1

Parliament Portfolio Committee on Trade and Industry Briefing on Strategic Industrial Projects (SIP)

Presented by:

Francisca Strauss

Chief Director

The Enterprise Organisation

13 June 2007

2

CONTENTS

• Objective

• Qualifying Industry Sectors

• Mandatory requirements

• Point scoring

• Benefit

• Admin Process

• Statistics

• Monitoring

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STRATEGIC INDUSTRIAL PROJECTS

• SIP – 12G of the Income Tax Act

• Additional industrial investment allowance – R10b

• 1 August 2001 to 31 July 2005

Objective

– Encourage investments from local and foreign investors

– Contribute to the growth, development and competitiveness

– Upgrade industries

– Create employment opportunities

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QUALIFYING INDUSTRY SECTORS

QUALIFYING INDUSTRY SECTORS• Manufacturing – SIC 3• Computer and computer related activitie• Research and development activities

MANDATORY REQUIREMENTS• Investment in new qualifying assets more than R50m• Increase annual production• No substantially displace production and /or jobs• Demonstrate long term commercial viability• Promote employment and production• Not concurrently benefiting from certain incentives

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POINT SCORING

UPGRADING A SOUTH AFRICAN INDUSTRY

Criterion Description Points

New product/process New processes, technologies and products 1

Filling a cluster gap Benefiting other related industrial projects Improving efficiency and effectiveness Becoming a key component in a cluster

1

Value added process Add value of at least 35% 1

SMME procurement Acquiring raw material intermediate products and services from SMME

1 (10%)

2 (20%)

Infrastructure provision Addition to infrastructure open to the public.

At least 5% of qualifying assets

1

Employment opportunities Create direct and indirect full time jobs for each R1m – 3,4,5,6 or more jobs

1,2,3,4

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QUALIFYING CRITERIAMaximum points - 10

Point scoring Qualifying Status Applicable Allowance

4 or 5 points Qualifying project without preferred status

50% of the cost of the qualifying assets not exceeding R300m

6 and more points Qualifying project with preferred status

100% of the cost of the qualifying assets not exceeding R600m

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• Application

• Evaluation

• Recommendation by Adjudication Committee

• Approval by the Minister of Trade and Industry

• Letter to applicant

• Letter to the Commissioner of South African Revenue services

• Publish in Government Gazette

ADMIN PROCESS

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APPROVED PROJECTSPER SECTOR AND PROVINCE

Regions Chemicals

Metals Packaging Printing Wood &

Pulp

Agro

Processing

Textiles Ship

Building

Total

Gauteng 2 2 3 3 1 11

Kwa Zulu Natal

2 5 1 1 1 1 11

Eastern Cape 1 5 1 7

Western Cape 2 1 3

Mpumulanga 3 3

Free State 5 1 1 7

Limpopo 1 1

North West 1 1

Northern Cape

1 1

Total 15 14 3 3 4 4 1 1 45

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APPROVALS BY SECTOR

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

Sector

Val

ueR

m

TotalInvestment

Qualifying Assets

Allowance

10

INVESTMENT PER PROVINCE

Investment per Provice

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Valu

eR

m

Qualifying Assets

Allowance

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STATISTICS

Greenfields or Brownfields projects

• 7 Greenfields projects

• 28 Brownfield projects

Foreign Direct Investment and Local Investment

• 4 Foreign Direct Investment

• 41 Local Investment

Projects – Complied but no budget available

• 13 Projects with R4.9b investment

• Additional allowance of R3.06b required

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Approved

Established

Approved 1 14 1 4 4 15 3 3

Established 0 10 0 1 0 9 2 3

Textile & Clothing

Metals &allied ShipbuildingAgroprocessi

ngPaper &wood Chemicals Packaging Printing

• 25 projects have established to date– Investment worth R9,8 billion

– 12,018 jobs

ESTABLISHED PROJECTS

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IMPACT ON JOB CREATION

Sectors Actual Investment Actual Jobs

Chemicals R3.9b 4 629

Metals R4.9b 6 068

Printing R507m 514

Paper & Wood R89m 94

Agro Processing R320m 309

Textiles R137m 404

Total R9.853b 12 018

25 Established Projects

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MONITORING

• Prescribed by section 12G of the Income Tax

• Submit annual progress report and financial statements

• Evaluation report

• Recommendation by Adjudication Committee

• Minister – Accept, amend or disqualify

• Inform client

• Inform Commissioner of SARS

• Report to parliament

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SIP Review (Feb 2004)

• Independent assessment commissioned by the dti in conjunction with the NT

• A survey amongst 19 approved projects; 8 in-process applications; 4 prospective

applicants; 4 tax consulting firms

• Study objective to assess need for amendments to the programme in order to

enhance project selection.

• Key questions: Perceptions on Marketing and Promotion of SIP

Assessment of Impact of SIP on the firm’s Investment Decision

Assessment of the suitability of the project selection criteria

Perceptions of Administrative Processes.

Methodology

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SIP Review (Feb 2004)

• Awareness challenges: Of the 75 manufacturing Capex projects announced by IDC (Jan 2001 to Jun 2003), only

7 of the 38 projects potentially eligible for SIP applied

• Chemicals, metals dominance: Most applicants were from sectors with a natural diversity in products, processes

and technology, which can easily match the industrial upgrading criteria

• Only 3 out of 19 approvals were FDI: SIP seemed to attract investors with existing operations in SA that are able

to exploit the tax allowance soon after project implementation

• Impact on investment decision: SIP was effective in influencing investment decision of 2/3 of approved projects

• Bias for capital intensive projects: due to the R50m investment requirement, SIP attracted more capital-

intensive that labour-intensive projects. The projects however had potentially larger spin-offs for other economic

activities

• Cost-benefit analysis: In a longer term, the additional tax revenue from SIP approved project will more than pay

for the cost of the incentive (tax allowance)

Observations and Lessons

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SIP Review (Feb 2004)

• Impact analysis: A further analysis is necessary to determine the real economic

impact of the SIP approved projects that have established to date

• Better targeting: Future [tax] incentive programmes can be structured to better

target strategic (including FDI) in line with the National Industrial Policy

Framework

• Maintain good practices: Independent review by Paul Babour (Dec 2006)

indicates that SIP has a sound design framework, has transparent processes

and the Act requiring regular reviews and reporting to parliament.

Way forward

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Thank you