a proposed framework to create a
TRANSCRIPT
A PROPOSED FRAMEWORK TO
CREATE A SUCCESSFUL TOURISM
INVESTMENT CLIMATE IN
KWAZULU-NATAL
Prepared on behalf of KwaZulu Natal Tourism Authority by Kessel Feinstein Consulting
© KwaZulu Natal Tourism Authority
ISBN 1-919758-14-3
July 1998
2
TABLE OF CONTENTS
Chapter Page
GLOSSARY OF TERMS AND ACRONYMS
SYNOPSIS 1. INTRODUCTION
1.1 General 1 1.2 The Brief 1 1.3 Market Research 2 1.4 Assumptions 3 1.5 Scope of Analysis 3 1.6 Outline 6
2. BACKGROUND
2.1 Worldwide Tourism Industry 7 2.2 South African Tourism Industry 8
2.2.1 Foreign Tourism 8 2.2.2 Domestic Tourism 9 2.2.3 Projected Growth in Tourism 9
2.3 KwaZulu-Natal Tourism Industry 9 2.4 Economic Spin-offs of Tourism 11
2.4.1 Development 11 2.4.2 Job Creation 12 2.4.3 Foreign Exchange 12 2.4.4 Tax Generator 13 2.4.5 Tourism Multiplier 13
2.5 Socio and Environmental Benefits of Tourism 14 2.6 Tourism and the Economy 15 2.7 Tourism Investment Incentives 16
2.7.1 Financial Incentives 16 2.7.2 Fiscal Incentives 18 2.7.3 Other Incentives 18
3. ISRAEL
3.1 General 19 3.2 Legislation and Regulation 19 3.3 Tourism Investment Incentives in Israel 19
3.3.1 Financial Incentives 20 3.3.2 Fiscal Incentives 20
3.4 Community Access 22 3.5 Institutional Support 22
3.5.1 The Israeli Center for Business Promotion 22
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4. MALAYSIA
4.1 General 24 4.2 The Tourism Industry 24 4.3 Legislation and Regulations 25 4.4 Investment Incentives relevant to the Tourism Industry 25
4.4.1 Fiscal Incentives 25 4.4.2 Financial Incentives 29 4.4.3 Other Incentives 29
4.5 Success of Malaysia’s Investment Incentives 30 4.5.1 Labour Force 30 4.5.2 Industry 31
4.6 Community Access 32 4.7 Institutional Support 32
5. IRELAND
5.1 General 33 5.2 The Tourism Industry 33 5.3 Legislation and Regulations 34 5.4 Investment Incentives for the Tourism Industry 34
5.4.1 Fiscal Incentives 34 5.4.2 Financial Incentives 36 5.4.3 Other Incentives 42
5.5 Success of Ireland’s Investment Incentives 42 5.6 Community Access 43 5.7 Institutional Support 44
5.7.1 IDA Ireland 44 5.7.2 Forbairt 45 5.7.3 The Shannon Development Company 45 5.7.4 Bord Failte Eireann 46 5.7.5 The Irish Trade Board 46 5.7.6 Bank of Ireland 47
6. AUSTRALIA
6.1 General 48 6.2 The Tourism Industry 48 6.3 Legislation and Regulations 48 6.4 Investment Incentives for the Tourism Industry 49
6.4.1 Financial Incentives 49 6.4.2 Fiscal Incentives 51 6.4.3 Other Incentives 53
6.5 Success of Australia’s Investment Incentives 54 6.6 Community Access 54 6.7 Institutional Support 54
7. SINGAPORE
7.1 General 55
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7.2 The Tourism Industry 55 7.3 Legislation and Regulations 56 7.4 Investment Incentives for the Tourism Industry 56
7.4.1 Fiscal Incentives 56 7.4.2 Financial Incentives 57
7.5 Success of Singapore’s Investment Incentives 60 7.6 Community Access 61 7.7 Institutional Support 61
7.7.1 Economic Development Board 61 8. KWAZULU-NATAL
8.1 Macro Overview 62 8.2 The Tourism Industry 63 8.3 Legislation and Regulations 64 8.4 Current Investment Incentives offered in KwaZulu-Natal 64
8.4.1 Fiscal Incentives 65 8.4.2 Financial Incentives 66 8.4.3 Other Incentives 74
8.5 Success of South Africa’s Investment Incentives 77 8.6 Community Access 78 8.7 Institutional Support 79
9. RECOMMENDATIONS
9.1 Pre-requisites 84 9.2 Legislation 86
9.2.1 Tourism Policy 86 9.2.2 Other Legislation 88
9.3 Regulations 89 9.3.1 Abuse of Incentives 89 9.3.2 Loss of Revenue 89 9.3.3 Complicated Income Tax Legislation 90
9.4 Regulation 91 9.5 Incentives 91
9.5.1 Policies to Increase Tourism Demand In KwaZulu-Natal 92 9.5.2 Policies to Stimulate Capital Investment in Tourist
Facilities 96 9.6 Inappropriate Investment Incentives 103
9.6.1 Unconstrained Development 103 9.6.2 Fiscal Incentives 104 9.6.3 Financial Incentives 104 9.6.4 Labour Force 105
9.7 Community Access 105 9.8 Institutional Support 106 9.9 Conclusion 108
10. BIBLIOGRAPHY
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Annexure A Summary of Significant Tourism Related Investment Incentives Annexure B List of Promoted Activities and Products – Malaysia Annexure C List of Promoted Activities and Products – South Africa Figure 1.1 Components of the Tourism Industry 5 Figure 2.1 South Africa’s Overseas Tourism Arrivals 8 Figure 2.2 Regional Marketshare of the Domestic Leisure Tourist Market 11 Figure 2.3 Regional Marketshare of the Domestic Leisure Business Market 11 Figure 8.1 Composition of the Private Economy in 1995: KwaZulu-Natal 63 Table 2.1 World Travel & Tourism Aggregates 7 Table 2.2 Projected Growth of South Africa’s Tourism 9 Table 2.3 Purpose of Visit by Foreign Visitors 10 Table 2.4 Tourism Income Multipliers for Selected Overseas Countries 14
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Confidential
A PROPOSED FRAMEWORK TO CREATE A
SUCCESSFUL TOURISM INVESTMENT CLIMATE IN KWAZULU-NATAL
Prepared on behalf of KwaZulu-Natal Tourism Authority by Kessel Feinstein Consulting
February 1998
7
GLOSSARY OF TERMS & ACRONYMS
Balance of Payments
Record of transactions of the economy with the rest of the
world. It includes borrowing and lending and the exchange
of assets between countries as well as imports and exports
of goods and services.
Biodiversity
The variability among living organisms from all sources,
including terrestrial, marine and other aquatic ecosystems
and the ecological complexes of which they are part; this
includes diversity within species, between species, and of
ecosystems.
Biological Resources
Includes genetic resources, organisms or parts thereof,
populations, or any other biotic component of ecosystems
with actual or potential value for humanity.
