Provide incentives to support local production
WORLDWIDE, content policies have been noted as a panacea to import substitution. A number of countries have implemented backward integration policies (BIP) with a view of encouraging local production.
Nigeria, for example, implemented BIP in 2002, which was supported with various fiscal and non-fiscal incentives. Studies by the World Bank showed that local capacity utilisation in the sector grew by 400% in the six years following the introduction of the Nigerian Content Policy. In addition, World Bank noted that the local content policy has had a positive impact on value creation in Nigeria’s oil and gas industry through greater participation of local firms and the development of backward linkages, although the overall effects have been below targeted levels.
World Bank results also show that backward linkages have helped create both direct and indirect jobs. Still in Nigeria, the World Bank’s recent studies estimates local content policies in the sector have been responsible for attracting $5 billion into the local economy and created 38 000 jobs.
Recently, I undertook a study in the food and beverages and seed industries and noted that companies are implementing local content enhancement initiatives regardless of the fact that the tax incentives are elusive.
In the seed industry, the majority of seed houses have contract agreements with farmers aimed at the provision of a reliable grower base or uninterrupted supply of seed which ranges from maize, wheat, soya bean, vegetable, sorghum and sugar bean seeds. In support of the outgrowers’ schemes through contract farming, companies are supporting farmers with working capital, investment in farm infrastructures and extension services.
The seed industry indicated that the economic collapse period affected their company operations and it forced them to import seed from other countries. In 2009, maize seed production fell to 12 000 metric tonnes against a national requirement of 35 000 metric tonnes per year.
However, as a result of local content support measures, maize seed production increased to an average of about 30 000 metric tonnes of seed maize, leaving an import requirement of just 5 000 metric tonnes.
With respect to the dairy industry, the sector has come up with a strategic plan for its resuscitation (Zimbabwe Association of Dairy Farmers’ Strategic Plan 2018 to 2022). The strategic plan was developed by the industry with a view of working towards self-sufficiency in milk production. In this regard, the industry is working on mobilising US$46 million which will be used in local content support programmes which must yield 131 million litres of milk by 2022.
The dairy industry strategy was mooted when key dairy processors were already working on key local content enhancement programmes which inter alia include establishment of the Dairy Empowerment Schemes where an excess of $20 million was invested in national herd building since 2011.
Technical and extension support to farmers and dairy processors have used their strong balance sheet to borrow money on behalf of the farmers who have no capacity to do so in the absence of collateral.
Based on these initiatives and also in line with international best practice, the Ministry of Finance must consider offering the following tax incentives: ◆ Double tax deductibility for all local content supporting programme expenses, for example, interest accrued and extension services costs; Lower tax rates for companies investing in milk supply. The tax regime should be balance sheet or income statement based. For example, for the next five years, Government must reduce corporate tax by 5% for every additional $1 million support. This is key as the industry is working on mobilizing $46 million for national herd building which is targeting to produce $131 million of milk. At this level of production, that is, in the next five years, the industry will meet the national milk requirements and spur exports whilst at the same time creating savings of $20 million from the current imports of powdered milk. Government stands to get more VAT which comes from the multiplier effects of the $46 million investment. Dr Mugano is an author and expert in Trade and International Finance. He is a Research Associate at Nelson Mandela University, Registrar at Zimbabwe Ezekiel Guti University and Director at Africa Economic Development Strategies. Feedback: Cell: +263 772 541 209. Email: gmugano@gmail.com