THE EVALUATION OF THE REGIONAL INDUSTRIAL DEVELOPMENT PROGRAMME (RIDP) CONDUCTED BY NEDLAC AND ON NEDLAC DISCUSSIONS ON THE TAX HOLIDAY SCHEME

1. Background

1.1. At a meeting between the Minister of Trade and Industry and MEC's of all the provinces, in December 1994, it was decided that the Regional Industrial Development Programme be evaluated with the aim of bringing the programme in line with the trade and industrial development goals of the newly elected democratic government. Following this meeting, the Chief Directorate for Regional Industrial Development drafted a brief for the evaluation which was subsequently approved by the Minister.

1.2. In determining policy research relating to South Africa's international competitiveness, the Japanese Grant Fund (JGF) subcommittee identified industrial incentives as a key area for consideration. This was in keeping with discussions on supply side measures which occurred in Nedlac and previously in the National Economic Forum.

1.3. Following discussions between the Chief Directorate for Regional Industrial Development and the chairperson of the JGF, the JGF Subcommittee agreed to undertake a study evaluating the RIDP. It was felt that the evaluation would provide policy direction on industrial and investment incentives more broadly as the RIDP had been the key instrument in this regard. The evaluation of the RIDP was initiated by the Japanese Grant Fund in May 1995 and the study was concluded in July 1996.

1.4. The Growth, Employment and Redistribution Strategy (Gear), released by government in June 1996, announced that the RIDP would be replaced by a Tax Holiday Scheme. The policy shift reflected in Gear with respect to manufacturing incentives was consistent with recommendations emerging from the RIDP evaluation, and experts and consultants working on the RIDP Evaluation were utilised in detailing aspects of the Tax Holiday Scheme.

1.5. This report covers the RIDP evaluation process and findings, as well as Nedlac discussions on investment incentives.

2. The Evaluation of the RIDP

2.1. The evaluation of the RIDP was structured according to the Japanese Grant Fund (JGF) model of conducting investigations. At a meeting on 16 May 1996, the JGF Subcommittee approved a brief and budget for the study and agreed to set up a Counterpart Group (CPG) to manage the evaluation.

2.2. The CPG included:

2.2.1. Two representatives each from government, business and labour.

2.2.2. One representative from each of the Economic Affairs Ministries in the provinces.

2.2.3. Three experts to assist in defining the study and providing ongoing technical support to the group.

2.2.4. Representation from the Reconstruction and Development Programme (RDP) office.

2.3. A steering committee, comprising representatives from each constituency, one representative for all the provinces and the three experts, met on 6 July 1995 and clarified the brief and process for the evaluation. A working group was appointed to detail a brief for the study based on the original brief from the minister, and to formulate an explanatory memorandum on the evaluation. A draft brief and an explanatory memorandum were presented to the CPG on 13 September 1995.

2.4. The CPG approved a brief for the evaluation on 3 October 1995. The brief comprised of component studies relating to:

2.4.1. The actual performance of the RIDP.

2.4.2. Provincial government legislative powers, capacities and requirements with regard to industrial development.

2.4.3. The RIDP's policy fit with other policy initiatives relating to support for manufacturing, spatial development and regional industrial location.

2.4.4. A comparative account of contemporary regional industrial development policy.

2.5. Various consultants tendered for different aspects of the evaluation and, on 2 November 1995, the CPG approved a mix of 11 consultants to undertake 18 studies. Ernst and Young was appointed as the overall managing consultant with the responsibility of overseeing the various studies and synthesising them into a single report.

2.6. The consultants presented work-in-progress and received feedback from the steering committee and the CPG at various stages of the study. (1 February 1996, 11-13 March 1996 and 2 May 1996).

2.7. The consultants also made a presentation to the Parliamentary Portfolio Committee on Trade and Industry on 26 March 1996.

2.8. A presentation on the near-final synthesis report was made by Ernst and Young to the Trade and Industry Chamber of Nedlac on 2 May 1996.

2.9. The consultants received written comments on their near-final report in May 1996 from the provinces, the consultants working on individual studies, international consultants and the panel of experts. These comments were considered in finalising the report.

2.10. The final report of the consultants ("Summary Report of Findings, Conclusions and Recommendations") was tabled at the Trade and Industry Chamber on 25 July 1996. The chamber also subsequently received and accepted reports from the chairperson of the counterpart group.

2.11. The recommendations of the RIDP evaluation included:

• Changing from a grant to a tax-based (partial or total tax holiday) incentive scheme for a period of 5 years with qualifying criteria based on employment creation, sectoral and spatial objectives.

• The withdrawal of establishment grants except for SMMEs, with the introduction of a new restructuring grant for SMMEs.

2.12. The RIDP Evaluation Report was discussed in the Trade and Industry Chamber on 29 August 1996 and 19 September 1996. Based on the chamber's recommendations, the Executive Council, on 20 September 1996, finalised Nedlac's consideration of the RIDP evaluation report, as follows:

• It was noted that the RIDP was to be replaced by a tax-based incentive scheme as announced in government's Growth, Employment and Redistribution Strategy.

