Incentives need to be centrally co-ordinated to reap benefits
An overdue report shows there are 244 different initiatives in total, with no feedback on whether they are attracting investment for SA
Nissan’s announcement that it is to invest R3bn in an expansion of its SA operations with the production of the Navara has been widely reported and welcomed. Not least by President Cyril Ramaphosa, who is keen to demonstrate that his investment drive is leading to real results, not just pledges.
However, as trade and industry minister Rob Davies noted at the Nissan launch, none of this would have been possible without investment incentives.
A long-overdue government incentives review, the report on the evaluation of government business incentives, was adopted at the pre-election cabinet meeting. It notes: “Overall the evaluation was not able to comprehensively test whether the system of incentives is achieving its outcomes and having the desired impact. Thus, based on the available data the extent to which these incentives have made a meaningful contribution to reducing overall levels of poverty, inequality and unemployment in SA is uncertain. This is partly because there are many other factors that influence the achievement of these objectives; but also because there is insufficient information available on the outcomes of most incentives, and the system as a whole”.
It seems the incentive landscape is a bit muddled, with several government departments and entities in charge of an array of tax breaks, investment grants and other public largesse — about 244 different incentives in total.
A large chunk of the R50bn in “incentives” covered by the report involves spending on skills education training authorities.
As the report notes, we don’t yet have a clear and comprehensive policy framework to say what the rationale is, what the costs and benefits are, and whether we have the capacity to efficiently implement all the 244 programmes. An important suggestion in the report is that the government should put in place a national incentive policy framework. This would be a welcome move and could start more efficiently to guide how the government and all the various departments must proceed.
It should clearly lay out how to design and administer all the incentives, with detailed procedures on the budgeting process. A shortcoming of the report, however, is that it doesn’t appear to look at whether there is enough capacity to do the job properly, nor how to build up the capacity required to target and implement these incentives. Which raises the vital question of whether individual government departments themselves are the right vehicles to implement these incentives. Do we need some changes?
One idea doing the rounds, which has some merit, is that it might be worthwhile to establish an institution similar to the independent power producer (IPP) office, which oversees renewable energy investment and is highly regarded. If the majority, or all, of the incentive programmes were sitting within one specialised entity, the task of co-ordination and developing a clear and focused strategy, ensuring sufficient impact from the public expenditure on incentives, might be easier.
This is the route Thailand — a comparator country in the report — as well as other developing countries have adopted. It appears to be working and there is no reason to suppose it would not be worth considering in SA.
At the very least, there should be what is known as a “practice note” by the Treasury — clear guidelines on how to operate an incentive programme. At present, the responsible government department designs each of its incentives, and the report notes that there is poor alignment with the government-wide budgeting process led by the Treasury.
The result is that you might find an incentive programme ready to roll, but with no budget allocation. A better framework would ensure a co-ordinated and consolidated process between government departments — dealing from the start with costs, administrative capacity and who is best able to administer the incentive. And what about an online administration system? This could be used to improve efficiencies and minimise time for decision-making. Why should firms wait three months or more to know if their incentive application has been successful?
Meanwhile, the report has highlighted that government departments are not efficiently talking to one another. A national framework would guide this. With a central system, it would be much easier to co-ordinate. The suggested framework and monitoring upgrades would ensure the aims of programmes are clear and not just window-dressing to boost the kudos of whoever pulls the strings. At the moment, the crucial monitoring and evaluation function is too far detached from project design and implementation, as well as from the budgeting process.
This monitoring and evaluation function should be a core element, properly thought through when the incentives are designed. You need to ask questions when people apply, and seek all the relevant data. You don’t want to try to ask these vital questions after the event. Once the project has gone ahead, you need to be able to quantify and assess how much investment was leveraged by providing the incentive. Did it work? This is taxpayers’ money, after all.
With the encouragement of investment a top priority for the government, the cluster of incentives is a vital tool. It is time they were better managed.
• Marumo is an incentives expert at Cova Advisory.