Conservation
The management of human use of the biosphere to yield
the greatest benefit to present generation while maintaining
the potential to meet the needs and aspirations of future
generation. Conservation therefore includes sustainable
use, protection, maintenance, rehabilitation, restoration and
enhancement of the natural environment.
Developed country
A self-reliant first world country with high per capita income,
sophisticated financial infrastructure, human resources and
capital formation and a high level of technological
development.
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Developing country
A country which has embarked on a process of
development, characterised by low levels of technological
development, low standards of living, poverty and illiteracy.
DEAT
Department of Economic Affairs and Tourism
DTI
Department of Trade and Industry
Enhancement
Increasing the capacity of a system or population to fulfill a
particular function or yield a specific product.
Ecotourism
Environmentally and socially responsible use of natural or
near natural areas that promotes conservation, has low
visitor impact and provides for beneficially active socio-
economic involvement of local people.
Entreprenuer
A person who undertakes a growth oriented commercial
activity with a view to profitability and wealth creation and
accepts its associated risks.
Environment
Includes natural, urban, human living and cultural
environments.
Exempt from tax
Free from any obligation to pay income taxes.
Financial Incentives
See Section 2.
Fiscal Incentives
See Section 2.
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GDP
Gross domestic product – the total value of all final goods
produced and services provided in the economy during a
given time period. It is the basic measure of the total level
of economic activity.
IDC
Industrial Development Corporation
International/Foreign Tourist
A person who travels to a country other than that in which
he has his usual residence, for at least one night but less
than one year, and the main person of whose visit is other
than the exercise of an activity remunerated from within the
country visited.
Investment Incentives
Direct benefits made available to investors by government
in order to induce investment.
ITMAS
International Tourism Marketing Assistance Scheme
KFC
KwaZulu Finance and Investment Corporation
KMI
KwaZulu-Natal Marketing Initiative
KZNTA
KwaZulu-Natal Tourism Authority
Multiplier effect of tourism
The additional flows of money and credit in the economy as
a result of the initial tourism spend.
Other Incentives
See Section 2.
Previously disadvantaged
communities
Non-white population groups that were largely excluded
from mainstream tourism activities.
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Private sector
The component of an economy that is free from direct
control by the State.
Public sector
The component of an economy that is controlled by the
State.
R & D
Research and development
Responsible tourism
Tourism that promotes good governance of the
environment through its sustainable use by involving local
communities, by ensuring the safety and security of visitors
as well as ensuring communication with and participation
by government, employees, employers, unions and local
communities.
SBDC
Small Business Development Corporation
SMMEs
Small, micro and medium-sized enterprises owned and/or
operated by the previously disadvantaged population
groups.
Successful tourism investment
climate
An environment which encourages investment in the
tourism industry through:
the implementation of attractive investment incentives;
the creation of demand for tourist facilities and services
over and above the intrinsic demand created as a
result of the nature of the industry;
Political and social stability;
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The intrinsic value of existing natural and other
resources.
the creation of a stable economic environment which is
not significantly affected by high crime rates, rising
costs and other adverse economic factors.
Sustainable tourism
development
Tourism development and any other tourism activity which
optimises the economic and other social benefits available
in the present without jeopardising the potential for similar
benefits in the future.
Tax Holiday
An exemption from corporate income taxes.
Tourism Investment Incentives
Direct benefits made available to investors in the tourism
industry by government in order to induce investment.
Tourist
A person who travels away from home, staying away for at
least one night.
The tourism industry
See Section 1.
Tourism infrastructure
Accommodation establishments, transport systems and
other tourist facilities including entertainment, catering etc.
Tourism Policy
A course of action decided on by a government to facilitate
the development, promotion and administration of the
tourism industry.
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WTO
World Tourism Organisation
WTTC
World Travel and Tourism Council
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SYNOPSIS
Tourism is an activity that must play an important role in the economic and technological
development of KwaZulu-Natal. Development of the tourism industry will facilitate the
creation of new employment opportunities and provide an important source of foreign
exchange.
If tourism policies are carefully developed, the tourism industry would not only result in
an increased source of income and the creation of new jobs, it would also stimulate
infrastructural development.
In addition, an effective tourism policy could reduce poverty, foster entrepreneurship
and promote the growth of domestic industries, stimulate production of food and local
handicrafts, facilitate cultural exchange and contribute to social goodwill in the province.
In KwaZulu-Natal, a significant problem is one of unemployment. The economy will
require many new positions for job seekers wanting to enter the labour market in the
future. Tourism, which has sometimes been referred to as an “engine” of employment
offers an important source of jobs. According to the World Travel & Tourism Council
(WTTC), the tourism industry provided employment for over 250 million people in 1996
(1 in every 9 workers). The tourism industry is a particularly good potential source of
employment creation because it is both labour intensive and likely to grow in the future.
Estimates released by the WTTC indicate that by 2005, this industry is expected to
employ 385 million people, representing 11,3% of the world’s workforce. It has a further
advantage of creating employment in the “difficult-to-employ”, lower-skilled occupations
(for example, housekeepers and porters in accommodation establishments, waiters and
kitchen cleaners in restaurants and coach drivers in tour operating businesses). The
tourism industry is therefore likely to create jobs for all levels and representative groups
of the labour force in KwaZulu-Natal.
In addition to these direct benefits associated with an expanding tourism industry,
tourism expenditures contribute significantly to state and provincial earnings and tax
receipts, particularly in light of the multiplier effect.
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If carefully planned, tourism can (in addition to the potential benefits already discussed)
become an important tool for increasing income in areas of high unemployment or
where underutilisation of resources is prevalent. This is of particular importance to a
country like South Africa where racial, political and income disparities are evidenced.
Of particular importance to KwaZulu-Natal, a province committed to encouraging social
and economic development, is the fact that international trends demonstrate that small
businesses dominate the tourism industry worldwide. Tourism therefore provides an
avenue for a local community to become involved in an economic opportunity.
Community participation further facilitates social harmony, a reduction in crime and
creates economically active people.
The tourism industry is a large and rapidly growing sector of commercial activity and
KwaZulu-Natal’s share of total world tourism is well below its potential. Although the
province currently has a large share of the domestic tourism market, its share of the
total value of this market has declined in recent years. Statistics released by Satour
indicate that KwaZulu-Natal’s share of the value of the domestic tourism market has
declined from 32,0% in 1994 to 28,2% in 1996. KwaZulu-Natal has a relatively small
slice of the foreign tourism pie (the province only attracted 27% and 33% of all foreign
visitors to South Africa in Summer and Winter 1997 respectively according to Satour),
and needs to increase its market share to benefit from the high foreign tourist spend.
The potential socio-economic benefits of an attractive, accessible and developing
tourism industry clearly warrant encouraging the development of a climate which is
conducive to tourism investment.
