African Integration and Trade Incentives: A

compelling proposition for South African manufacturers

Layout

Introducing the IDC

Types of Trade Incentives

Intra & Extra Regional Trade

RSA Imports and Exports to ROA

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Introducing IDC

Established 1940

Type of Organisation Development Finance Institution

Ownership 100% state-owned

Total Assets (Group) R139 billion (31 March 2014)

Total Liabilities (Group) R32 billion (31 March 2014)

Credit Rating AA+ (Fitch Ratings)

Main Business FocusProviding funding for entrepreneurs and projects that are contributing to industrialisation and job creation

Geographic Activities South Africa and the rest of Africa

Products

Custom financial products to suit a project’s needs including debt, equity, guarantees or a combination of these

Stage of InvestmentProject identification and development, feasibility, commercialisation, expansion, modernisation

Number of Employees 824 (December 2013)

Preferential Trade Agreements

• Regional trade agreements (RTAs) can be defined as reciprocal trade agreements between two or more partners. They include free trade agreements and customs unions;

• In the middle of 2014 some 379 RTAs were in force around the world;

• Yet only 16% of world merchandise trade receives preferences;

• Preference margins of over 10% only account for 2% of world merchandise trade;

• Regional trade agreement have increasingly become an important part of the global trading system;

• African countries/regions are part of no less than 23 of such agreements 14 of whom are African RTAs.

AFRICA Intra and Extra Regional Trade

• In recent years, intra-regional trade has been growing at the expense of extra regional trade;

• Intra regional trade is the lowest in Africa but growing rapidly off a low base;

• Constraints to higher levels of intra Africa trade include: underdeveloped infrastructure border bureaucratic delays proliferation of preferential

trade agreements

TRAs and Integration of African Economies

• RTAs in Africa include Southern African Development Community (SADC) Southern Africa Customs Union Common Market for East and Southern Africa (COMESA) East Africa Community (EAC) Economic Community of West African States (ECOWAS) Economic and Monetary Community of Central Africa (CEMAC)

• South Africa is a member of SACU and SADC in Africa• COMESA-EAC-SADC Tripartite established in 2005 aims

to deepen economic integration of the southern and eastern Africa region

• Existing RTAs could form the basis of deeper integration of African economies

Intra and Extra Regional Trade

Source: WTO

Intra Regional TradeAdvantages• Members are encourage to

specialise;

• Easier access to each others’ market – increase trade;

• Producers can benefit from economies of scale;

• Jobs are created as a consequence of increased trade;

• Firms inside the bloc are protected from cheaper imports from outside.

Disadvantages• Distortion of world trade;

• Benefits of free trade between countries in different blocs is lost;

• Inefficient producers within the bloc can be protected from more efficient ones outside;

• Retaliation by other regional trade blocs.

South African - Tools/ Incentives to promote Trade

• Import and export levies/Incentives• Preferential Trade Agreements

Regional Bilateral Continental

• Manufacturing Incentives MCEP (RSA) APDP (RSA automotive industry) Etc

• Industrial Finance Low interest rate schemes (E.g IDC growE scheme) Export and Import finance schemes Export Finance insurance (E.g ECIC)

Incentives available in major African economies

• The efficacy of incentives in attracting investment remains debatable; • Studies have shown, investors are searching for access to local and regional market,

political and economic stability and favorable bilateral trade agreements;• RSA Incentives

APDP MCEP Tax

• Kenya provides an array of tax incentives which include: Export Processing Zones, offers companies a 10-year corporate income tax holiday Tax relief for research and development (R&D)

• Nigeria offers a wide range of incentives including: Up to 120% of expenses on R&D are tax deductible Local raw materials utilisation 30% tax concession for five years to industries that

attain minimum local raw materials 15% Tax concession for five years employing one thousand persons or more

South Africa’s exports into Rest of Africa

South African exports to Africa by product

South Africa’s Automotive Trade with the rest of Africa

• SA leader in intra-Africa trade;

• Trade skewed in favour of SA;

• In 2013 18% of exports destined for Africa but only 9.4% of imports from continent;

• Automotive industry leader in exports to Africa mostly motor vehicles;

• Africa now largest export market for SA produced vehicles particularly SADC

Source: NAAMSA

South Africa’s Automotive Exports to Africa, 2013

SA Industry Trend – SA Top Export by continent• Europe remains the most

important trading partner.

• Developments in the EU have a direct and measurable impact on the SA auto industry.

• Trade relations with EU are governed by the Trade, Development and Co-operation Agreement (TDCA).

• Under the SA-EU Free Trade Agreement SA produced passenger cars and components with at least 60% local content are imported into the EU duty-free.

Key challenges to Africa Intra trade • Relatively High country risk factor – Commercial and Political risk, thereby resulting in high

cost of funding;

• Inconsistencies and uncertainties in some Government policies;

• Volatility and Erratic market conditions - Forex fluctuation, duty structure changes;

• Logistical infrastructure challenges and lack of distribution networks for products across the region;

• Limited statistical data and market intelligence - Lack of reliable market information ;

• Grey market penetration (second-hand vehicle imports)- Grey market estimated to be 10 times size of new vehicles market size;

• Skills shortage - The shortage of requisite skills hinders growth of the motor industry in Africa.

Conclusion

• Reliable and efficient infrastructure (i.e. roads, ports, rail, telecom etc) is key for regional market integration and connectivity;

• Apart from investment and tax incentives, studies have shown, investors are searching for access to local and regional market, political and economic stability and favorable bilateral trade agreements;

• The numerous RTAs need to be streamlined and consolidated to create a single African market;

• Modest levels of intra Africa trade also indicate the potential for its growth;

• Regional Market integration is key to attracting manufacturing industries.