Incentive Schemes: briefing by Department of Trade and Industry

Meeting report

Incentive Schemes: briefing by the Department of Trade and Industry (DTI)
Mr Lionel October, DTI Director General, noted that the DTI had two types of incentives. One was the industrial incentives to promote the manufacturing sector; this was the Enterprise Investment Programme (which used to be the Small Enterprise Development Programme) and the Automotive Investment Scheme (AIS). The other type of incentive was that of broadening participation such as the Black Business Supply and Development Programme (BBSDP) and the Cooperative Incentives Scheme (CIS). The incentives were having a big impact. The biggest incentive scheme was the AIS; the automotive industry secured R14 billion of committed investment from large automotive companies such as Toyota, Volkswagen, BMW and Mercedes Benz. For the first time the incentives had been extended to the component sector, where the jobs and small businesses were. The other incentive scheme that had a large measure of success was the Business Process Outsourcing Services Incentive. The phone incentive also had a substantial effect, by encouraging an increased number of South African-made phones over the past few years. In terms of budget allocation, incentives were over R4.5 billion and made up almost 70% of the DTI budget. This figure excluded the AIS programme. The bulk of budget went directly to the private sector to stimulate co-investment in the industry. All of the investments were joint ventures between the public and private sector.

Mr Tumelo Chipfupa, Deputy Director General: The Enterprise Organisation, stated that incentives had been grouped into four clusters: broadening participation and competitiveness, services, manufacturing and infrastructure. The focus for the broadening participation incentives was to increase participation by historically disadvantaged individuals in the economy. This aspect had been a growing part of DTI’s work, as most incentives in the past were not reaching marginalized communities and Black entrepreneurs. The idea was to grow existing small Black enterprises and rural enterprises and get them to be part of the mainstream of the economy. The main instruments were the BBSDP, CIS, the Emerging Exporters Development Programme and the Enterprise Investment Programme (EIP) - with a strong emphasis on SMMEs. BBSDP was an 80/20 cost sharing scheme for business development services to assist small Black-owned enterprises with marketing activities and quality improvement. The Department would pay 80% of the development activity and the enterprise would pay 20%. Last year the scheme was expanded to look at things like acquisition of machinery and equipment to improve the productivity of the business. The CIS was a 90/10 cost sharing scheme where the DTI would pay 90% of the cost of an intervention and the co-op would pay 10%. The Emerging Exporters Development Programme gave rural enterprises the opportunity to understand export markets. Relative to other parts of the Department, the budgets were quite small but were growing fast as DTI gained experience working with this market.

Unlike normal DTI incentives, where the concentration was around Kwazulu-Natal, Western Cape and Gauteng, there was a better spread of activities in the CIS. Limpopo accounted for 7% of GDP, but in terms of co-op incentives it only received 27%. Funding towards co-ops could be improved in the Northern Cape by working more closely with provincial and local governments. The approach differed from the usual spread, which focused on the three provinces that made the biggest contribution to GDP.

The BBSD programme had existed since 2002, but was re-worked and re-launched in 2011. Initially most approvals tended to be around Gauteng because many small enterprises came to Johannesburg. The DTI had set up infrastructure in all the nine provinces and trained intermediaries to assist the Department in facilitating applications. Most targeted enterprises were micro-enterprises, however in 2010 the scheme was adjusted to include some of the larger small enterprises. Turnovers were between R250 000 to R35 million. One of the requirements for enterprises receiving funds was that the owner and a manager needed to be working in the business.

Project funding for the Emerging Exporters Scheme took emerging exporters and exposed them to external markets. DTI worked with export councils, industry associations and municipalities. Typically a municipality would connect a micro-enterprise with the DTI and the Department would pay for the cost of taking an entrepreneur to an exhibition overseas or locally.