THE STUDY
In order to determine the best scenario for the creation of a successful tourism
investment climate in KwaZulu-Natal, four international case studies were analysed in
terms of:
Their legislation and regulations pertaining to tourism investment;
Their fiscal, financial and other investment incentives available to investors;
Community access; and
Institutional support.
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The countries analysed were as follows:
Australia;
Ireland;
Malaysia; and
Singapore.
The analysis comprised a literature review and interviews with appropriate officials.
An analysis of the investment climates of the four countries indicate that a matrix of key
policy decisions needs to be devised in order to produce a strategy designed to create a
climate which will encourage tourism investment.
These decisions include whether:
To devise an overall investment strategy that applies across the spectrum of
industries and /or to promote specifically identified industries, including the tourism
industry;
To promote specific geographic locations;
To promote an investment climate that focuses on foreign and /or local investors;
To decide on the composition of tools to be made available to the potential investor
including the use of fiscal, financial or other incentives; and
To ensure that the global view of the country in terms of political and economic
stability is positive.
As a result of increased leisure time and disposable income / wealth, correlated with
promotional activities undertaken by proactive companies, and the improvement in
technology, growth in the tourism industries in many countries is symptomatic of the
organic worldwide development of tourism.
Notwithstanding this, with specific reference to the tourism industry in each of the case
studies examined, the investment incentives implemented have led to industry growth
rates in excess of the worldwide average growth rates, except in the case of Singapore.
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Industry Specific vs General Incentives
South Africa, Malaysia, Ireland and Israel all offer investment incentives specific to
the tourism industry. These countries also offer a number of the general incentives
which affect development within the tourism industry.
Singapore and Australia, on the other hand, do not offer investment incentives to the
tourism industry specifically. Instead they offer general incentives to stimulate the
economy as a whole.
Australia has implemented general incentives to promote export markets in an attempt
to attract foreign earnings. Investors in the tourism industry whose main focus is on
attracting foreign tourists to Australia will therefore fall within the ambit of most of the
general export industry investment incentives.
Incentives are also available to encourage technological innovation and research and
development which aims to improve Australia’s competitiveness in the international
market.
Singapore’s focus promotes industries involving high-technology and the employment
of skilled labour as opposed to labour-intensive industries which create opportunities for
the unskilled mass labour force.
Foreign Investment vs Local Investment
Malaysia has implemented investment incentives that promote entrepreneurship and
the SMME sector. Most of the incentives in place are largely beneficial to the Malaysian
Nationals themselves and to a lesser degree, to the foreign investor. This is particularly
evident, for example, in the granting of “Pioneer Status”, for which an entity only
becomes eligible if at least 70% of its equity is owned by locals, and shareholders’ funds
do not exceed (Malaysian Ringgit) RM 500 000.
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Ireland’s financial and fiscal investment incentives available to the tourism industry
promote both local and foreign investment. The incentives available to the Irish tourism
industry are predominantly in the form of development grants and a reduction in the
corporate tax rate.
Australia and Singapore place particular emphasis on attracting foreign investment
and earning foreign currency although incentives are also available for local investors in
export markets and high-technology industries.
Israel has incentives designed to attract both large foreign investment and local
SMMEs.
In South Africa, and hence KwaZulu-Natal, the incentives available to investors to a
large degree promote the manufacturing sector, and to a much lesser extent, the
tourism and other industries.
Incentives tend to favour local investment by SMMEs over foreign investment, except in
the case of the tax holiday which is only available to large projects involving a capital
investment in excess of R3 million.
Incentives Offered
An analysis of the investment climate of Australia, Ireland, Singapore and Israel,
indicates that they have chosen to implement a combination of fiscal, financial and other
incentives to attract foreign investment. Malaysia has chosen not to offer financial
incentives to the tourism industry, but rather a combination of fiscal and other
incentives.
Bearing in mind that the various countries’ incentives will have been formulated with
differing objectives / goals, the following commentary highlighting differences in the type
and mix of incentives on offer to potential investors.
Primary Focus of Incentives
The primary focus of each of the countries’ specific tourism investment is illustrated in
the table below. The focus is either on:
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Development of the local workforce;
Development of enhanced technology;
Encouragement of the SMME sector;
Encouragement of new local investment;
Encouragement of new foreign investment; or
A combination of the above.
Primary Focus of Tourism Investment Incentives
Employment
Creation
Technology
Development
Foreign
Investment
SMME
Development
Australia
Ireland X X X
Israel X X X X
Malaysia X X X X
Singapore X
South Africa X X X
Each of the countries emphasises the creation of employment opportunities in the
tourism industry for the local labour force with, in some respects, the exception of
Singapore.
For example, Malaysia will only grant work permits to skilled expatriates for a short
period of time. The objective is to allow expatriates to provide on-the-job training to the
less skilled local labour force. There are strict controls in place in Australia and Ireland
with respect to expatriates. In contrast, Singapore does not place stringent restrictions
on the importation of skills or the recruitment of expatriates. Although Australia has no
specific incentive for job creation in the tourism industry, a general incentive exists for
the creation of employment opportunities in all sectors of the economy.
Malaysia and Ireland offer incentives to encourage training and skills and human
resource development in the tourism industry, usually in the form of training grants. The
objective of this incentive is to create an “employable” labour force and enable the
country to promote its labour force as being educated and as possessing the basic skills
required by tourism industry.
19
Malaysia and Ireland have also both created an investment climate to facilitate or
enhance the profitability of an investment. Although a number of factors have an impact
on an investment climate (eg. production costs, infrastructural facilities, crime rate,
inflation, currency stability) investment incentives play a significant role in enhancing
the profitability of a project in these countries.
In contrast, Australia has created an attractive investment climate by encouraging
export marketing incentives as oppose to the more common fiscal and financial
incentives. Promotional activities in international markets by investors in Australia,
supported by the export marketing incentives, have encouraged an increase in the
demand for tourist facilities. This has had an impact on the supply of such facilities.
Singapore has not implemented specific incentives to enhance the attractiveness and
encourage the development of the tourism industry.
Ireland, Israel and Malaysia have clearly defined objectives specifically for their
tourism industries (as is evident in the table), and have formulated investment
incentives to attract investors that have been identified as beneficial to this industry. As
mentioned earlier, Australia’s objectives differ from these countries as its industry is
predominantly demand driven.
Singapore, on the other hand, does not have clearly defined objectives and incentives
specific to the tourism industry and has experienced a declining growth rate.
The specific incentives offered by each of the countries analysed is represented in
tabular format in Annexure A.
RECOMMENDATIONS FOR KWAZULU-NATAL
Pre-requisites
A pre-requisite for the creation of an environment that will stimulate investment in the
tourism industry is one that is stable and that facilitates the promotion of tourism and the
attraction of tourists to the region. In order to encourage an increasing number of
tourists to the province, and hence increase the demand for tourist facilities, it is of
20
paramount importance that the macro issues affecting tourism, some of which are
mentioned below, are given the urgent attention that they require.
