Manufacturing Incentives - South Africa’s Best Kept Secret

Nothing warms the cockles of my engineer heart quite like seeing widgets flying off a production line! I joined Moore Stephens (now Moore) in April 2019, after being head of strategic projects at Coca Cola South Africa and being an operational manager in Coca Cola s bottling and packaging operations. Prior to that, I served as an engineer for Unilever South Africa and in their aerosol, soap, and personal products factories.
 
Before gaining this more corporate experience, like many of Moore’s manufacturing clients, I had been involved in a family business, addressing many of the same issues our clients face today.
 
In 2001 my brother and I embarked on a Department of Trade and Industries sponsored primary market research trip to the United States, where our aim was to export aluminium castings to the automotive sector. The Motor Industry Development Programme (MIDP) was in its infancy at the time and provided added margin for us to be competitive. In truth, we never got any contracts, but as so often happens, other avenues were explored and it kickstarted a very successful manufacturing business that continues to grow to this day.
 
Working for two, large Fast Moving Consumer Goods (FMCG) companies with deep routes within South Africa, I saw first-hand the benefit that investing in manufacturing plants and new production lines made to the bottom line. Adding production capacity helped to streamline supply chain, improve cost structures, and it brought new products to market. It also fought competitors.
 
South Africa is rife with opportunity to set up manufacturing plants, yet most investors are not focusing on this much needed sector nor are they even aware of the benefits and incentives available.

More so, the deal flow within this sector has been considerably vibrant as of late and Moore is uniquely placed to help proactively facilitate these investments by mid-tier and larger manufacturers wanting to expand their manufacturing capacity closer to the growing middle market in Africa.
 
South Africa’s manufacturing categories are diverse and not dominated by any one or two categories, as recently published by South African Market Insights (SAMI) South Africa s Manufacturing Industry, August 14, 2019.
 
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The SAMI article goes on to explain: “… the main reason South Africa's manufacturers are not running at full speed is the lack of demand, with lack of demand contributing 62% to the reasons for under-utilization. In contrast, the availability of unskilled and semi-skilled labour contributes only 1% of the reasons for under-utilization. This is due to the fact that South Africa has a large number of unskilled and semi-skilled labourers. Skilled labour contributes 5.3% (or 5 times the amount of unskilled labour) to the reasons for under-utilization of production capacity. The summary below shows the percentage of under-utilization of production capacity over the last couple of years:
 
  • Q2: 2016: 18.6%
  • Q2: 2017: 19.1%
  • Q2: 2018: 19.3%
  • Q2: 2019: 18.7%
Further, the manufacturing industry declined significantly from Q4 2018 to Q1 2019.
 
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In order to kick start manufacturing in South Africa, here are some of the incentives that are making it more attractive to invest in the manufacturing powerhouse of Africa. Information has been obtained from the Department of Trade and Incentives website:
 
  1. 12I Tax Allowance Incentive: This incentive has been designed to support greenfield and brownfield investments with a focus on manufacturing assets and training of personnel.
  2. 12J Tax Allowance Incentive: Section 12J of the Income Tax Act allows an investor to deduct the full amount invested in a Venture Capital Company from his/her taxable income for the specific tax year. This is to assist small and medium enterprises and junior mining in attracting equity capital.
  3. Loan opportunities from the Development Finance Institutions, such as the Working Capital Facility and the Industrial Policy Niche Project Funds, have been devised to boost manufacturing ventures.
  4. Foreign Investment Grant (The FIG) compensates qualifying foreign investors for costs incurred in moving qualifying new machinery and equipment from abroad to South Africa.
  5. Industrial Development Zones (IDZ): These purpose-built industrial estates are linked to international ports that leverage fixed direct investments in value-added and export-orientated manufacturing industries.
  6. Manufacturing Competitiveness Enhancement Programme (MCEP): Is one of the key action programmes of the Industrial Policy Action Plan (IPAP). The MCEP will provide support to companies upgrading their production facilities, processes, products, and people in the short to medium term.
  7. Manufacturing Investment Programme (MIP): The MIP is a reimbursable cash grant for local and foreign owned manufacturers who wish to establish a new production facility expand an existing production facility or upgrade an existing facility in the clothing and textiles sector.
The beauty of some of these incentives, such as 12J, is that they work alongside others. For example, applying a 12J incentive within an IDZ would yield substantial benefits and downside protection. Given the focus on this sector by the government and the attractive incentives, investors both within South Africa and abroad should take a good look at manufacturing again.
 
The Moore Johannesburg office has extensive experience in structuring investments utilising all of these structures. For additional information on South Africa incentives and others in the Southern Africa region, please contact Kai Reuning or get in touch with your local Moore firm.