Incentive Schemes of Department of Trade and Industry

Meeting report

Incentive Schemes: Department of Trade and Industry(dti) briefing
Mr Tumelo Chipfupa, Deputy Director General, The Enterprise Organisation, Department of Trade and Industry said that The Enterprise Organisation (TEO) was where most of the Department of Trade and Industry’s (dti or the Department) incentives were done. Of the Department’s R18 billion in total resources, R9 billion went towards incentives. The funding for incentives did not include some their programmes that were off-budget such as the Motor Industry Development Programme, as well as some of the tax incentives that were planned. TEO’s mission was to stimulate and facilitate the development of sustainable and competitive enterprises by providing effective and accessible incentive measures that supported national priorities. Its medium-term strategy was to continue providing incentives to support enterprise development, competitiveness, investment, job creation and exports. It had been looking at amending the rules governing its incentives in order to accommodate firms in distress. Another objective was to focus on efficiency of administration, and ensuring that it developed a good management information system which would enable it to account properly for the resources devoted to the Department. The outcomes it hoped to achieve from its resources were increased investment and growth of sustainable and competitive enterprises, job increases and increased participation by Small, Micro  and Medium Enterprises (SMMEs), black-owned enterprises, women and rural enterprises.

Some of the incentives, such as the Small Medium Enterprise Development Programme, Strategic Industrial Projects and Staple Food Fortification Programme, were no longer offered to industry. Where TEO had made commitments to fund, it did so. It also continually monitored whether firms were meeting the obligations they undertook to the Department in order to obtain the grant.

With regard to broadening participation, the aim was to promote broader economic participation in the economy through the provision of incentive support measures. The reasons for some of the market failures had been identified. These included the fact that, owing to South Africa’s history, there was limited participation in the economy by previously disadvantaged individuals, the marginalisation of certain regions in the mainstream of the industrial economy, the low contribution to the Gross Domestic Product (GDP) by SMMEs, especially when compared to other emerging economies, and limited support for SMME development.

One the incentives offered was the Black Business Supplier Development Programme, which was provided to small black enterprises in order to assist with training, software acquisition and marketing material. The maximum funding here was R100 000. Since 2002, 6 409 enterprises had been assisted. Most of these enterprises were located in Gauteng, as those in more remote areas had found it difficult to access these services. In order to redress this, TEO had decided to place more focus on enterprises that had shown growth and where it felt these enterprises could be integrated into the value chains of the industries. Responsibility for those enterprises that still required a lot of development work would, as of 1 April 2010, be shifted to the Small Enterprise Development Agency (SEDA) as it had a broad network within the provinces. It was therefore much better placed to access smaller enterprises.

Another programme was the Cooperatives Incentive Scheme, which started off as a pilot scheme in 2006 but only became effective in 2008. This focused on small co-operatives and was a 90:10 cost-sharing grant with the maximum funding being R300 0000. As this programme was more focussed on rural areas there was a much more even spread provincially. Since KwaZulu-Natal and the Eastern Cape were active in terms of co-operatives, the Department was able to do more with this scheme in those provinces. Another reason for these successes was the fact that the Department had partnerships with economic departments in those provinces. Agriculture was a sector that saw a lot more success.

The Export Marketing and Investment Assistance (EMIA) scheme aimed to expose emerging enterprises with export potential to export markets. TEO also had investment schemes in the Service Sector. Here the focus was placed on those services that were internationally tradable. The incentives here included the Business Process Outsourcing and Off-shoring (BPO&O) scheme, the Film &TV Production Incentive Support Programme and the Tourism Support Programme (TSP). In terms of BPO&O, assistance was provided to companies that exported back-office services to companies located abroad. The actual grant for which a company would qualify would depend on the investment as well as the number of jobs that were created. Since the scheme was launched in 2006 more than 20 projects had been approved. Over the period in which these companies would be receiving government support, they would have created more than 21 625 jobs. As the five-year target was set at 25 000 jobs, the Department felt it was already ahead of target. In addition, as the job multiplier in this scheme was four, it estimated that this scheme would create 100 000 jobs. The scheme had been helpful in attracting major multinationals from Europe, the United States and India to start business operations in South Africa. Because international companies would focus on those cities in which there was good infrastructure, most of the approved projects were found in major metropolitan areas such as the Western Cape, KwaZulu-Natal and Gauteng. The Minister had designated 22 rural areas in which the requirements for companies wishing to locate their businesses there were relaxed. Projects that were started in the Northern Cape, Limpopo and North West came about as a result of this relaxation.