(i) Safety and Security
Because there is a strong correlation between a region’s political and social stability and
its tourism industry, effective measures need to be taken to improve the poor
perceptions that currently exist regarding the safety and security of tourists in KwaZulu-
Natal.
(ii) Health and Sanitation
The maintenance of good health and sanitary conditions is imperative if tourists are to
be encouraged to visit the province. This is particularly relevant in underdeveloped
areas that have been earmarked for the promotion of tourism.
(iii) Service Standards
KwaZulu-Natal is constantly competing with the Western Cape for a larger slice of the
international tourism pie. Much emphasis is placed by international tourists on service
standards, which are often regarded as being higher in the Western Cape than in
KwaZulu-Natal. This issue needs to be addressed by operators and all organisations
involved in training those employed in the tourism, hospitality and leisure industries.
Legislation & Regulations
In order for the province to realise the full benefits of a mature tourism industry,
KwaZulu-Natal must urgently incorporate its tourism goals and objectives into a tourism
policy document. It is imperative that a formal tourism policy be formulated to provide
the guidelines for tourism development because it is tourism policy that drives other
aspects of tourism on both the demand and the supply side.
In addition to documenting policies that will maximise tourist arrivals and improve the
balance of payments through international tourism receipts, the Tourism Policy
document will need to focus attention on systematic planning for policy decisions in
tourism.
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South African Income Tax Legislation would require new clauses to be inserted should
any of the fiscal incentives recommended be implemented.
The broad concepts discussed in the White Paper for the Conservation and Sustainable
Use of South Africa's Biological Diversity will need to be legislated and adopted.
The White Paper on Local Government defines the responsibilities and authority vested
in local government in regard to special taxes. Notwithstanding the fact that the fiscal
incentives discussed will enhance the tourism investment climate in KwaZulu-Natal, the
White Paper on Local Government outlines the fiscal restrictions on local government
regard to taxes and incentives. The absence of the authority to implement meaningful
fiscal incentives severely hampers the ability of the authorities to be proactive in the
establishment of a comprehensive regional strategy for a successful tourism investment
climate. Unfortunately, the restriction on the provincial efforts to the non-financial
aspects will not be sufficient to swing the investment decision in favour of KwaZulu-
Natal in the mind of a potential investor.
Investment Incentives
A combination of fiscal, financial and other incentives would be most successful in
promoting KwaZulu-Natal’s tourism investment climate.
As a result of the declining South African currency and the low rates at which investors
can borrow money abroad, it is suggested that fiscal incentives would be most effective
in attracting foreign investment than financial incentives.
A reduction in the corporate tax rate for enterprises operating in the tourism industry (as
opposed to a tax holiday) will encourage investment and at the same time, a
contribution will be made to government revenues.
To encourage development in areas that are currently underdeveloped, corporate tax
rates that are even more preferential can be effected for companies operating in these
predetermined areas. This strategy has been employed sucessfully in Israel and
Malaysia.
Financial incentives, on the other hand, could be awarded to previously disadvantaged
communities to foster a spirit of entrepreneurship, thus encouraging local development.
22
It is envisaged that these will be awarded on a discretionary basis and each applicant’s
project will be judged on its feasibility, sustainability, potential contribution to GDP and
potential to create jobs.
Other incentives which would enhance the investment climate in KwaZulu-Natal include:
Effective measures taken to control criminal activity in the province in an attempt to
improve poor perceptions that currently exist regarding the safety and security of
tourists.
Measures taken to ensure that the highest standards of hygiene and sanitation
possible are maintained, particularly in underdeveloped areas that are earmarked
for the development of the tourism industry.
Effective marketing campaigns by public- and private-sector organisations to
increase the number of international and local visitors to the province. This would
increase the demand for tourist facilities and increase the viability of new
development.
Effective and responsible management of environmental issues. It is imperative
that environmental issues are addressed on an ongoing basis as recommended in
the White Paper for Environmental Issues to ensure that the province’s natural
attractions are not destroyed by poorly planned development.
Effective institutional support for foreign and local investors.
Provision of strategic information required by investors for planning and monitoring
purposes.
Effective training schemes offered to employees in the tourism industry.
The incentives recommended to enhance the investment climate in KwaZulu-Natal for
foreign and local investors can therefore be summarised in the table overleaf.
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Recommendations for KwaZulu-Natal
Foreign Investor
Local Investor
Fiscal Incentives
- Corporate tax rate reduction for promoted activities
X
X
- Corporate tax rate reduction in promoted areas X X
- Accelerated depreciation rate X X
- Double tax deduction for qualifying marketing costs X X
- Double tax deduction for qualifying training costs
X X
Financial Incentives
- Discretionary grants X
- Low interest loans X
- Loan repayment moratorium X
- Loan guarantees X
- Training grants X X
Other Incentives
- Safety & security X X
- Health & sanitation X X
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- High standards of service
- Workforce assistance
X
X
X
- Institutional support X X
- Effective marketing campaigns X X
- Responsible environmental planning X X
Community Access
An effective communications campaign needs to be embarked upon in order for local
communities to become aware of the assistance available to them. This process could
include a series of workshops and brainstorming sessions conducted in outlying areas
to communicate the assistance available to residents and to encourage
entrepreneurship. Alternatively, easily comprehensible documents should be compiled
and widely distributed to previously disadvantaged communities. It is envisaged that
these workshops and the distribution of informative documentation will increase the
awareness and encourage local communities to take advantage of the assistance
offered.
Those communities that have no previous business experience but are interested in a
business involvement in the tourism industry need to be given access to an organisation
or process that can impart the necessary financial, managerial and operational
knowledge to them.
To ensure that the benefits of future tourism development in the province are made
available to previously disadvantaged communities, the current stringent qualifying
conditions for financial aid should be relaxed in circumstances where previously
disadvantaged individuals demonstrate the viability of their proposed projects beyond
reasonable doubt.
It is suggested that preferential treatment be given to investment in pre-determined
areas which are currently underdeveloped either by way of fiscal or financial incentives.
It is envisaged that benefits such as the creation of employment opportunities and
wealth generation will flow to those living in the promoted regions.
25
Institutional Support
To facilitate ease of access to assistance in the tourism industry in KwaZulu-Natal, it is
advisable that there be one clearly designated organisation to act as the first point of
contact for investors and developers. This organisation will be in a position to direct
investors to the relevant “support” institutions based on the nature of the query.
Other services offered by this organisation should include the provision of managerial,
operational and general business advice to local investors in the tourism industry and
the design of effective marketing campaigns to stimulate the demand for tourist facilities
in the province.
Potential Problems
There are a number of potential problems associated with the implementation of
investment incentives. Consideration needs to be given to the following issues, inter
alia:
Abuse of incentive schemes;
Cost of administration and regulation;
Loss of government revenue; and
Complicated nature of income tax legislation.
