SOUTH AFRICAN MOTOR INDUSTRY DEVELOPMENT PROGRAM WILL BE

UNCLAS SECTION 01 OF 03 PRETORIA 003203 SIPDIS DEPT FOR AF/S; AF/EPS; EB/TPP/MTA USDOC FOR 4510/ITA/IEP/ANESA/OA/JDIEMOND TREASURY FOR CUSHMAN DEPT PASS USTR FOR PCOLEMAN SIPDIS E.O. 12958: N/A TAGS: ETRD ECON EINV AGOA USTR SF SUBJECT: SOUTH AFRICAN MOTOR INDUSTRY DEVELOPMENT PROGRAM WILL BE EXTENDED BEYOND 2012 ¶1. (U) Summary. The Department of Trade and Industry (DTI) announced that the Motor Industry Development Program (MIDP) will be sustained beyond 2012. According to Tshediso Matona, Director General for the Department of Trade and Industry, a post-2012 MIDP would take into account WTO rules with respect to government support for industries, address vehicle affordability and the extent to which tariff protection impacts on affordability, as well as improve employment in the vehicle manufacturing industry. Although widely regarded as one of the most successful pieces of post-apartheid trade and industrial policy, the MIDP has been criticized for high domestic car prices, poor job creation, and weakness in its global trade rules. Yet, the local automotive industry called for continued support after 2012 to ensure international competitiveness. End Summary. Review Process -------------- ¶2. (U) On July 24, 2006, Tshediso Matona announced that the MIDP will be sustained beyond 2012. This came after local industry voiced concern over ongoing uncertainties in the regulatory environment while the MIDP review process was in progress. The DTI has been studying a report on the review of the MIDP produces by independent consultants, Blue-print International, for some months now. According to Matona, the DTI is close to finalizing its thoughts on how the program should progress. He indicated that a post-2012 MIDP would take on an entirely new form. ¶3. (U) Matona explained that government will seek to build on the successes of the MIDP, while modifying it to bring it more into line with policy interventions in other parts of the world. Matona emphasized that the post-2012 adjustments will take into account the WTO rules regarding government support for industries. He mentioned that the review will definitely address legitimate concerns about vehicle affordability and the extent to which tariff protection impacts on affordability. Moreover, government will look at a way to improve employment in the motor industry during the current review. Background -------------- ¶4. (U) The Department of Trade and Industry (DTI) implemented the Motor Industry Development Programme (MIDP) with effect from September 1, 1995. Since then the program has been extended twice and was scheduled to expire in 2012. The MIDP is an import/export complementation arrangement, whereby the local-content value of components or built-up vehicles exported, earns credits that can be used to rebate import duties on components and vehicles. The program also made provision for a gradual reduction in import duties on both vehicles and components. Import duties on vehicles and components are currently at 32% and 26% respectively to reach 25% and 20% respectively in 2012. The MIDP has as key objectives the improvement of international competitiveness, vehicle affordability in the domestic market as well as export and employment growth. Successes -------------- ¶5. (U) The MIDP is widely regarded as one of the most successful pieces of post-apartheid trade and industrial policy introduced into the South African economy. Moreover, government praised the MIDP for pushing the vehicle sector into becoming a major contributor to the economy and transforming a small, protected industry into a competitive global player. The National Association of Automobile Manufacturers of South Africa (Naamsa) supports the MIDP for its successfully contribution towards the industry's integration into global markets and making it a global source of high technology, high quality automotive products at internationally competitive prices. Statistics -------------- ¶6. (U) Statistics South Africa (StatsSA) data for 2005 shows that the automotive industry is South Africa accounted for 30% of the country's manufacturing output. According to Naamsa data, vehicle exports grew from 15,764 units in 1995 to 139,912 units in 2005. Vehicle exports as a percentage of total domestic production increased from 4% in 1995 to 27% in 2005. Imports grew from about 27,289 units in 1995 to over 233,489 units in 2005. Component exports have also grown from a negligible amount to more than R25 billion in 2005. Moreover, investment in the vehicle manufacturing PRETORIA 00003203 002 OF 003 sector has grown from less than R1bn annually in 1995 to R3.6 billion in 2005, exceeding R2.0 billion in every year since 2001. Criticisms -------------- ¶7. (U) While most popular discussions focus on the MIDP's successes, questions have been raised about some of its unintended impacts. Critics argued that investment success has come on the back of domestic consumers paying excessive prices for cars, neglecting a stated objective of the MIDP. Canadian expert and professor at Queen's University, Frank Flatters, in his study of the MIDP which was funded by USAID and DFID, estimated that motor companies had received almost R100 billion in duty rebates during the almost eleven years the program has been running. According to his analysis, this subsidy was paid for by domestic consumers of vehicles in the form of restricted choice and higher prices. Moreover, consumers subsidized not only vehicles produced for the domestic market, but also those produced for export. Flatters said the subsidy program was possible because of import duties of more than 30% and a virtual ban on used car imports, which made car prices much higher than necessary. Flatters recommended that the review of the MIDP should include an economic cost-benefit analysis conducted by an independent third party. ¶8. (U) A Competition Commission investigation into excessive pricing in the South African new vehicle market, found that South African car prices were on average 14% more expensive than in Europe. The 14% difference cost buyers of new cars an additional R17.5 billion annually. The commission said it believed the high level of South African car prices was mainly due to the MIDP, particularly high tariffs on imported cars and components. Moreover, the report stated that prices are to an extent based on import parity as prices of locally manufactured vehicles were aligned with prices of imported vehicles, adding that local manufacturers knew they could not price above imported substitutes. The commission recommended a decline in the tariff component of the MIDP. The motor industry, supported by a study by industry specialists, has disputed these claims. ¶9. (U) In addition, critics questioned if the benefits of the MIDP have been spread wide enough. Flatters pointed out that in spite of investment of more than R14 billion since 2000, the program has been unsuccessful in creating job growth in vehicle assembly. Naamsa data indicates that employment in motor vehicle manufacturing declined by 17% during the first five years the MIDP was in operation, after which it stabilized for the period 2000 to 2004, and showed growth for the first time in 2005. Employment in the components production has grown by a modest 12% since 2000. According to Flatters the MIDP is an expensive scheme that boosts the profits of the automotive manufacturers without stimulating job creation. Moreover, automotive production in South Africa is biased towards capital intensive sectors, and not towards using lesser skilled labor. ¶10. (U) Furthermore, analysts regard the MIDP as unsustainable in terms of global trade rules. Dr Justin Barnes, Managing Director of Benchmarking and Manufacturing Analysts, pointed out that the current export subsidies provided by the MIDP are not WTO compliant. According to Barnes, South Africa could consider a program similar to the WTO-compliant Australian Automotive competitiveness and Investment Scheme (ACIS),which was implemented in 2000. According to this program, duty rebates are still on offer, but tied to production volumes and development criteria, such as skills development and environmental aspects. Flatters noted that WTO compliance is an issue that should be addressed in the current MIDP review. ¶11. (U) The International Monetary Fund (IMF) in its latest annual review of the SA economy, criticized the MIDP as a complicated incentive scheme, with unclear costs, designed only to make the local motor industry internationally competitive. Furthermore, the IMF argued that local content programs in the motor industry tend to raise cost and prices, reduce competition and generate few, if any benefits for employment. Senior Financial Officers of major motor manufacturing firms have in the past complained about the MIDP's highly complex and costly administration. MIDP Support -------------- ¶12. (U) Nevertheless, the local automotive industry has stated that it requires continued support after 2012 to ensure international PRETORIA 00003203 003 OF 003 competitiveness. Manufacturers not only want the MIDP to be extended beyond 2012 but also for it to be WTO compliant. Brand Pretorious, chairman of McCarthy holding, said the motor industry is far too valuable for South Africa as a job creator and earner of foreign reserves, not to be supported by government. Furthermore, manufacturers have already made long-term investments in South Africa. BOST