Incentives 'may be pointless'

Treasury said in February 128 projects had been approved under the multibillion rand Automotive Investment Scheme, while more than 460 firms had benefited from the clothing and textiles competitiveness programme.

Strikes, high electricity and labour costs, and weak demand are among factors limiting growth in manufacturing - the economy's second biggest sector.

Manufacturing production fell for the second consecutive time in May, decreasing 3.7% year on year after falling 1.9% in April.

No substitute for stability

"Incentives help, but they cannot substitute for labour stability, the impact of bunched-up administered price increases and utility service outages," Manufacturing Circle executive director Coenraad Bezuidenhout said in an interview on Friday.

The Kagiso purchasing managers' index (PMI), an index which measures manufacturing activity, fell to 45.9 last month, indicating that activity in the sector contracted for the fourth consecutive month as strikes and high input costs weighed on output.

Finance Minister Nhlanhla Nene said on Friday industrial incentives had been increased and adapted to cater for the varying needs of businesses including "process improvements, machinery upgrades, industrial finance and export promotion."

However, the Manufacturing Circle - the body representing the majority of the country's producers - said that incentives could be rendered less effective by tough operating conditions.

Around R22bn has been spent on industrial incentives over the past five years and almost R22bn has been set aside for the next three years.

The Kagiso PMI's price subindex rose to 76.5 index points from 73.8 in June - the highest in three months following increases in fuel prices last month.

Further pressures

Bezuidenhout said further cost pressures in the short term would result from wage increases that were granted despite inferior productivity, administered price increases and water and electricity outages.

Workers in the platinum mining sector, and steel and engineering have walked away with aboveinflation wage increases, which the South African Reserve Bank has warned could stoke inflation.

Manufacturers will be among those hit hardest by electricity increases next year, which are set to be higher than the anticipated 8% hike.

This is after the local energy regulator granted power utility Eskom the go-ahead to implement higher tariffs to cover costs.

Bezuidenhout said that government should investigate offering a "special dispensation for electricity costs" for manufacturers as is the case in Brazil.

The tough operating conditions mean that job creation in manufacturing will be weak.

The Kagiso PMI's employment subindex deteriorated in line with the depressed business activity environment to 43.9 points last month from 49.3 previously.

Inhibiting employment

Investec economist Kamilla Kaplan said high operating costs coupled with broadly weak economic growth prospects and the "generally fractious labour environment" inhibited employment generation in the sector.

Nene said that the country needed to take "clear steps" to improve its investment climate to continue attracting multinational firms such as car manufacturer Mercedes-Benz.

Modernising tax policy, remaining a leader in financial regulation globally, creating more competition, and bringing policy certainty and investor protection would attract international investors, he said.

Source: Business Day