Conclusion
The benefits of a greater tourism industry include the creation of employment
opportunities, economic growth and development, and the enhancement of quality of
life.
In order for these benefits to be realised, increased planning, coordination and
evaluation of the tourism policy adopted by KwaZulu-Natal is essential.
26
In addition, a strategy to promote quality development needs to be implemented.
Unless tourism is an integral part of the province’s overall economic development plan,
and there is a balanced approach to the development of tourist infrastructure and
services, the economic benefits alluded to throughout this analysis may be shortlived.
CHAPTER 1: INTRODUCTION
1.1 GENERAL
The KwaZulu-Natal Tourism Authority is currently assessing the investment climate in
KwaZulu-Natal in order to promote the development and growth of the tourism industry
in the Province. In this way, it hopes to encourage the development of a climate which
encourages investment in tourism projects in the province of KwaZulu-Natal.
1.2 THE BRIEF
In terms of the brief, the consultants were to:
Analyse 4 international case studies to determine the best scenario for the creation
of a successful tourism investment climate in KwaZulu-Natal; and
Identify inappropriate tourism investment processes.
The analysis was required to be in terms of:
Legislation and Regulations pertaining to tourism investment;
Fiscal, financial and other investment incentives;
Community Access; and
Institutional Support.
2
1.3 MARKET RESEARCH
For the purposes of the market research, the consultants:
Examined 3 international case studies of countries which have developed climates
conducive to tourism investment and where effective tourism investment incentives
have facilitated appropriate development of tourism infrastructure and plant. The
case studies involved the examination of the following countries’ tourism investment
climates:
Australia
Ireland
Malaysia.
Examined the tourism investment climate in Singapore to analyse factors that have
contributed to its declining tourism industry.
The analysis of the abovementioned case studies comprised a literature review and
interviews with appropriate officials in each country.
The case study selection process initially involved the compilation of a list of
approximately 50 countries which offer any form of investment incentives. Where the
information was available, a short list was developed based on the following
considerations:
The state of each country’s general economy;
The levels of success achieved in each country’s tourism and leisure industres
relative to the rest of their economies;
The level of capital investment in the travel and tourism industry;
The investment incentives offered by each country; and
Socio-economic factors (such as unemployment rates) in each of the countries.
3
A final consideration was the accessibility of relevant information and the credibility of
information sources.
Although Israel was not selected as a comprehensive case study, owing to the extent of
the investment incentives offered in this country, a literature review of Israel’s
investment incentives is incorporated into the report.
1.4 ASSUMPTIONS
In order to draw conclusions regarding factors that would create the most appropriate
tourism investment climate for KwaZulu-Natal, the following major assumptions have
been made:
Political and social stability will be maintained as opposed to a dramatic
degeneration in the current political and social climate to the extent that it renders
the promotion of tourism in the province impossible;
Extremely effective, ongoing public sector marketing will take place actively to
promote the province as a tourism destination and to increase the market demand
for tourism infrastructure and other facilities;
Information sources from the case studies have provided up-to-date, relevant,
reliable and complete information.
1.5 SCOPE OF ANALYSIS
Our definition of the tourism industry includes all recipients of the direct spend from
tourists, including:
Travel agents, booking services, tour wholesalers, tour operators, all of whom earn
commission or fees on transport, accommodation and related bookings;
Investors in and operators of accommodation, transport, restaurant and catering,
retail attractions, souvenir and craft businesses, entertainment, etc; and
4
Telephone and postal services, banks, fuel suppliers etc.
Investment in the tourism industry therefore encompasses investment in all components
of the tourism industry, being:
Investment in infrastructure
- Accommodation establishments
- Transport systems
- Facilities (retail, entertainment, catering etc.)
Investment in services
The tourism industry is an allencompassing industry which casts its net very wide with
vertical and horizontal integration. For the purposes of this analysis, incentives
applicable to the “primary” tourism industry were considered and have excluded
incentives applicable to investments that only affect a tourist indirectly were excluded.
In other words, incentives offered to encourage investment in tourist accommodation
establishments, transport systems and direct tourist facilities and services have been
included in this review. Incentives affecting the manufacturing industry and comments
on industrial development have thus been included as affecting the manufacturers/
producers of tour coaches and other modes of transport, gifts and souvenirs, etc.
In addition to investment incentives offered to specific industries, a concentrated focus
by government on an economic sector has a spin-off for ancillary businesses. This
being the case, incentives implemented will promote not only the tourism industry, but
generic business as well.
The definition of the “primary” tourism industry used here is illustrated in Figure 1.1.
5
Figure 1.1: Components of the Tourism Industry
TOURISM
Infrastructure
Services
Accommodation
Transport
Facilities
Operation
Development
Research Operation Developmen
t
Research Operation Development
Research
6
Investment in infrastructure can either take the form of an investment in the
development of such infrastructure, the operation thereof, or related research.
Investment in tourism related services primarily involves an investment in human
resources and training.
Given all of the above, the case studies will deal with incentives that:
Encourage appropriate capital expenditure in the tourism industry;
Encourage appropriate job creation in the tourism industry;
Encourage appropriate training in the tourism industry; and
Encourage appropriate tourism operations and services.
Throughout this study, particular reference will be made to the promotion of foreign
investment and local small business development.
1.6 OUTLINE
This report identifies factors that have contributed to the creation of successful
investment climates in the tourism industry in Israel, Malaysia, Ireland and Australia.
After a brief introduction, Chapter 2 demonstrates the viability of the tourism industry by
analysing trends in the worldwide, South African and KwaZulu-Natal tourism industries.
In addition, the importance of nurturing and encouraging the expansion and
development of the industry is stressed.
Chapters 3,4,5, 6, and 7 one dedicated to brief discussions of the tourism investment
climates available in Israel, Malaysia, Ireland, Australia and Singapore respectively.
Chapter 8 encompasses a discussion on the investment climate in South Africa and
more specifically, KwaZulu-Natal.
Finally, Chapter 9 outlines recommendations as to appropriate options available to
encourage a successful tourism investment climate in KwaZulu-Natal. In addition, it
draws the reader’s attention to possible pitfalls associated with those recommendations
and discusses incentives considered inappropriate for implementation in KwaZulu-
Natal.
7
CHAPTER 2: BACKGROUND
2.1 WORLDWIDE TOURISM INDUSTRY
Tourism is now the world’s number one export-earner, having surpassed exports of oil
and petrolium products, motor vehicles, electronic equipment and raw materials.
According to the World Travel & Tourism Council, tourism is the world’s largest industry
and the most powerful generator of jobs, employing 1 in 9 of the world’s workforce. Some
of tourism’s global aggregates are presented in Table 2.1 below.
