Firms left in lurch by funding fix

Carambola Invest dries and exports pineapples in a poor area of the Eastern Cape for local supply and export.

The pineapple-growing industry has been under tremendous pressure in recent years as prices fell in light of global oversupply.

“There were only just a handful of pineapple producers left, and because of the price problem and, in order to survive, I had to add value to my product,” said company founder Jonathan Bradfield.

An unusually high global demand for dried pineapple products has since developed – “and I realised I needed to go into a major expansion phase to take advantage of the demand”, he said.

Bradfield’s accountant alerted him to grants available through the department of trade and industry’s manufacturing competitiveness enhancement programme.

Investing R2.15-million in new equipment became an easy decision when Bradfield discovered he was eligible to get 50% of that amount back through the incentive over a three-year period.

The incentive aimed to help productive sectors weather the global economic crisis, attract investment, raise competitiveness and save jobs.

Carambola’s application was submitted and, even though it hadn’t yet been formally approved, the process allowed the company to begin buying specialised equipment that often takes months to arrive in South Africa. “I needed to start ordering the [capital expenditure] in order to fill the orders I had coming in for the next year. I put in half the amount from my own savings and borrowed the rest from the bank.”

The investment meant the company was able to employ 31 new people, 28 of whom had never had jobs before.

But last week, Carambola and other applicants were dealt a blow when the department suddenly declared that funds for the incentive had run out. No new applications would be accepted, and those that had been submitted and were awaiting approval would be rejected, it said.

The funding shortfall is said to have been R2.2-billion this March.

“Over R5-billion was originally set aside for this programme and is now fully committed,” the department said this week, noting that the “very large” number of applications had far exceeded funds set aside.

“The department will continue to honour all approved applications. All applications that were not approved will have to apply afresh. A new application window will be opened in April 2016, pending availability of funds,” it said.

The department says more than 3 000 entities have applied for the programme.

“Eighty-six applications were approved under the industrial financing loan facility; 1?153 [were] approved under the production incentive.” Many of the companies left in the pipeline now find themselves in a difficult spot.

“A lot of companies depended on the cash, and some would have put the business case together based on the incentive expectation,” said Duane Newman, director of Cova Advisory. “It’s a bigger challenge for small guys [who] have spent the money and are relying on it and are not going to get it.”

The programme’s design requires an application for funding against future budgeted expenditure, but claims are assessed against actual expenditure once incurred, Philippa Rodseth, the executive director of industry body the Manufacturing Circle, explained.

“We were banking on the fact [that] we would get a grant,” said the owner of Marshall’s Traditional Healthcare, Vick Maharaj. The company was unsuccessful in its application to the fund some years ago, having not understood at the time that it needed proof that it had funds to go ahead with investment before the application would be approved. With all qualifying criteria in place, in July last year Maharaj decided to apply again.

“Then this year we were asked [by the department] for an updated tax clearance certificate. On October 26 we received a letter to say it was ready for adjudication [a final process before formal approval]. On October 27 we heard the programme had been suspended.”

Maharaj has procured R4-million worth of specialised equipment in anticipation of the incentive covering 30% of it. “I was on the verge of creating jobs, but now I’m assessing whether I can afford to do that.”

Rodseth said several Manufacturing Circle members are directly affected, and are frustrated with the department’s inconsistent communication about the status of applications and the delays between submission and approval – or rejection, as the case may be.

Newman, who is also vice-chair of the Incentive Consultants Association, said the association represents about 1 000 manufacturers and a large portion of the manufacturing competitiveness applications.

“One of our biggest challenges is communication,” said Newman, explaining that association members monitor their own applications to get a sense of the size and length of the manufacturing competitiveness enhancement application pipeline, so as to manage client expectations.

“The challenge is the [department] has [a] big pipeline of applications and there is a long lead time between application and approval,” he said. Applications can take up to 18 months to process. “What happened is they started to slow down communicating approvals and the manufacturing competitiveness system wasn’t updated regularly.”

Grants are criticised as costly to administer. “My view is that the [programme] was poorly designed as it had too many components to it,” said Newman. “This has added complexity for clients and ultimately to the department to process.”

Some clients have received no approval or rejection letters, so applicants don’t know whether they have qualified or not. But Newman commended the department for the significant increase in approval letters since it announced the suspension of the programme last week.

The problem seems to have been a long time coming. The Democratic Alliance spokesperson on trade and industry, Dean Macpherson, said presentations to Parliament in March indicated that the manufacturing competitiveness funds were in shortfall of R2.2-billion for the year.

He said the department had approached the treasury about additional funding, but was unsuccessful. Neither department would comment to the Mail & Guardian on what had transpired.

In its interim budget policy statement in October, however, the treasury said a review of business incentives would be conducted during 2016, with a focus on creating jobs and incentivising labour-intensive economic activities. The review’s outcomes will inform the allocation of resources for business incentives in 2018-2019 and beyond, the statement said.

Underlining the programme’s success, the trade and industry department said the funding had enabled enterprises to invest an expected R25-billion in key sectors such as agro-processing, and had benefited companies such as Adcock Ingram, Parmalat SA and Stellar Winery.

But Jerome Morkel, Tandym Print’s managing director, says he would have held off on commissioning R30-million worth of equipment and the hiring of 21 new staff had he known the programme would be suspended.

“It grates me. We are really just trying to do good,” he said. “We just want to grow businesses and compete on an equal footing. This is now stopping us from doing so.”

The incentive’s applications and claims process is outsourced to consultants. There is an administrative cost, whether the company insources or outsources the work. Some consultants offer to refund fees should an application be unsuccessful.

“Some consultants are in trouble now,” said Newman. One such consultant, who did not want to be named, told the Mail & Guardian he now owed his clients R75 000. “I don’t have it,” he said.

But, Newman says, according to industry estimates there is a large fall-off rate between what is applied for and what is ultimately paid out. From what was in the pipeline and what people have applied for, less than 20% has been paid by the department. This is owed to factors such as delays between the application and the ultimate claim, and in the payment of claims.

An industry insider, who asked not to be named, said funding projections by applicants may not always be accurate; when grants are approved and administered, that cash may remain unused until the department claws it back. “I’d say only approximately R1-billion was paid out in 2015, while the contingent liability was R3.9-billion at theend of March 2015. This has subsequently increased to R5-billion after March 2015 to date.”

The resulting lack of capital expenditure and increased competitiveness will impact on projected growth targets and, in some cases, lead to job losses, said Rodseth.

“For applications in progress, companies may decide not to incur additional expenditure to enhance their competitiveness due to the uncertainty now around the application process,” she said. “Businesses planning to apply to the programme will no longer do so due to the temporary suspension, and are unlikely to make any strategic plans around the reinstatement, as this is pending the availability of funds.”

If the application process opens in April, Marion Smith, a foreign investor and owner of organic winemaker Elgin Ridge, doesn’t know whether she will reapply. “I have to give it some serious thought. There is a lot of work that goes into it. You have to hire an accountant and have business plans done. I’ve already incurred this cost. I will have to have some confidence in process.”

Elgin Ridge’s application was also at the adjudication stage and had a green energy component, which would allow the enterprise to operate off the national power grid. But its expansion plans are now on hold.

Smith said she found it “astonishing” that a programme can be stopped without notice or allowing some leeway for those already in the pipeline.

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