SA manufacturers sitting on a gold mine

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VW assembly point in Port Elizabeth Eastern Cape. The Industrial Policy Action Plan (IPAP) 6, which was released last month, will affect manufacturers and the service sector supporting the manufacturing industry. Photo: Simphiwe Mbokazi.

To be a successful manufacturing business, you need to understand the investment incentive landscape in the country where you operate, as this will have an impact on the success of your business in the short, medium and long term.

Get it right and you will secure a helping hand in the form of grants or tax rebates; get it wrong, and you will watch your competitors as they move into the fast lane and speed away from you.

There are many examples of the way in which business needs to keep an eye on government policy as it is being formulated and introduced, with the carbon tax being a great indicator of how to get it right – or wrong.

Plans for a carbon tax appeared in the Treasury’s strategic plan way back in 2008, but it was clear that most businesses paid no attention to the strategy document, which resulted in chaos when the first carbon tax discussion document was released in February 2010.

It had been in the public domain for two years, but suddenly company bosses were confronted with a major potential threat to their operations, having taken no action to study what the government was planning, or to voice their concerns.

It may be hard work, and often bureaucrats have difficulty in expressing themselves clearly, but large corporates must pay attention to government policy documents. Ultimately it is the fault of your business if you have no process to monitor a key business risk, and to put pressure on your business organisations to ensure they monitor these key potential developments.

And make no mistake, South African manufacturers are sitting on a gold mine of potential support from the government, but many don’t even realise it. As with the carbon tax, so it is with investment incentives: you snooze; you lose.

A new wave of support for the sector was unveiled last month by Trade and Industry Minister Rob Davies in a policy document called Industrial Policy Action Plan (IPAP) 6, which lays out priorities for manufacturing incentives over the next few years.

A key question is: who needs to care about IPAP? The simple answer is: manufacturers and the service sector supporting the manufacturing industry.

The government’s stated aim is to “defend, support and nurture the manufacturing sector by steering, not rowing”. This effectively means that the government will be pointing the direction where it thinks the manufacturing sector should be moving, but it is up to business to implement and leverage the goals set by government.

Clearly, if a business does not understand what sectors and what areas government is trying to promote, it is clearly not able to leverage the opportunities – or to identify the risks.

There are seven key areas of focus in IPAP 6. The focus is economy-wide, procurement will play a role, industrial finance will be a focus, as will developmental trade policy, competition policy, regulation and intellectual property, and innovation and technology.

The government has identified actions that impact on numerous industries, and it has also specified which sectors it will be supporting. I would argue the most important areas being focused on in IPAP 6 are public procurement, incentives and industrial financing and special economic zones (SEZs).

In terms of public procurement, it is clear the Department of Trade and Industry (dti) is trying to link the promotion of manufacturing with the larger aim of the public sector buying local, particularly in the mega budgets for infrastructure development. This has been actioned through the competitive supplier development programme, which is being run by state-owned enterprises such as Eskom and Transnet.

Secondly, it is being carried out through the renewable energy programme run by the Department of Energy – and finally through a revised National Industrial Participation Programme.

As an example, under the renewable energy programme, it’s clear that the government has set rather high local content requirements – over 60 percent.

However, we believe there is a lack of alignment between this requirement and ensuring that there is a strong manufacturing base being created to supply into the renewable energy sector in South Africa and in Africa.

There must be a recognition that business as project developers must carefully consider their localisation strategies by working with the dti and the incentives it offers. If this is not done effectively, bid prices will be too high.

It has been challenging to take government grants and incentives into account when taking an investment decision – mainly due to the fact the incentives carry rules and conditions, which makes it challenging to build the incentive into any financial model with absolute certainty.

In IPAP 6 it has been clearly identified that the government has work to do to link these incentives to the industrial financing it offers.

SEZs seem to be a key weapon of the government to attract investment – through foreign direct investment (FDI) and local investors. To be able to attract FDI, it is vital that we mobilise local investors, as there are large cash stockpiles which are not being actively invested by local business.

For SEZs to be effective and to create so-called strategic industrial capacity, they need to be attractive to local investors, as well as foreign investors.

In terms of the sectorial focus, it is clear that IPAP, since its first iteration way back in 2007, is focusing more on tangible and achievable objectives. It is important to make sure we as business continue to engage with the dti on what the opportunities are in this myriad of sectors.

There are lots of opportunities – but there is also a potential competitive disadvantage. If you don’t understand what sectors are receiving support, you may fall behind your competition.

It is vital for business to understand IPAP 6 in terms of opportunities and risks, and that knowledge may make the difference between failure and success.

 

Duane Newman is a director of Cova Advisory & Associates, a sponsor for the Manufacturing Indaba taking place on May 19-20. Follow him on Twitter: @Duane_Newman


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