Table 2.1: World Travel & Tourism Aggregates
Projection Annual
1996 2006 Growth
Jobs
millions
255
385
4,2%
Employment 1 in 9 1 in 9
GDP
US$ billions
3 153
6 283
7,1%
Ratio of total GDP 10,7% 11,5%
Private consumption
US$ billions
2 063
4 054
7,0%
Ratio of all spending 11,3% 12,0%
Capital expenditure
US$ billions
766
1 605
7,7%
Ratio of all investment 11,9% 12,8%
Total taxes
US$ billions
653
1 301
7,1%
Ratio of all taxes 10,4% 11,0%
Exports
US$ billions
761
1 533
7,3%
Ratio of exports 11,4% 10,4%
Source: World Travel & Tourism Council
International tourist arrivals have grown at a compound rate of 5,4% pa for the last two-
and-a-half decades. The World Tourism Organisation’s statistics show that international
tourism increased by 4,6% in 1996 to reach 592 million arrivals.
8
Prospects for global tourism are very good. The WTO predicts that the growth of tourism
will be “unstoppable” in the 21st century. It is expected to soar to 1,6 billion international
arrivals annually by the year 2020.
2.2 SOUTH AFRICAN TOURISM INDUSTRY
2.2.1 Foreign Tourism
There is a strong correlation between South Africa's foreign tourism and its political
stability. In the mid-70s and early-80s, the social instability in South Africa exerted
serious pressure on tourist arrivals and by 1986 the number of overseas arrivals had
declined to a very low level. Since then, however, there has been a sustained recovery in
foreign tourism. Despite the high levels of violence during 1993 in the run-up to the
elections, overseas arrivals grew significantly in that year. During the first five months of
1994 tourist figures were depressed due to the violence and the uncertainty surrounding
the elections. However, since the peaceful elections of 1994, South Africa's overseas
tourist arrivals have increased significantly. An increase of 50% was experienced in
1995. This growth was, however, flattered by a relatively poor first five months in 1994
and also by the 1995 Rugby World Cup. Even though foreign-tourist arrival figures
continued to improve in 1996, a lower growth rate of 10% was recorded in 1996. 1997
Marked the eleventh successive year of increases in the number of overseas arrivals
(see Figure 2.1). Growth in 1997 is estimated to be around 19%.
Figure 2.1: South Africa's Overseas Tourist Arrivals
0.0
0.2
0.4
0.6
0.8
1.0
1.2
An
nu
al
arr
ivals
(m
illi
on
s)
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
Source: Central Statistical Service.
South Africa attracted 4,9 million international visitors in 1996, 3,7 million from Africa and
1,2 million from other overseas countries. CSS arrival statistics indicate that
approximately 4 million foreign visitors entered South Africa from January to the end of
September 1997, of which 3 million were from Africa and 1 million from overseas.
9
Comparing 1996 and 1997 year to date arrivals, it is estimated that the number of
overseas visitors to South Africa will have increased to 1,4 million in 1997.
2.2.2 Domestic Tourism
The latest survey by Satour on the South African domestic tourism market (conducted in
1996) indicates that 63% of South Africa's population take at least one holiday trip a year.
This yields some 16 million domestic tourists in 1996.
As in 1994, the most preferred destinations for domestic tourists are still KwaZulu-Natal
and Gauteng. The Western Cape, however, lost its third place to the Eastern Cape.
2.2.3 Projected Growth in Tourism
The potential for South Africa to increase both arrivals and expenditures from the
overseas, regional and domestic tourism markets is considerable. Projected growth rates
of South Africa’s tourism are presented in Table 2.2 below.
Table 2.2: Projected Growth of South Africa's Tourism
1998 – 2001
% pa
2001 – 2010
% pa
Foreign Tourism
Overseas 10,0 5,0 – 10,0
Africa 7,5 3,0
Domestic Tourism 2,0 – 3,0 2,0 – 3,0
Source: Kessel Feinstein Consulting
The large increase in foreign-tourist numbers should result in a decrease in the relative
size of the VFR market, and a corresponding increase in the proportion of the so-called
"real" holiday tourists. This should be accompanied by a decrease in the average length
of stay and an increase in average spend.
2.3 KWAZULU-NATAL TOURISM INDUSTRY
10
According to the latest Satour Survey of the International Tourism Market (January 1998),
29% of all international visitors passed through or spent time in KwaZulu-Natal, which
equates to around 1,2 million tourists a year.
KwaZulu-Natal enjoys the third-highest visitation by international tourists (only Gauteng
and the Western Cape are visited more often). On average, foreign visitors spend 10,5
nights in KwaZulu-Natal in comparison to 10,7 and 8,7 nights in the Western Cape and
Gauteng respectively.
Table 2.3 gives a breakdown, by purpose of visit, for South Africa as a whole and for
KwaZulu-Natal. The majority of foreign visitors to KwaZulu-Natal are holidaymakers. This
province achieves a higher proportion of holiday visitors than the country as a whole, but
a lower proportion of business visitors.
Table 2.3: Purpose of Visit by Foreign Visitors
Purpose of Visit
KwaZulu-Natal
South Africa
Holiday
77%
67%
Visiting friends & relatives 35% 33%
Business 22% 33%
Other 13% 14%
Source: Satour
International tourists have a poor impression of service and safety in KwaZulu-Natal. The
province is rated 7th out of the nine provinces in terms of friendliness, 7
th for helpfulness,
7th for service and 8
th in terms of personal safety (only Gauteng is rated lower).
Figure 2.2 and Figure 2.3 give breakdowns of the regional marketshare of the domestic
leisure tourist market and the domestic business market by number of tourists. KwaZulu-
Natal ranks first in terms of holidaymakers and third in terms of business travellers.
11
Figure 2.2: Regional Marketshare of the Domestic Leisure Tourist Market
Source: Satour, The South African Domestic Tourism Market, 1997
Figure 2.3: Regional Marketshare of the Domestic Business Market
Source: Satour, The South African Domestic Tourism Market, 1997
2.4 ECONOMIC SPIN-OFFS OF TOURISM
2.4.1 Development
Estimates by the WTTC indicate that, in 1995, 11,4% of total global investment was
related to the tourism industry and amounted to $701 billion, and that by 2005 this will
rise to 11,8% of total global investment, and amount to $1,6 trillion. Total investment in
Mpumalanga
7%
N Province
5%W Cape
12%
Gauteng
15%
North West
9%Free State
6%KwaZulu-Natal
30%
E Cape
14%
N Cape
2%
North West
13%
KwaZulu-Natal
12%
Gauteng
29%
N. Province
10%
Mpumalanga
3%
Free State
10%
E Cape
7%
W Cape
11%
N Cape
5%
12
the tourism industry in Africa in 1995 was estimated at $9 billion, accounting for 11,7% of
all investment in Africa.
The WTTC expects Africa and other developing regions to experience growth exceeding
the world average in terms of investment. Specifically, it projects an increase in
development of 68% in the developing regions over the next decade, whereas investment
in the developed regions is expected to fall short of the world average.
