Incentive is a ray of sunshine
27 July 2015
Posted by: Authors: Duane Newman and Mari Wichmann
Authors: Duane Newman and Mari Wichmann (IOL)
It is often tempting to blame the government for anything and everything. From the dog making a mess in the local park to those pesky commuter taxis that just won’t obey the rules of the road. But there are success stories as well.
The Department of Trade and Industry has got it right when it worries about the decline of South Africa’s manufacturing, and it puts a lot of time, effort and money into trying to reverse this decline.
We are not hesitant to point out where things could be better, but it is only fair to give praise where praise is due, and praise is due for an investment tax incentive that goes by the very unsexy title of 12I.
Our comments are timely because a recent report by the Organisation for Economic Co-operation and Development (OECD) report suggested that South Africa should abolish tax incentives on investment, seemingly oblivious to our need to compete for scarce new projects in a fiercely competitive world.
The OECD rationale is that there is little cost-benefit analysis done and they contribute to large differences in effective tax rates. South Africa needs to tread very carefully.
We are in no doubt that 12I is a very good news story, but understandably people are reluctant to probe the fine print of budget documents to unearth the story.
The table alongside shows just how much money has been invested in manufacturing through this incentive, and the range of sectors that have benefited.
More than R15 billion in additional tax allowances have been awarded to local manufacturers.
The top three sectors that have benefited from the scheme are chemicals, biofuels and cement.
Not only are significant funds flowing through 12I, but there is a quick turnaround on applications, and it is administered by professional staff who are prepared to properly engage with investors.
Trade and Industry Minister Rob Davies is also personally involved in the approval process before the applicant can order the assets.
An amazing feat of teamwork.
All this means that the incentive is doing what it is supposed to do – making a difference to investment decisions, and thereby boosting investment in projects in South Africa.
Unfortunately, this tax break is becoming a victim of its own success.
A fixed budget of R20bn was earmarked for the incentive, and the current big challenge is that 85 percent of this has already been allocated, as far as we can calculate.
The support scheme was due to expire at the end of this year, but was extended to December 2017.
That’s the good news.
The bad news is that no extra budget has been allocated, which means the cupboard will be bare long before the scheme expires.
More money needs to be found, otherwise we will have just an academic extension, for which there is no more budget.
That would a big shame, because 12I is the only incentive where a company can apply for support for a new – or green fields – project, apart from a few schemes that are industry specific.
Key criteria for receiving the incentive are commitments to enhance energy efficiency and to further skills development, which is changing the approach of companies to training, with more emphasis than otherwise would be the case.
On energy efficiency, there is a need to plan and save energy to meet the criteria.
Companies which don’t do this when they are planning their project tend to run into trouble in the reporting phases that follow the approval of an application.
A company should not take this lightly, as it could lose the incentive if it fails to deliver on energy efficiency.
Positive behaviour change is to be applauded, but companies must take it seriously from the start.
Those who fail to do so will find themselves challenged when trying to report on energy savings.
They will face a factual question: has the project actually achieved the promised energy savings?
This must be properly measured, as projects are approved on the theoretical energy efficiency advances, but get the incentive on their results in saving energy.
It is a very technical field, and we have found clients have struggled, because they did not understand from the start what was needed, or made too many optimistic assumptions.
Another big challenge is the need to buy more from small and medium enterprises (SMMEs) – those with a turnover below R50 million, and with less than 200 employees.
It needs very careful planning and management to achieve the required 10 percent or 15 percent of total expenditure on SMMEs.
There needs to be an undertaking up-front to spend 10 percent of your procurement budget on SMMEs, but a company will subsequently have to prove that this actually happened.
A lot of clients don’t do enough work from the start to identify and to do business with SMMEs, which is what the incentive is designed to make happen.
We are finding some companies in a borderline position, very close to failing to comply with the requirements, and thus very close to losing the incentive support.
You have to be diligent.
It is a complicated incentive, but 12I can be worth tens or hundreds of millions of rand.
The process just starts with getting approval; you need to make sure you are diligent in your application – or you risk getting burnt in the reporting phase.
It would be a real shame if this highly successful and worthwhile government support mechanism were to crumble – assuming that its funding challenges can be overcome – not because the government is failing to meet its commitments, but because applicants can’t or won’t do their homework in advance.
This article first appeared on iol.co.za.