Succeed first, then get help

The MIP, which has been offered to new businesses as well as extensions to existing plants since 2008, was supposed to be available until July next year. But last week the DTI stopped the programme early. The main reason given was that "overwhelming interest" in the MIP had already exhausted its six-year budget.

The DTI hailed the MIP as a success and detailed how more than 200 (10%) of approved MIP projects were foreign direct investments projects, which will attract a further R13bn and create or sustain 20,000 jobs. But the incentive isn't going to be extended in the new medium-term expenditure framework.

The plan is to support new manufacturing businesses by extending the Manufacturing Competitive Enhancement Programme (MCEP), which was launched last year and which has been available only to businesses that have a two-year trading history.

The reason for the shift is that the DTI is seeing the benefit of the MCEP's ability to offer bigger, less onerous incentives for the manufacturing sector, which government's industrial policy seeks to revive and strengthen.

Simple, easy incentives

Tumelo Chipfupa, deputy director-general of the DTI's industrial development and incentive administration division, says: "If you're going to make incentive programmes work you need to make them simple and accessible. Firms need to get a response quickly, otherwise people become discouraged."

Manufacturing Circle executive director Coenraad Bezuidenhout says: "In our experience the DTI is learning through previous mistakes."

The MIP, for example, locked manufacturers into conditions that some firms weren't able to meet, especially requirements around creating new jobs. Though the DTI agreed to relax some of these requirements in 2011, manufacturing start-ups pointed out how existing businesses had access to much bigger incentives under the MCEP (double in most cases).

Manufacturing incentive consultant Duane Newman, who is the managing director of Cova Advisory and Associates, asks: "Why should a start-up get less than an existing business?"

Newman points out that the MIP required applicants to raise 40% of the project in debt, regardless of whether they were able to finance this 40% without incurring further debt. The state insisted on this funding gap rule as proof that the firm needed support from the state. The MCEP doesn't require this.

No up front incentives

But there is one thing the state says it can't change. It won't pay incentives up front, which means manufacturers will still have to find bridging finance, which banks have been reluctant to provide.

Like the MIP, the MCEP is a reimbursive incentive. The state pays out the approved money only when the project is completed. For example, if R100m is approved for a start-up or expansion project, the firm will have to make this full R100m investment first and then, if government is satisfied that the project meets all the criteria, it will pay out the grant of, say, R30m.

"This means companies that drop the ball along the way and fail to meet any of the required MCEP/MIP criteria or can't make the investment then they don't get the government incentive. No bank will rely on the grant in the funding model, knowing that this is the risk involved," says Newman. He adds that the DTI is willing to help firms make good on certain criteria they fail to meet. But manufacturers can find themselves in a Catch-22 situation.

Chipfupa acknowledges this problem. He says the state has to offer reimbursive incentives to minimise risk but that the DTI is trying to make it easier for beneficiaries by reducing the time it takes to pay incentives once the project is complete. He says the competitive enhancement programme already offers a much quicker turnaround time.

Speedier turnaround

"Under the MIP the reimbursement was made up to three years after the investment. The MCEP allows us to cut this down to six months," says Chipfupa.

"The DTI," he says, "is also trying working with financial institutions, including the Industrial Development Corp, to find ways for them to offer cash flow grants.

"The banks need to give more weighting to the fact that projects have been approved for government incentives. They are in a much better position to manage risk," he adds.

While the DTI has always pushed for a much more generous and flexible incentive regime to stimulate manufacturing, national treasury raises concerns about limiting risk and setting criteria that will ensure incentives don't just prop businesses up without making them viable and competitive.

Since the 2008 economic crisis, which made government incentives for industry a global trend, finance minister Pravin Gordhan has agreed to spend more on the productive side of the economy. But the Manufacturing Circle says Gordhan has made "disappointing" progress on this commitment.

Not only have incentives declined as a percentage of GDP, they say, but the minister hasn't done enough to reduce the impact of administered prices on manufacturers.

Source: Financial Mail via I-Net Bridge