The Film & TV Production incentive offered a 15% rebate to foreign companies that produced and shot film or television productions in South Africa. The scheme was amended in 2008 to create a separate window for South African productions – especially smaller ones – which were offered a cash rebate of between 25% and 35% of production costs. Most productions had occurred in the Western Cape, Gauteng and Mpumalanga as these were provinces that had prioritised film as an industry. Though the jobs these productions created were not of a full-time nature, they did contribute to skills development in South Africa.

With the Tourism Support Programme, tourism enterprises that were investing in new businesses or expanding their current businesses were able to qualify for a cash grant of between 15 and 30% of money they were investing. For small enterprises these grants were paid over a three-year period. Since the launch of the scheme in 2008, 44 applications had been approved with a total grant commitment of R102.5 million, leveraging 929 jobs. The scheme placed emphasis on areas outside of Cape Town, Johannesburg and Durban as these areas already had well-developed tourist markets. The aim of the scheme was to promote job-creation outside of the main metropolitan areas. As 64% of projects which had been approved were SMMEs, this scheme assisted the Department in fulfilling its mandate of promoting SMMEs.

Although the Small and Medium Enterprise Development Programme (SMEDP) was a programme that ran from 2000 to 2006, a significant part of the Department’s budget went to paying companies which it had approved under this programme.
 
The Enterprise Investment Programme differed from the SMEDP in that a strong focus was placed on whether investments were supporting the national industrial policy framework. In order to qualify companies also had to be either in one of the lead sectors, create a fair amount of jobs, and/or be Black Economic Empowerment (BEE) compliant. Since launching in August 2009, the scheme had approved projects which would yield a projected 4 991 jobs. Though most of the projects approved (51%) were for medium-sized enterprises, a fair amount (34%) were for SMEs.

In areas where there was not sufficient infrastructure, the Department’s Critical Infrastructure Programme (CIP) provided a cost-sharing grant which would entail the establishment of a private-sector project. Since its inception, the CIP had approved 36 programmes. Mining had been a major beneficiary of the CIP as the scheme had an impact mostly in rural provinces.

The Industrial Development Zones (IDZ) programme was a negotiated programme similar to Export Processing Zones, though, unlike in these zones, the incentives offered in IDZs were limited. Firms here would also have to remain within the regulatory framework around labour and environment. Firms wanting to locate to an IDZ would be able to locate to an area called a Customs Controlled Area. The company was then able to import all of its equipment and other inputs duty-free, provided that it exported 80% of its output. IDZs had to be located next to a port. There also had to be a plan by either the municipality or province to develop that area as an export-oriented cluster. To date, four IDZ clusters had been designated by the Minister. The IDZ programme had experienced a number of challenges, such as poor coordination between relevant stakeholders, a weak policy and legislative framework, poor institutional arrangements, inadequate funding models and slow attraction of investors. The Department had been working on addressing these challenges by: speaking to the different provinces; looking at how other countries were managing their programmes and developing an action plan looking at policy development.
Export Marketing and Investment Assistance (EMIA) was a cost-sharing grant which allowed SMEs to exhibit in and explore international markets. With this scheme, typically, 100% of the costs of smaller businesses were covered, while 50% of larger businesses’ costs were covered. Through the Sector Specific Assistance Scheme (SSAS), industry was encouraged to work in clusters towards addressing the challenges. Once a group had identified a particular challenge, the Department was then able to cost-share working on a project with the cluster in order to address this. The Capital Projects Feasibility Programme aimed at getting companies involved in the capital goods sector to do feasibility assessments of major projects both across the rest of Africa as well as abroad. The intended result was an increase in the export of South African capital goods.
 
