Effectiveness and Economic Impact of Tax Incentives in the SADC ...

4-14 EFFECTIVENESS AND IMPACT OF TAX INCENTIVES IN THE SADC REGION
unless it is based on highly simplified methods. 60 If the screening is meant to identify strategic
projects that will deliver dynamic spillover benefits through knowledge externalities or
technical innovations, then ERR estimates are little more than guesswork in the best of
circumstances.
Most countries that offer selective incentives sidestep formal economic analysis by using
simple criteria, such as limiting incentives to projects in “pioneering industries,” non-
traditional export activities, or designated sectors like manufacturing, agriculture or tourism.
Other common criteria include the size of the investment, the number of jobs created, the
capital cost per job, “significant use” of local raw materials, net earning or saving of foreign
exchange, rural enterprises, and positive domestic value added. All of these criteria have been
employed in tax incentive programs in various SADC countries. Some of the standards are
nonsense. For example, “positive value added” will not rule out anything, because no
company will seriously consider an investment where the expected revenues are smaller than
the cost of raw materials and intermediate goods. Likewise, nearly every project producing
for the domestic market can claim to be “saving foreign exchange.” 61 In addition, the
threshold levels for eligibility are often unstated, which renders the evaluation highly
arbitrary and discretionary.
The main problem, however, is that none of these criteria focus on stimulating efficient projects
that would not be undertaken in the absence of special incentives. As Krugman (1983) concluded
from his review of “popular criteria” for targeting industrial promotion policies, it is very
difficult for governments to “devise criteria…which will by and large pick the right
industries,” or establish procedures that will not be driven by political interests rather than
genuine economic benefits.
60 When Botswana offered investment subsidies through its Financial Assistance Program, one criterion was
that qualifying projects needed an ERR above 6 percent. According to a senior government official, the ERR
analysis was rarely carried out. The program was phased out in 1999 after it encountered widespread abuse.
61 The worst criterion that the author has seen appeared in a draft schedule to the Incentives Act in a certain
SADC country in 1997. The criterion was: “any activity which in the opinion of the incentives committee
promotes economic activity.” In this country, technical discussions about the criteria for awarding incentives
held up action on the Incentives Act for several years.