My many posts on investment incentives have mostly focused on the US.  I’ve been collecting some info on incentives in Canada, the UK, Brail and now South Africa.

South Africa is an interesting case where the majority of the incentives are provided through a government agency based on this tax incentive act.

This act directly specifies what types of investments are eligible for incentives and at what level.

• R900 million in the case of any Greenfield project with a preferred status;
• R550 million in the case of any other Greenfield project;
• R550 million in the case of any Brownfield project with a preferred status;
• R350 million in the case of any other Brownfield project;
• An additional training allowance of R36 000 per employee may be deducted from taxable income; and
• A maximum total additional training allowance per project, amounting to R20 million, in the case of a qualifying project, and R30 million in the case of a preferred project.

Basically, new investment (greenfield) is privileged over mergers and acquisitions or expansions of existing investment (brownfield).

Further details include:

• Upgrade an industry within South Africa (via an innovative process, cleaner production technology or improved energy efficiency);
• Provide general business linkages within South Africa;
• Acquire goods and services from small, medium and micro-sized enterprises (SMMEs);
• Create direct employment within South Africa;
• Provide skills development in South Africa; and
• In the case of a Greenfield project, be located within an Industrial Development Zone (IDZ).

Sounds fair.  How does it work in practice?  This is the latest press release.

Not a lot of detail on these investments, but I wanted you to focus on one stat.  The claim is that these investments will create 1,618 direct jobs and 25,448 indirect jobs.  Indirects jobs are the jobs that will be created by suppliers or other businesses benefiting from the investment.

This is a crazy number of indirect jobs.  My conversations with people in US economic development offices have indicated that they have hard rules (and some specific software) on calculating the indirect benefits of investment.  Automobile investment is the best type to get, where the multiplier is 7-8 indirect jobs for every direct job at the most.  The South African average multiplier is an average of over 15.

What is going on?  This week I saw five announcements of incentives in South Africa.  Below are the companies and tax incentives in U.S. dollars.

1. Mamba Cement: $20.59 million
2. Omnia Group: $8.71 million
3. Sepkahu Fluoride: $20.59 million
4. Sappi Southern Africa: $20.59 million
5. Lomotek Polymers:  $2.51 million

What do these investments have in common?  First, all five are South African companies, so don’t blame foreign MNCs for this.  Second, all of these investments are classified as being investments in the “Basic Materials”.  Mamba Cement is pretty self-explanatory.  Omnia, Sepkahu and Sappi are chemical plants and Lometek makes “second generation” pallets.

Do these investments justify job multipliers of 15?  I don’t have any details about South Africa, but the United States Bureau of Economic Analysis has standard multipliers by industry (and by region).  Here are multipliers for investments in California.

Don’t bother clicking on the document.  The quick story (presented in Column 6 of the many pages of tables) is that for every direct job created, most industries created about 2 total jobs.  A few industries hit multipliers of 6 or 7 (automobile production is 6.45).  Petroleum refineries are a 9 and Electronic Computer manufacturing tops 13, and on type of finance (funds, trust, etc.) hits 14.  That is the maximum.

The industries most closely related to the three chemical investments are chemicals are 3-7, and cement at 4.45.  I don’t have a multiplier for “second generation” pallets, but most plastic manufacturing has multipliers of 2-3.  My brother worked at a pallet company in Wisconsin.  2 is generous.

What is the story here?  Looks like the South African government is providing very large incentives (even by US standards) to local companies using inflated indirect job numbers.  Why?  That is a question for future research.