Strategic Choice

Chief Directorate

Chapter 4: Evaluation of the Small Medium Manufacturing Development Program

4.6. Strategic Choice

investment of R2 324 100 000, employed a total of 5825 employees, or on average one employee per R398 987 invested in qualifying assets.

Table 4-2 summarises the three studies referred to in the preceding paragraphs.

The study concludes that the SMMDP has been aimed at a target group of companies that when combined will generate more employment opportunities than the target group of the Regional Industrial Development Programme.

The SMMDP on it's own, however, is not sufficient to create employment that would not have existed without the availability of the incentive.

1998 Annual Report

Ernest and Young RIDP evaluation

5091

5825

148 303,974,000 2,053,878

173 2,324,100,000 13,434,104

59,708

398,987

Table 4-2: Summary of Employment Data Source: Compiled from Secondary Data, Annual Report of the SMMDP (1998), and Ernst and Young, Evaluation of the Regional Industrial Development Programme (1991

RIDP and 1993 SRIDP) (1996).

4.5.3. External Shocks

The SMMDP is not able to prevent external shocks, but by providing assistance that increases cash reserves and drives up return on investment, companies that participate in the programme are better able to absorb the effects of external economic shocks than companies that did not receive assistance.

Non-profit organisations more often utilise a prescriptive approach, due to their objectives having been clearly defined by stakeholders prior to the development of the strategy. It was also noted, however, that an emergent strategy is better suited to an environment that is constantly changing, and where stakeholders cannot predict from one day to the next what circumstances they may find themselves in.

In the global competitive environment in which South African companies compete, the government may be foolish in expecting that the business environment will be the same tomorrow as it is today. In the not too distant past, organisations have been severely effected by changing conditions in global financial markets, the East Asian crisis, and regulations imposed upon countries by the World Trade Organisation. In an environment like this, an emergent strategy would be more appropriate.

The strategic choices made by the Chief Directorate: Manufacturing Development are based on traditional tried and tested approaches to government intervention in manufacturing, and while effective when appropriately employed, are somewhat stayed in their effect. Perhaps the time has arrived for a more radical approach to incentivisation. This suggestion is made with the acute awareness of the administrative, budgetary, and capacity constraints faced by the Board for Manufacturing Development, but nevertheless if results different to those achieved in the past are desired, then different methods should be employed in the future.

The scope of this study is limited to the evaluation of methods employed in the SMMDP. The available choices implemented in the past are discussed below.

4.6.1.

Choice of Alternative Incentives:

The government has a host of mechanisms at its disposal that could be used to address market failures. In the context of manufacturing development it has successfully used some alternatives in the past, which are listed below:

4.6.1.1.

Labour Subsidy

Labour subsidies offer a direct grant per waged employee employed. These schemes would directly create employment by encouraging employers to employ additional staff, and reducing the cost of employing them.

This kind of incentive is open to broad scale abuse, and fraudulent claims can easily be lodged. In addition, productivity of workers becomes less of a priority because the employer is not bearing the full cost of employment. It is therefore not a practical solution to creating employment.

Perhaps more relevant than a failed past incentive mechanism, is the adverse effect that labour legislation has on the ability of employers to be competitive.

The effect of the comprehensive regulation that takes place in the labour market is to convert the labour component of manufactured good to a fixed cost. Labour input should be a variable cost of production that varies according to the number of units produced. The effect of legislation is to force employers to maintain a constant labour force regardless of output. The increase in fixed cost associated with this phenomenon results in an increase in the risk of failure of the manufacturing concern, because a small reduction in turnover will render the company unable to cover its fixed costs.

The effect of the SMMDP should therefore be balanced with corresponding legislation in the labour area if is to be effective

4.6.1.2.

Rental Subsidy

A subsidy of rental assists companies to reduce the costs of doing business and therefore increases returns.

4.6.1.3.

Transport Subsidies

A rail rebate, road transport subsidy or any other form of transport rebate will assist companies in outlying areas to be competitive with companies in a closer proximity to their markets. The effect of these subsidies is to remove the primary constraint preventing companies from establishing themselves in locations with high levels of unemployment. The impact of this subsidy is

and the development of towns and infrastructure surrounding factories in outlying areas.

These companies are also able to benefit from locating themselves close to the source of raw materials, reduced costs of labour, and cheaper utilities.

Pollution can also be controlled in this manner.

The transport subsidy is therefore an effective tool for a variety of differing objectives. Like the wage subsidy, however, this subsidy is open to some abuse.

4.6.1.4.

Relocation Grant

Relocation grants are offered to companies to aid in the relocation of plant and equipment. Their application is particularly relevant where organisations are required to move into decentralised areas, and incur relocation costs as a result of their move. When these relocation costs would make moving unattractive, the provision of relocation grants by government would remove one of the reasons for not desiring to move.

The use of relocation grants has been employed as an element of the SMMDP, entitled the Foreign Investment Grant. The Foreign Investment Grant is aimed at assisting foreign direct investors to import machinery, by paying for a portion of the relocation costs of plant and machinery. It is only payable on new machinery.

This tool is particularly useful when foreign investors are considering alternative countries to house their projects, and has been employed in the past with good results.

4.6.1.5.

Training Allowance

Training Allowances are provided to assist companies to train their employees. The allowance may take the form of a tax rebate for training completed, or a direct cash grant to assist in the provision of training.

A training allowance is an effective tool to encourage companies to invest money in the training of employees. In light of the South African structural

constraints associated with an unskilled labour force, a training grant would be appropriate.