DTI’s work in the services industry was mainly around job creation, both domestically and in terms of exporting services - a growing part of international trade. The instruments were the Business Process Services (BPS), Film and Television and the Tourism Support Programme. The scheme had been reworked so that the incentive amount a South African company received was directly related to the number of jobs created. The BPS Scheme targeted 30 000 jobs and DTI had applications approved over the next three years that would create over 15 000 jobs. The Film and Television incentive was initially focused on bringing international films to South Africa, but the scheme was amended to focus heavily on developing the local film industry. The Tourism Support Programme took a deliberate decision not to focus on projects in metropolitan markets such as Johannesburg, Cape Town and Durban that were already saturated.

Manufacturing consumed most of the DTI budget. The idea was to support the DTI Industrial Policy Action Plan (IPAP) and focus on job creation, value addition and increased productive capacity in the manufacturing industry. Key programmes were the Manufacturing Investment Programme (MIP), the Critical Infrastructure Programme (CIP), Industrial Development Zones (IDZs), Automotive Investment Scheme (AIS) and the Investment and Training Allowance (12-I). 12-I was launched as a tax incentive that did not provide cash grants, but DTI approved companies investing between R30 million and R1.5 billion were able to claim an additional allowance saving significantly on tax. 12-I focused mostly on industrial upgrading and promoting new capacity in manufacturing. The focus was on energy efficiency, process innovations, improving production time, reducing production costs, improving quality and creating employment in IDZs. DTI launched the programme in December 2010 and had approved five projects with a total of R4.3 billion in capital investment. Most of the projects were in agro-processing, chemicals and metals.

The EIP and MIP offered grants of between 15-30% of qualifying investment for first time Foreign Direct Investors (FDI) in South Africa. DTI was also able to offer a rebate of 15% on the transportation costs of machinery. The AIS gave a capital grant for auto manufacturers and assemblers. Most of the grants in the MIP programme were in Gauteng, Western Cape and Kwazulu-Natal because this was where the manufacturing engine of the country was located and where most of the investment took place. Of the companies receiving investment, most tended to be in the sectors of agro-processing, capital equipment and metal and chemicals. Of the total investment of R10 billion DTI hoped to get on approval, 35% of the investment was in place, 14% of the grant had been paid and 43% of the job creation was in place. DTI disbursed the grant as the investment and the job creation took place.

The objectives of the Critical Infrastructure Programme (CIP) were to reduce the costs of logistics and infrastructure, as well as to provide skills development. CIP was a 70/30 cost sharing grant, where the company, municipality or province would pay 70% of developing the infrastructure and the DTI would pay 30% towards the cost of the infrastructure. Examples of such projects included setting up an electrical grid or building a road. The scheme had supported 42 projects in 10 years worth of work with an investment value of R88 billion. The grants DTI had approved totalled nearly R1 billion. Total infrastructure and development costs were R5.3 billion. The CIP had a good provincial spread. Since most projects located in rural areas would struggle to get infrastructure, seven projects were purposely located in the North West, three projects in Limpopo, six projects in Mpumalanga, and four projects in the Northern Cape.

Other incentives focused on competitiveness promotion. The idea was to perform industrial upgrading and to promote exports. These programmes were the Export Marketing and Investment Assistance (EMIA) Programme, the Sector Specific Assistance Scheme (SSAS), and the Capital Projects Feasibility Programme. The Capital Project Feasibility Programme provided South African engineering companies with an incentive to perform feasibility studies in Africa. If a project went ahead, then South African manufacturers would supply the capital goods to the project.

Mr October mentioned that the briefing did not deal with the IDZs, because DTI would ask for permission to do a special presentation surrounding the new legislation being introduced concerning IDZs.

Discussion
M B Mnguni (ANC: Free State) registered his “toyi toying” that Free State was only getting 1% approval. He asked about the Tourism programme and remarked that provinces that were receiving more support were contributing more to the GDP. It was unfair that DTI was supporting the provinces that were doing well in tourism as opposed to those not doing well. There were lots of activities and tourist sites in the Free State and Northern Cape that could be developed with some funding. Also did the Critical Infrastructure Programme address the logistics in the Free State. How could the Department help facilitate foreign investment in the Free State?

