19 Aug The facts point to a highly effective automotive policy in SA
The claim by Sars that it costs the country R31bn is wrong — the real cost is about R4bn a year
Newly assembled Hilux automobiles pass through quality control at the Toyota manufacturing plant in Durban. File photo: BLOOMBERG/WALDO SWIEGERS Recent press reports have glibly referred to the high cost of the Automotive Production & Development Programme (APDP) incentive scheme to the SA fiscus, thereby questioning the integrity of the programme.
Most recently, National Union of Metalworkers of SA (Numsa) general secretary Irvin Jim put the annual cost of the programme at R30bn, noting that this is a key reason Numsa members should be given significant wage increases (“Motor sector bosses offer Numsa inflation-based pay increases”, August 10).
Similar pronouncements on the APDP have been made in the press over the past few months. The source of this disinformation comes from the government itself, in this case the SA Revenue Service (Sars), which put the cost of the APDP in 2019 at R31.3bn. This figure is factually incorrect and bears no resemblance to the real level of support being provided to the industry.
The correct cost of the APDP to the fiscus is R4.1bn a year, and for this cost the seven SA light vehicle original equipment manufacturers (OEMs) — BMW, Ford, Isuzu, Mercedes-Benz, Nissan, Toyota and Volkswagen — contribute over R86bn in local value addition each year. These figures are based on 2019 (pre-Covid) actual values submitted by the OEMs to Sars for their assembly incentives, and to the department of trade, industry & competition for investment support and an incentive for local value addition.
This yields a quick multiplier calculation for the SA economy that is a substantial 21 times greater than the cost. Instead of bemoaning the cost of the APDP, its value to the economy should be celebrated.
Why the discrepancy between Sars’s R31.3bn cost claim and the R4.1bn indicated here? To answer that we need to understand how the APDP works. The programme provides two types of incentives to firms that invest: investment support (payable in the form of a cash grant that covers 20%-30% of the total investment amount), and allowing them to rebate the import duties that would render them less competitive than the importers they compete against, assuming they were required to pay them. The value of the import rebates earned is calculated and based on the local value addition generated by the OEMs and their component manufacturers.
It is an understanding of this concept of investment, import rebates, true cost to the fiscus and the industry’s enormous contribution to the local economy that is missing in the support narrative associated with the automotive industry in the business press. The evaluation of the APDP should be simple. Have the investors come to the country, and have the incentives worked to secure major benefit for the economy?
Let’s start with the cost. Of Sars’s R31.3bn total, about R17bn is for the loss of duties on parts that are imported and then re-exported in SA-built vehicles. This duty flow-through is required to make SA attractive as a vehicle exporter and is offered in all competing economies. In their cases, the flow-through is, however, not recognised as a form of incentive. They recognise that the imposition of a duty on imported components for re-export would undermine the business case for local assembly. This duty flow-through is particularly important for SA as nearly 70% of all vehicles produced in the country are exported (when measured by value, the figure increases to 81%).
About R12bn of the total is from rebated import duties earned by the OEMs and their suppliers for recognised local value addition. The rebates earned are not cash based but are rebate certificates used to settle duty payments on imported components used in locally assembled vehicles for the local market and imported models that allow each of the seven OEMs to offer a competitive range of products in the SA market at globally comparable prices.
As an illustration of this, instead of paying the 25% duty on a fully imported vehicle (18% in the case of the EU or UK), the seven OEMs paid an average vehicle duty of 4% in 2019, thus allowing them to offer a compelling range of vehicles in the SA market. The reduction of the duties is moreover a policy objective. The OEMs are required to generate large amounts of value addition to earn the ability to rebate their duties — hence the major benefits secured for the domestic economy from automotive production.
The balance of Sars’s published APDP cost is made up of investment support.
Critically, without the APDP the country would not have an automotive industry that generates over R86bn in value addition, and that lies at the heart of the country’s manufacturing capabilities. If an accurate cost to the government isrequired, then in 2019 this was R2.4bn in cash grants paid to the industry for new investments (those that exceeded R10bn) and R1.7bn in the rebating of excise taxes relating to import duty reductions on imported vehicles — a genuine cost saving to the industry (hence the R4.1bn figure put forward).
It is important to emphasise that the domestic market does not come close to supporting the size and scale of the local automotive industry. By incentivising local production in the manner it does, SA has secured the operations of several major export-orientated vehicle assemblers and their global suppliers, creating more than 110,000 well-paid jobs and securing advanced production capabilities that set benchmarks for the broader manufacturing sector. It is critical that the narrative towards the APDP shifts. Take it away and the automotive industry will contract significantly, perhaps even disappear — as it did in Australia when its support programme was withdrawn. What will the narrative be were this to happen and it was discovered that the cost of the programme is only a fraction of the amount lost to the SA economy? It would be fantastic if Sars and the department of trade, industry & competition were to put their own record straight on this key policy instrument.
Barnes, an associate professor at the Gordon Institute of Business Science and the Toyota Wessels Institute for Manufacturing Studies manufacturing ambassador, was previously lead adviser to then trade & industry minister Rob Davies on the development of the APDP.
Article written by JUSTIN BARNES