• It was noted that the recommendations from the evaluation were used as the basis for developing the tax holiday and Small/Medium Manufacturing Development Programme (SMMDP).

• It was agreed that the report on the evaluation of the RIDP be publicly released.

3. Investment incentives

3.1. Investment incentives were initially discussed in Nedlac in early 1995 following a study commissioned by the Japanese Grant Fund (JGF) on "Developing a framework for investment promotion in the New South Africa" undertaken by SRI International. The study had recommended that South Africa shift from a grant-based investment incentive system to a tax-based system.

3.2. Tax incentives were also raised as a possible support measure to promote investment in the context of broader discussions held at Nedlac on supply side measures. Following the release of a government document in December 1995 on "Support Measures for the Enhancement of the International Competitiveness of South Africa's Industrial Sector", a workshop on supply side measures was attended by constituency representatives in January 1996, and business and labour tabled written responses to the supply side strategy.

3.3. The Trade and Industry Chamber agreed on 26 March 1996 that investment incentives be prioritised as a support measure within government's supply side strategy.

3.4. On 30 May 1996, government presented to the chamber its conceptualisation of a tax based investment incentive scheme. The Growth, Employment and Redistribution Strategy, released by government on 14 June 1996, announced that the RIDP would be replaced by a tax-based investment incentive scheme.

3.5. The tax-based investment incentive scheme in Gear comprises:

• An accelerated depreciation tax allowance for expansions.

• A tax holiday, up to a maximum of 6 years, based on qualification criteria relating to labour absorption, regional priorities and priority industries.

3.6. Government presented its work plan on detailing the legislation and regulations for the investment incentive scheme to the chamber on 11 July 1996.

3.7. In considering the consultants' report on the RIDP evaluation, the Trade and Industry chamber, on 29 August 1996, noted that the RIDP was being replaced by the Tax Holiday Scheme. Further discussions in Nedlac on the legislation and regulations for the Tax Holiday Scheme occurred in the Management Committee on 30 August 1996, at a Policy Session on Trade and Industry on 13 September 1996 and at the chamber on 19 September 1996.

3.8. The Joint Parliamentary Standing Committee on Finance discussed the Tax Holiday Scheme on 2 September and conducted public hearings on 11-12 September 1996. Labour and members of the business constituency made representations at the hearings. There were a number of common points of concern.

3.9. Government addressed the concerns of business and labour at the Trade and Industry Chamber meeting on 19 September 1996 and undertook to include these in the regulations where these were framed in reasonable terms and were not already incorporated.

3.10. The chamber made recommendations to the Executive Council meeting on 20 September 1996, where the matter was finalised, as follows:

3.10.1 It was agreed that the following concerns from labour would be accommodated in the regulations or, if necessary, by the Minister of Trade and Industry amending the regulations by proclamation in the Government Gazette:

• Reporting on forgone revenue due to tax holidays. Government clarified that it would report on tax that would have ordinarily been paid by companies in the scheme. This did not necessarily represent forgone taxation since projects might not have existed in the absence of the scheme.

• Disaggregating and reporting separately on the training and wages components in the human resource development criterion.

• Representation of business and labour on the Board for Regional Industrial Development.

• The board having regard to "the effect of granting a tax holiday on existing business producing similar products, and on their employees".

• The board having regard to long term investment plans beyond the period of the tax holiday.

3.10.2 Based on a labour proposal it was agreed that a focused investigation into the range of options which could be considered to mobilise investment aimed at addressing basic needs would be conducted following further discussion on the matter in the Public Finance and Monetary Chamber.

3.10.3 In response to the labour proposal on the removal of the provision in the Revenue Bill which proposes to remove liability for the payment of secondary tax on companies (STC) for a period of six months after the ending of the tax holiday, it was agreed that the matter would be discussed as part of a broader discussion on STC and revenue issues in the Public Finance and Monetary Chamber.

3.10.4 Government argued against the labour recommendation on publicising applications and allowing for objections, saying that this would discourage investors and create the impression that South Africa was not serious about adapting to economic change. Labour reiterated that it was not convinced by government's argument but agreed that disagreement on this point should not delay the implementation of the Tax Holiday Scheme.

3.10.5 On the criticism from business and labour that the tax holiday would unfairly disadvantage existing industry, government pointed out that existing industry could access the accelerated depreciation scheme, development finance (from the IDC and Khula) and supply side measures. Existing industry could also access the tax holiday by setting up tax ring-fenced companies for their expansions.

3.10.6 On labour's concern that the tax holiday would result in a compensatory increase in VAT and income tax, government argued that the real loss in revenue through the tax holiday scheme will not be of an order that will require such increases and that savings from GEIS and the RIDP, less the allocation to supply side measures, would compensate for lost revenues.

3.10.7 It was agreed that the deadline for the implementation of the Tax Holiday Scheme (1 October 1996) should be adhered to.

4. Conclusions

4.1. This report concludes the Nedlac evaluation of the RIDP and the report on the evaluation is now released publicly.

4.2. The Trade and Industry Chamber of Nedlac will continue to play a role in monitoring the implementation of the Tax Holiday Scheme, the Accelerated Depreciation Scheme and the Small/ Medium Manufacturing Development Programme.