Mr K Sinclair (COPE: Northern Cape) stated that the idea of incentives programmes was fine, but lamented that without clearer direction from the political leadership about “getting out of this mould” there would not be progress. 75% of allocations went to the ‘golden triangle’ of Gauteng, Western Cape and Kwazulu-Natal. In order to grow the economy of the broader South Africa, programmes needed to be expanded to the other six provinces. For example the government decided that the State Diamond Trader needed to be set up in Johannesburg but the primary position for the State Diamond Trader should be Kimberely where the diamonds were sourced. The poverty levels and unemployment were killing our people in the rural areas and the DTI needed a different approach with the grants so as to get to the places where infrastructure and jobs were needed.  He stated that once an entrepreneur or enterprise engaged the government, it took two years to see an effect. The Department needed to work on improving the turnaround time. Transformation of society and industry was an issue. If you tried to get a Black owner to own a petrol garage it would be a logistical nightmare because people did not have collateral to put down a deposit for a garage. This resulted in business partners funding White companies because they had the credit rating to be successful in the industry. In terms of grants, it was necessary for the DTI to have a package approach as the instruments were there. He stated that 12-I was a difficult programme to access. The people said that this was not a new incentive and it was not effective to roll out. He pleaded that incentives were made accessible and effective to engage with.

Ms E Van Lingen (DA: Eastern Cape) asked whether the Tourism Support Programme was specifically promoting job creation in non-traditional Tourism clusters or was it concerning rural development.  In addition, she wondered about bulk services such as permanent water for the village of Steytlerville. The project had been approved and the fountain was built, but it needed R66 million to complete the project. Would DTI consider such a project? Under what programme would the boat building industry fall?

Mr F Adams (ANC: Western Cape) thanked the DTI for its leadership. He was worried about the DDG’s comments about the Tourism sector in Western Cape. The Western Cape government was in the process of creating a new Economic Development Agency (EDA). The tourism industry particularly in the Western Cape was still in the hands of the advantaged. The historically disadvantaged people had not been able to access schemes that could assist until the EDA was up and running, even though there were no assurances that the EDA would look at the tourism industry. He expressed concern that the Tourism incentive programme would not focus on the metropolitan areas where entrepreneurs could be created. In the Southern Suburbs of Cape Town there was not one B&B in a historically disadvantaged areas even though tourists were passing them constantly. How could the Department assist in “getting those people off the ground”. With the fishery co-ops, the process was too slow even though SEDA and DTI were working collaboratively. The worrying factor was that small business people do not get a chance to grow.
 
Ms M Dikgale (ANC: Limpopo) noted that Limpopo was not doing well in the project funding for the Emerging Exporters Performance. She asked how participation could be increased among historically disadvantaged peoples to get jobs?

The Chairperson asked if, given the history of co-ops in South Africa, there would there be a different approach? He noted that on broadening participation, there was nothing about disabled people. He also wanted to see the project funding for emerging exporters in rural areas, as two years ago he had requested a list of beneficiaries; and there was a large number of people who could export. The Committee would want to see a list of the beneficiaries of the Tourism Support Programme.

Mr October agreed in a broad sense that more had to be done for the “marginal provinces”. In principle, DTI had experienced some progress in the past two years, but were still not where it wanted it to be. The co-ops and the BBSDP scheme had been growing but the failure rate was highest amongst those businesses. He identified two problems: 1) expanding the programme rapidly 2) high failure rate amongst small businesses and co-ops. The Department needed to look at how support could be expanded, for example, by establishing extension offices where management support for access to machinery and marketing were offered in addition to the loan. DTI was looking at having more staff available for mentoring and direct support.

When helping communities, there were two problems: 1) financing and supply side 2) marketing and the demand side of the economy. Unfortunately, on the advice of the World Bank, the Government took away the agricultural support structures post-1994. There used to be marketing boards to took care of that aspect so that the individual farmer did not have to worry about marketing his product. Hopefully new co-ops introduced ways in which DTI can give support and technical assistance through the extension offices.

