mention was made in regard to rural development.

Mr S Rasmeni (ANC) agreed with this comment.

Dr P Rabie (DA) asked dti to give concrete examples, when referring to Future Tax Incentives Programme, of how it could improve on present tax incentive schemes so as to encourage further FDIs.

Mr Rasmeni wanted to know whether the period 1 August 2001 to 31 July 2005 was the timeframe in which SIP operated, and if Activities ceased thereafter. He also asked how the projects approved by SIP impacted on procurement by SMMEs.

Mr J Maake (ANC) commented that given that SIP was capital intensive, did not encourage job creation, did not seem accessible to SMMEs and did not have a good ratio of foreign investment. He queried therefore what its real benefits were.

Mr Maake asked which local investors were referred to in the report.
 
Mr S Njikelana (ANC) wanted to know whether the SIP project had or tried to achieve labour-intensive downstream beneficiation.

Prof E Chang (IFP) asked for clarity as on job creation pertaining to projects within SIP.

Prof Turok commented that in light of the tax rebate training should be an imperative of SIP, and compulsory implementation of all industries' training programmes was needed.

Mr Baloyi conceded that training was an area that needed much improvement. I

Prof Turok warned against getting issues mixed up and said that there was no reason to object to capital-intensive enterprises, as South Africa needed these to manufacture machines. However, the linkage between the capital-intensive projects and the rest of the economy must be made clear by SIP. It should also be clarified how SIP aimed to build capital schemes into the second economy. He would also like it clarified why the FDI component was so small.

Mr Baloyi commented that the design of some of the schemes and projects tended to discriminate against FDIs but added that a team was established that, in conjunction with the National Treasury, would address this issue.

Mr D Oliphant (ANC) agreed that there was no opposition to capital-investment but that a clear link to the second economy and other issues was needed.

Mr Baloyi acknowledged that the report tended to be mechanical in nature without showing linkages to policies such as BEE. He accepted the criticism of the Committee. He commented that in future a conscious attempt would be made to show the linkages.

Mr D Oliphant (ANC) reiterated his concern that the projects by SIP seemed to be unfair towards the marginalised population. He asked the delegation to make a serious effort to address this issue.

Ms M Ntuli (ANC) requested the delegates to return with programmes designed to benefit such marginalised people, particularly in light of the closure of many small factories.

Technology and Human Resources for Industry Programme (THRIP) and Support Programme for Industrial Innovation (SPII): Briefing by Innovation Technology, dti
Mr Johannes Potgieter, Chief Director, Innovation Technology, dti, gave a concise description of three Schemes employed by the Support Program for Industrial Innovation (SPII). These were the Matching Scheme, the Partnership Scheme and the Product Process Development Scheme. Each was described in depth and the terms outlined (see presentation). Each related to grants paid on costs incurred in development activity. The costs related to direct labour, direct material, direct subcontracting, prop rata portion of capital and patents.

Mr Potgieter also tabled and explained statistics on the geographic locations of the SPII programmes, their impact and contribution to key economic factors, and the meeting of development objectives.

Mr Potgieter commented that there had been an external review of SPII in 2006, and recommendations were made by the World Bank. These pointed out that the project was making a substantial contribution to small enterprises and innovation and should be maintained. It was felt that there was need for a single body to oversee programmes, that support was needed for technological platforms and that the accessibility and response time should be improved. The World Bank Report had indicated that SPII was one of the best performers. Mr Potgieter also made special mention of two specific projects namely: Cell Power and Blackstone Tech (Pty) Ltd. Cell Power created business opportunities in the community where municipalities would use people from the community to sell prepaid services. This was creating combined turnover of nearly R3 million a month. The Blackstone Tech enterprise was manufacturing light and strong wheels with no joins or bonds, made from carbon fibre. Mr Potgieter then reported to the Committee on Technology and Human Resources for Industry Programme (THRIP). It was noted that this was administered by the National Research Fund and guided by an advisory Board. It operated on a cost sharing basis with industry and supported research collaboration focusing on technology needs of participating firms. It aimed to improve competitiveness by supporting research and development and enhance the quality and quantity of appropriately skilled researchers, particularly emphasising black and female students following technological and engineering careers. It aimed to pass knowledge down to the small enterprise sector. The ratios and statistics were outlined. A review of the programme had recommenced its retention, under a single body, and participation by small enterprises should be encouraged. Some suggestions were made to improve disbursement of funds. Specific projects of Bread for Africa, which aimed to develop a brown bread that was more affordable, with less sodium to decrease blood pressure, and Changing the Face of Crime, to identify suspicious internet behaviour, were described.

Mr Potgieter then tabled and explained statistics on the outputs for 2006/07 (still to be audited), the administration costs, an indication of the industry categories in 2005/06, the funding history and the geographical spread of the programme.

He indicated that the impact could be measured by the number of student graduates employed, which was currently at 3 178 students, or whom 55% were black and 36% female.
 
Discussion
Mr D Oliphant (ANC) expressed appreciation that the presentation seemed to be supportive of BEE.
 
Dr P Rabie (DA) agreed that he was impressed with the presentation. He noted that THRIP was recognised in other countries and asked whether examples of similar projects in other countries could be given.

Mr Johannes Potgieter commented that the status of all programmes was ongoing and government- approved on an annual basis. The projects within SPII and THRIP benchmarked very well with similar schemes currently run in the U.K. and in New Zealand.

Ms Khunou, referring to SPII job creation, expressed her hope that this good initiative would also assist in with small businesses that were faced with closure in rural areas and in the townships.

Ms Ntuli asked who would actually benefit from 50% to 75% SPII grants. On the issue of the Product Process Development Scheme she asked SPII to elaborate how this was implemented. She expressed her concern that dti seemed to benefit more businesses in urban than in rural areas.

Mr D Oliphant (ANC) wanted to know if the geographical spread was by design meant for the rural areas, or if it was partial to the urban areas also. He commented that in many small and rural towns the potential for developing of High-Tech industries was very good, and wanted to know how, through these schemes, investors in these industries could be attracted.

Mr Potgieter said that SPIIs were not implemented only to create jobs but that they had other priorities too. In relation to what was being done for SMMEs he commented that the PPD schemes provided for small companies to actively participate. Linkage played a major role in creating transfer of technologies and knowledge between large and small businesses.

Mr J Maake (ANC) asked the dti to comment on future trends, particularly with reference to SPII geographical locations in Barkly West and the Northern Cape. He wanted to know if in addition to the internal reviews, external reviews were also going to be done.

Mr Potgieter noted that internal-reviews were being done but that DTI also had an established management forum, which would review projects on a regular basis. He added that there was also good interaction with Department of Science and Technology.

Mr Potgieter stated that the report referred to new-schemes, which could be used for existing small-companies. THRIP marketing was part of the larger marketing drive by dti. He could not specifically speak to the question on Barkly West and the Northern Cape as he did not have any information but that would in future give more feedback to the committee on these issues.

The meeting was adjourned.