Dr Johannes Potgieter, Chief Director: Innovation and Technology, dti, said that the dti had three technology programmes which directly supported innovation with industry. These were the Technology and Human Resources and Industry Programme (THRIP), the Support Programme for Industrial Innovation (SPII) and the SEDA Technology Programme. The objective of THRIP was to develop new technologies at research institutions and councils. It was also important that there were students involved in the developing of these new technologies. The target for this programme was black and female students. Tertiary education institutions, science councils and SMEs were also involved.

The SPII programme was set up to promote research and development technology innovation. With this programme the research was done at the private sector research and development laboratory. This programme had three offerings: the Matching Scheme, which offered 50 – 75% of direct development costs, the Product Development Scheme for smaller enterprises, which offered a grant of between 50 -85%; and the Partnership Scheme for larger companies, in which the grant was 50% of direct costs.

The SEDA Technology Programme was a programme aimed at broadening participation of new SMMEs in finalising the development of their technologies. This was done through technology incubators, which he explained as areas of space where a small and/or newly created enterprise could get office space and support at subsidised rates to ensure that its technologies were market-ready.

Since 2008 there had been a decline in the total number of companies participating in the THRIP programme. This decline was expected to continue for 2009. A possible reason for this was the current economic climate. As this situation would eventually turn around, the Department felt it important to stress the need for continued support of research and development as this would ensure that growth markets could be captured once there was an eventual upswing in the economy. The Department believed THRIP to be successful, as industry had injected R300 million into it, indicating that THRIP was regarded as being important. In order to apply, an industry and specific University or University of Technology came together and decided on the research to be done. Although no particular sector was excluded, there was a multi-criteria decision model. According to this, a higher score would be scored if certain criteria were met, such as whether the industry was in line with dti priorities, number of students, and SMME support.

Dr Potgieter noted that SPII’s performance had shown a growth in local sales. There had also been good export sales. According to a questionnaire sent out to SPII recipients, most companies rated SPII funding as very important to them. The SEDA Technology Programmes performance, too, was viewed as a success, especially in the construction sector, where 100% of the companies supported were from previously disadvantaged groupings.  In addition, over the last year, 126 new SMMEs had been created. In these SMMEs 6 000 jobs had been created.

Mr Mkhululi Mlota, Chief Director: Automotive, dti, said that the Motor Industry Development Programme (MIDP) aimed to support the growth of the motor industry in South Africa through the promotion of rationalisation, promoting exports and the re-integration of the industry into global networks and higher volumes of production.
A key element to the MIDP was tariffs, which had, since the inception of the MIDP, been reduced significantly. Another key element was the duty-free allowance. This was created as certain high-value components were not made in South Africa, since this was not economically viable. There was also the import-export complementation, where participants earned Import Rebate Credit Certificates, based on exported local content. 

Since 2005 the Department had been reviewing the MIDP to ensure that the programme was still relevant and achieved the intended objectives. There had also been an increased pressure towards assuring better alignment with South Africa’s international obligations. This review led to the September 2008 announcement by the Minister of a new national programme called the Automotive Production and Development Programme (APDP). This programme replaced the MIDP, although it also aimed to further expand the vehicle manufacturing industry locally. Though the industry had managed to grow over the years, it still made up less than 1% of the global market.

Under the APDP it was decided to hold the tariff rate at the 2012 level right through to 2020. One of the main criteria for the duty-free allowance (or local assembly allowance) was that a particular plant should produce at least 50 000 units. Replacing the import-export complementation was the production incentive. Under the APDP the rebate certificates would be earned on the basis of production. The investment support scheme (referred to previously as the automotive investment scheme) would also encourage higher volumes of production. Although challenges still remained, production and export levels had increased since the introduction of MIDP production. There had also been a steady increase in investment as well as a steady level of employment.

Discussion
Mr A Van der Westhuizen (DA) asked what the effects were of these investments and support schemes, and asked if the Department had done any sustainability studies.

Mr Chipfupa answered that the Department had compiled a number of studies looking at the impact of these programmes. The Department would include these studies’ findings in a more detailed report that it intended handing to members of the Committee.