In response to the Free State question, DTI had been briefed about two potential IDZs in the Free State. The Harry Smith one had been mentioned. The IDZs used to be very limited, as they had to be linked to an international port or airport. DTI had extended that definition to include Special Economic Zones (SEZs), which do not have to be linked to international ports or airports. So all provinces could have industrial zones to develop and DTI did not have to wait for legislation.

Mr October said the point on the problem of turnaround time was taken. The DTI was putting teams into place that could respond more rapidly to programmes, on a request basis.

In terms of the 12-I scheme, DTI used to have the Strategic Investment Programme Scheme (SIPS), which was a tax-based scheme and Treasury did not extend that programme. The Department believed this new scheme could work as it had been fast with turnaround times for new investments.

On a state level, DTI could focus on sending out its CIP team. Traditionally DTI had focused on manufacturing rather than agriculture. However with the increased demands, the Department had expanded its focus. Social Infrastructure was another department’s work, however if there was an economic link then DTI would connect with the municipalities around relevant issues. 

The only incentives that the DTI had on lending for boat building fell under the IDC. The Department had just added this sector to IPAP to assist with the boat building industry.

DTI had had engagement with the Western Cape and Small Enterprises Development Agency (SEDA) to establish tourism support programmes to support small businesses. The point was taken that the Department needed to increase the response time.

Limpopo was one of the areas where DTI was looking at establishing a Special Economic Zone.

Mr Chipfupa stated that in the metropolises, tourism infrastructure tended to be located in particular areas so Cape Town, Johannesburg and Durban were excluded from the programme. However, if a project was located in a traditionally disadvantaged area such as Soweto or Khayelitsha, then the project could qualify as the Department was aware that there was untapped potential for small enterprises.

Previously the DTI had worked with the boat building industry as such enterprises qualified for the MIP. The boat building industry deserved particular attention now, due to issues surrounding exchange rates. The work on co-ops in the Department was mainly done by the Empowerment division, whereas the Enterprise Organization focused more on enterprise development within the co-ops.

The DTI had not kept statistics on disabled people; therefore it was an area that was a challenge and something to be looked at in the future. The Department had no specific programme for disabled entrepreneurs as it had just begun to move into the market of Black entrepreneurs and co-ops. As it moved into more programmes on economic participation, disabled entrepreneurs was an area that the Department should be looking at.

The Chairperson stated that people with disability were also included in the Black entrepreneur category and should not be treated differently as they formed part of the pool of Black entrepreneurs and should be seen.

Ms Qondani Rwigema, Director of the Business Development Unit, pointed out that the Department had just finished a pilot project on disabled entrepreneurs in Limpopo, Northern Cape and Free State but had not yet reported to the DDG on the outcomes. The responses were overwhelmingly positive.

In response to Mr Adams question about the Tourism Support Programme, the scheme tried to encourage entrepreneurs in this sector to move away from B&Bs and into areas of adventure cultural villages, theme parks and diversified activities packages.  This addressed the concern of transformation because it led to higher capital investment in the sector.

Mr October stated that the DTI would be coming with a new co-op strategy, as a “big push” was needed on this front in order to deal with issues of exclusion, underdevelopment problems and development of rural areas in the agricultural sector. The twin objectives both as a Department and as a country were to expand the industrial and manufacturing base and broadening participation. This was not an either or proposition; the goal was integrated development.

Ms Jodi Scholtz, Group Chief Operating Officer, added that DTI was working on a project on the process around incentive administration and internal processes management limitations. The goal was to establish a system that could extract all of the relevant information. Going forward the information that the Department provided to the Committee would be more robust.

Mr Adams was told in a meeting with Western Cape MEC, Alan Winde, that there was currently no capital for boat building in the Western Cape and the MEC was waiting for funding from National Treasury. This industry was not looking at the historically disadvantaged people in the industry in the Western Cape. How would the Department help such people in the boat building industry to get assistance?