2.4.2 Job Creation
Tourism is the world’s most powerful generator of jobs. According to the WTTC, tourism
provided employment for over 250 million people in 1996 (1 in every 9 workers). By 2005,
this industry is expected to employ 11,3% of the world’s workforce.
Tourism employees are better paid than employees in general. In 1995 tourism
employees were paid on average 6,6% more than the average for other employees
according to the WTTC.
According to the Tourism White Paper, tourism currently accounts for around 480 000
jobs in South Africa and there is significant potential for further job creation.
Because the tourism industry has the lowest ratio of investment-to-jobs, a relatively high
number of jobs can be created for every unit of capital invested. It is estimated that, by
the year 2005, South Africa’s tourism industry will have created 1 million additional jobs.
Tourism is a labour intensive industry and job creation is therefore one of the most
discernable socio-economic benefits of the industry. For provinces like KwaZulu-Natal,
with high unemployment rates and changing population dynamics increasing pressure on
economies, tourism represents an ideal opportunity for growth.
2.4.3 Foreign Exchange
As mentioned in Section 2.1, tourism is the world’s largest export-earner. In 1996, global
tourism exports were valued at $0,76 trillion which represented 11,4% of all global
exports. This is projected to increase to $1,53 trillion in 2006, or 10,4% of global exports.
African tourism exports for 1995 were estimated at $14,7 billion, representing 9% of all
African exports and 2,3% of global tourism exports. African tourism exports are
13
expected to increase to $37 billion by 2006 and will then represent 10% of all African
exports and 2,5% of global tourism exports.
The Tourism White Paper estimated South Africa’s foreign exchange earnings from
tourism at approximately R10 billion in 1996. This represented about 0,6% of global
foreign exchange generated by tourism. Grant Thornton Kessel Feinstein estimates that
“foreign” exchange earnings from tourism would amount to some R30 million by the year
2000 and possibly exceed the foreign currency generated by gold exports.
2.4.4 Tax Generator
Tourism contributes very significantly to the tax revenues of governments. In global
terms, direct corporate and personal taxes from the tourism sector exceed $650 billion a
year. Tourism is responsible for generating about 10,5% of all indirect taxes.
2.4.5 Tourism Multiplier
The impact of tourism spending is far greater than the nominal initial expenditure by
visitors. This phenomenon, usually referred to as a “multiplier”, expresses the relationship
between initial spending and changes in local income. The magnitude of a multiplier will
vary depending almost entirely on the nature of the local economy. In general, the larger
the economy of an area and the greater its diversity of industry and commerce, the more
linkages there will be between business firms, and therefore the higher the multiplier
effect will be.
Various studies undertaken at different times have established a range of tourist income
multipliers for a variety of countries, regions and cities. Generally, these multiplier factors
vary within a band of 0,2 to 2,0. In the Caribbean, for example, it is estimated that the
sum of direct and indirect “value added” generated per dollar of tourist expenditure was
around 1,6 times the value of the initial input of visitor spending. Tourism income
multipliers for selected overseas countries, cities and regions are presented in Table 2.5.
14
Table 2.5: Tourism Income Multipliers for Selected Overseas
Countries, Cities & Regions
Tourist Destination
Tourist Income
Multiplier
City of Winchester, UK
0,19
Gwynedd, North Wales 0,37
Grand County, Colorado, USA 0,60
Missouri State, USA 0,88
Mauritius 0,96
Cyprus 1,14
United Kingdom 1,73
Turkey 1,96
Caribbean 1,60
2.5 SOCIO AND ENVIRONMENTAL BENEFITS OF TOURISM
Although the current rapid growth and development of tourism puts pressure on and can
often lead to the destruction of the environment, the promotion of certain types of tourism
are beneficial to the natural environment. This includes the preservation of greenbelts
and nature reserves for tourists as opposed to the development of those areas. Tourism
can also contribute to cultural revival. Organised cultural tourism development can
provide opportunities for local people to learn more about themselves, thus increasing
feelings of pride in their heritage. It can stimulate a resident’s interest in the area’s history
through restoration and preservation of historical sites.
The realisation that there is an interdependence of tourism and the culture and
environment of a country has given rise to developmental constraints in an attempt to
preserve the ecosystem and improve the quality of the environment.
This issue was addressed in a speech by the President of India, Giani Zail Singh,
before the General Assembly of the World Tourism Organisation in New Delhi on
15
October 3, 1983. He said: “......Tourism can become a vehicle for the realisation
of a man’s highest aspirations in the quest for knowledge, education,
understanding, acceptance and affirmation of the originality of cultures, and
respect for the moral heritage of different peoples. I feel that it is these spiritual
values of tourism that are significant....Tourism has also made it possible for
nations to develop strategies for the conservation of natural and cultural heritage
of mankind. Planning for economic growth and development must go hand in
hand with the protection of environment, enhancement of cultural life, and
maintenance of rich traditions which contribute so greatly to the quality of life and
character of a nation. The rapid and sometimes alarming deterioration of the
environment due to pollution which is entirely man-made must be a matter for
concern to all of us, who hold in trust on behalf of our peoples, the distinctive
heritage of our respective countries....”.
(Edgell, D.L 1988. International Tourism Policy)
In short, eco-tourism, the conservation of natural resources and environmental
awareness have become a world-wide trend. In underdeveloped regions, geophysical
structures have been protected and policies are being formulated to ensure that there is
no possibility of indiscriminate development.
2.6 TOURISM AND THE ECONOMY
From the preceding discussions, it is clear that the tourism industry has played and can
continue to play a significant role in the expansion, not just of worldwide economies, but
also in the growth and development of economic activity in KwaZulu-Natal.
Governments and their representative bodies therefore need to encourage tourism
development to stimulate the growth of their economies through job creation, foreign
exchange earnings and the generation of income taxes.
Having recognised the benefits that the tourism industry could afford a developing
country, many governments have embarked upon a process of encouraging market
supply and demand for tourist facilities in their countries.
However, before any region can create a climate that is conducive to tourism investment
and hence realise the economic spin-offs and social benefits that the industry has to
offer, it is imperative that the climate is favorable for tourism in general. In other words,
16
factors having a negative impact on travel and tourism need to be eradicated, the most
pertinent of which are crime and violence.
2.7 TOURISM INVESTMENT INCENTIVES
Tourism investment incentives implemented by a national or regional government will
contribute to the development of the tourism industry, and hence the region’s economy in
a number of ways:
By encouraging or accelerating the development of tourism facilities by the private
sector;
By assisting the private sector in overcoming obstacles that hinder the development
of tourism facilities;
By encouraging development in depressed locations in order to stimulate growth in
these regions; and
By increasing local and global exposure of natural and man-made facilities.
A country needs to adopt a formal tourism policy before suitable investment incentives
can be implemented. In this way, the incentives will not only accelerate and promote
tourism development, but will also achieve balanced growth and optimise the benefits
from tourism with respect to a country’s society and its environment.