Ms C Kotsi (COPE) asked how, in view of the job losses in the Western Cape’s clothing manufacturing sector, the dti assisted experienced workers who had been retrenched in establishing cooperatives in which their skills could be utilised. She also asked what was being done for rural provinces. She further enquired whether Government had any say in the fact that senior managers in the automotive industry gave themselves big bonuses.

Mr Chipfupa replied that the clothing manufacturing industry had been a challenge for the Department. It had also been an industry to which dti had provided a lot of support. Grants were also made available for the industry to upgrade. The Department was assisting people in the cooperatives sector to start their own businesses. This also assisted people in this industry who had lost their jobs. The Department did not, however, have a programme that specifically targeted retrenched workers. It had been working with provinces and local organisations, as these had a better idea as to the needs of specific areas. There could, however, be greater pro-activity from the Department towards addressing this issue. Because industry was clustered around particular urban centres, these areas had an advantage when it came to attracting new investment. Provinces could play an active role in trying to attract certain types of investment. With continued discussions with different provinces, the Department was hoping to see an uptake of its instruments in those provinces.

Mr Mlota added that the area of management remuneration was not an area that the Department specifically looked into. The sector would, however, look at committing to not paying out undue bonuses to senior management.

Mr S Marais (DA) asked whether the number of IDZs could not be expanded. He further enquired where the incentives announced by Minister Patel were to be implemented and applied.
 
Mr Chipfupa answered that here too the provinces had a big role to play. The Department did interact with provinces, though part of the initiative had to come from provinces themselves. He asked for more clarity as to which particular incentive programme Mr Marais was referring to, as the Minister had spoken about numerous incentive programmes.

Mr B Turok (ANC) said that research and development needed to be prioritised. He also asked how all of these schemes impacted on the value chain. He recommended that an expert - preferably from the private sector – should analyse this presentation.

Mr Chipfupa said that the Department was more and more concerned with adding to the value chain. This it was doing by, for example, looking at research and development and job-creation, and was slowly moving in that direction. Some of the Department’s most difficult discussions with industry had been around this topic and the Department would welcome further engagement with the Committee.

The Chairperson said that, although there were a lot of good intentions, the presentation was not as integrated as it should be. She asked how many applications were received and approved

Mr Potgieter answered that for the THRIP programme the approval rate for applications received stood at 75%. For the SPII programme it ranged between 50 and 80%.
  
Mr Turok asked what the Department’s view was of the import of luxury cars.

Mr Chipfupa answered that imports and exports were governed by trade agreements South Africa had entered into.
 
The Chairperson asked whether the number of models of imported luxury cars could not be reduced.

Mr Mlota answered that the Department would support initiatives that encouraged consumers to ‘buy down’. Though the number of models on offer was of concern, it provided more choice and therefore stimulated competition.

Mr Z Mabaso (ANC) asked to what degree there was support between municipalities and government departments in providing water, electricity and other services. He noted that this presentation did not always reflect what was happening on the ground. He asked to what degree the Department would monitor, evaluate and support. There were areas that were once producing certain goods but failed to increase the production of these goods, and he enquired what the Department was doing to re-stimulate these growth areas. He further asked why the Department did not fund workshops for people of slender means.

Mr Chipfupa answered that emerging cooperatives were a risky area, in that certain projects might not, at first, succeed. It was therefore important for the Department to have a strong monitoring and evaluating process in place. It was also important to learn from the failures it was likely to experience. With cooperatives, he agreed that providing training and other non-financial assistance was important. The Department did not have a strong programme focussing on the redevelopment of areas that had once seen strong growth, though this issue had been under discussion. The Department did hold workshops that people were invited to attend. He asked Mr Mabaso to send him more information on specific areas that he wished to query.

Ms Kotsi asked how broad-based the incentives were, which people would be referred to Khula Direct and how the Department would incentivise logistics.
 
Mr Chipfupa answered that the Department had no direct subsidy for logistics costs for industry. The Department understood that Khula was about to approach small businesses directly and no longer work through banks or retail financial intermediaries as it was currently doing. The Department did target small black-owned businesses. It also took into consideration whether firms assisted with enterprise development and broad-based black economic empowerment.

The meeting was adjourned.