Mr Sinclair asked for more details on a Northern Cape project with a large investment of R15 billion intended to create 6 300 jobs. He stated that the Northern Cape had a development agency that was non-functional for political and capacity reasons. Provincial bottlenecks caused the agency not to move forward. The role of commercial banks as a partner was an issue, as the banks look after their shareholder interests. Commercial banks needed to “come to party” in terms of their corporate investment regarding these incentives and release that money under different criteria then the ordinary lending criteria. He referenced the Capital Projects Feasibility Programme and stated that on principle he had a problem that the DTI would even consider a company going to beneficiate gold in Kyrgyzstan. Could they not do it in South Africa?

Mr Chipfupa responded that the CIP project involved a mining company in the Northern Cape. The DTI provided the road, a bridge and an airstrip. The province was the lead partner in the project and the DTI provided 30% of the grant. He would get an update as to the current status and progress of the project and send that information to Mr Sinclair. He agreed with Mr Sinclair that effectiveness of local government did affect whether the Department projects were able to reach people on the ground.

There had been lots of engagement with the commercial banks and other private sector institutions around funds for corporate social responsibility and funds for enterprise development. The BBSDP did not provide collateral, but the funding for equipment lowered the cost for entrepreneurs. The idea was that the funds could complement what companies put aside for corporate social responsibility and for enterprise development.

The Capital Projects Feasibility Programme would not simply be beneficiating gold in Kyrgyzstan. These were contracts that would most likely have gone ahead without South Africa, so the idea was for South African companies to win these contracts and benefit from them.

Mr Donald Mabusela, Director of EMIA, Co-operatives, responded to the issue of the banks raised by Mr Sinclair by stating that the DTI had met with the Banking Association last year to establish what their appetite was in terms of risk as DTI was introducing the BBSDP. The banks were positive with regards to the 65/35 cost sharing breakdown that DTI had proposed. The problem was that they had not disseminated this information to various provinces and the branches at lower levels so that people could access this. It had been pitched at this level.

Mr October accepted Mr Adams’ point around boat building and stated that DTI would call a meeting on this. The Capital Projects Feasibility Study Programme was for engineering and construction companies with lots of experience. Similarly there were teams working with Brazil as they prepared for the 2014 World Cup as South African companies had shown that they could build world-class stadiums at low costs in record time.

Mr Sinclair stated that there must be a differentiation in the jobs created in the Northern Cape because the R15 billion was a big investment. If this project was related to Kumba it would be problematic because Kumba was declaring enormous profits and this money could be used to greater effect elsewhere. South Africa could not neglect the agricultural sectors as it was the most important industry and was doing better comparatively with the government investment than the automotive industry, which was taking government for “a bit of a ride”.

Mr October responded that the DTI had expanded the amount of incentives in the past three years and the DTI wanted to constantly expand the number of programmes for different sectors of the economy. The country would never develop if it started choosing winners and losers. New areas must be identified.  Agro-processing was an area that needed to be added to - but not at the expense of the automotive industry. South Africa needed to preserve its industrial capacity. Exchange rates were hurting our industries and companies were facing massive cost pressures related to transportation. Government needed to offer more support by giving them a kick-start grant.

Ms B Abrahams (DA:Gauteng) commented on a recent oversight visit in Limpopo to observe a dairy project and an agriculture project that failed because farmers did not get assistance in training. There needed to be support for follow-up as millions had been spent but there were no results.

Ms Dikgale raised the issue of mining, where the DTI was investing a lot of money in creating jobs but the people working in the mines were from Zimbabwe and Lesotho and not from the community. What could be done to monitor this so that these increased investments benefit the people from the community?

The Chairperson stated that the Committee still required answers on the automotive versus agro-processing issue as the tension that Mr Sinclair raised required follow-up on the new approach.

Mr October stated that the Department would follow up on agro processing and how to assist that project. The Department needed to let find solutions to the problems of co-ops and give more and different kinds of support. The problem was not on the supply side but to get producers into chains that they had been historically excluded from. The failure rate among businesses with ten or less employers was 51% so there needed to be a tolerance for turnaround and for failure but there needed to be more monitoring and more skilled LED officers to work with provinces. He thanked the Committee for the feedback on projects and stated that DTI would follow-up to see where improvements could be made.

The meeting was adjourned.