The case study countries classify the different incentives as follows:
2.7.1 Financial Incentives
The development of tourism infrastructure usually involves significant capital expenditure.
The constraints this imposes on the entrepreneur are:
Difficulty in the raising of capital and/or loan funding;
17
The high cost of borrowing;
The lead time of development outflows and revenue inflows;
A lead time between revenue generation and profitability/returns to investors;
Declining local currency values; and
Inflation rates that are high in world terms in most developing nations.
In this respect, financial incentives implemented by the government can include the
provision of grants or loans that could eliminate the negative cash flow implications of a
tourism development, and remove the obstacles preventing the development of these
facilities. Alternatively, financial incentives can be in the form of low interest loans to
negate the high borrowing costs in the country.
Grants can be in the form of:
a cash injection into the development with no repayment conditions; or
specific non-monetary grants such as the use of state assets.
Financial incentives can be discretionary or non-discretionary, depending on the
objectives of the government. Where the objective of government is to promote
sustainable, financially viable projects, financial incentives will be offered on a
discretionary basis subject to certain conditions being met. Where the creation of
employment and promotion of social tourism is a prime objective of government, then
financial incentives will usually be offered on a non-discretionary basis.
As already mentioned, financial incentives may include loans with preferential interest
rates as well as loans with repayment moratoriums or longer repayment terms than those
offered by commercial institutions.
Government’s decision as to whether to give grant aid or loan finance is influenced by a
number of considerations. In the case of a loan, the direct cost to the public will only be
18
the preferential interest rates and thus government loans are usually more acceptable
than government grants.
Governments of developing countries often do not have the resources to provide financial
assistance to developers in the form of government loans or grants. In these situations,
the government can offer loan subsidies which finance a portion of the commercial
interest expenditure incurred by the private sector. Alternatively, loan guarantees can be
provided by government to commercial funding sources. Neither of these investment
incentives exert pressure on the government’s financial resources as no large capital
outlay is required to be made by the government at the outset of the development.
2.7.2 Fiscal Incentives
Fiscal incentives, for example a reduction in the corporate tax rate or an exemption from
income tax for a period of time, attempt to make the investment climate in one country
more attractive than that being offered in another. Fiscal incentives can apply to the
developmental phase of a project and/or to its operations. In other words, fiscal incentives
will either protect operating profits or reduce initial development costs. In many
circumstances, the objective of fiscal incentives is to attract foreign investment to a
country.
2.7.3 Other Incentives
Support services offered to developers and operators, though not financial in nature,
often play an enormous role in the success of an industry.
Assistance afforded to the tourism industry by government could include:
The effective marketing of a country as a tourism destination;
The packaging of potential investment opportunities for presentation to potential
investors;
The granting of appropriate work permits to foreigners where no suitable local
personnel exist;
Subsidised research and development services; and
19
Foreign exchange controls that do not restrict the repatriation of capital gains and
operating profits.
20
CHAPTER 3: ISRAEL
3.1 GENERAL
Companies operating in specified sectors of Israel’s economy, including tourism, may
make application to be granted Approved Enterprise Status. This status entitles a
company to substantial support from the State in the form of reduced rates of taxation or
grants designed to encourage capital investment in Israel.
Approved Enterprise Status is granted to a project based on the following criteria:
Ability to compete in international markets;
Use of state-of-the-art technology;
Creation of employment opportunities;
High value added; and
Contribution to the special needs of Israel’s economy.
The applicant is required to submit an application form accompanied by a detailed
feasibility study to demonstrate the project’s economic and financial viability (The
Investment Centre of Israel, 1997).
3.2 LEGISLATION & REGULATION
The Israeli “Law for the Encouragement of Capital Investments” was implemented in
1959. This legislation was drafted to encourage economic initiative and focuses on the
needs of potential local and foreign investors. It was this legislation that led to the
development of the Israeli Investment Centre.
3.3 TOURISM INVESTMENT INCENTIVES IN ISRAEL
The investment incentives offered in Israel are designed to encourage and promote
capital investment. This should result in the expansion of production capacity of the
economy, thereby creating new employment opportunities.
21
The State of Israel is committed to the development of areas outside the main centres of
the country and to the encouragement of the settlement of those areas. Reflecting this
commitment, two national priority area types have been determined with different levels
of preference. These areas are classified as “National Priority” areas (Ibid).
3.3.1 Financial Incentives
Grants
Grants are given to Approved Enterprises to finance investment in fixed assets. Approval
is only given to projects involving investment in new equipment and buildings.
Grants are awarded under the following conditions:
The investor must finance at least 30% of the approved project by paid-up share
capital;
The project must be implemented within three years of the date of the original letter of
approval; and
At least 25% of the project must be executed within one year.
The grant is based on a percentage of the investment in fixed assets and can range from
10% to 24% of the investment depending on the nature of the project and the area in
which it is located. No grants are awarded for projects located in Central Israel (Ibid).
3.3.2 Fiscal Incentives
Company Tax Exemption
A company that waives its right to a grant will receive a complete exemption from
company tax on its undistributed income. If dividends are distributed, the company will
pay the tax it would have paid had it not opted for this incentive programme.
22
The company tax exemption will remain in place as follows:
National Priority Area A: 10 years
National Priority Area B: 6 years after which 1 year of tax benefits will accrue (see
below)
Central Israel: 2 years after which 5 years of tax benefits will accrue (see below).
(Ibid)
Tax Benefits
The tax benefits for an Approved Enterprise are granted over a period of 7 consecutive
years, starting with the first year that the company earns taxable income, providing that
14 years have not passed since the approval was granted and that 12 years have not
passed since the enterprise began operating.
If at least 25% of an enterprise’s owners are foreign investors, the enterprise is eligible for
a ten year period of tax benefits (Ibid).
The tax benefits, in the form of reduced company tax rates, are as follows:
Co owned by local investor
Company owned by foreign investors
Foreign Investment:
Co that is not an
Approved Enterprise
90 - 100% 74 – 90% 49 – 74%
Company Tax
25%
10%
15%
20%
36%
Dividend Tax
11,25%
13,5%
12,75%
12%
16%
Accelerated Depreciation
An approved project is entitled to accelerated depreciation on its property and equipment.
During the first five-year period of operation of these assets, the company
may depreciate its assets for tax purposes at rates ranging from 200% of the ordinary
rate of depreciation (regarding equipment) to 400% of the ordinary rate of depreciation
(buildings). Depreciation on buildings shall not exceed 20% per annum (Ibid).
23
Land & Industrial Buildings
Most of the land is owned by the Israel Land Authority which leases land for 49 years.
An Approved Enterprise is entitled to reduced prices on land. Construction companies
erecting buildings will receive grants and tax benefits according to the National Priority
Area in which the buildings are located (Ibid).
3.4 COMMUNITY ACCESS
Approved Enterprise Status is granted to a project which creates employment
opportunities and contributes to the special needs of Israel’s economy. The State is
committed to the development of areas outside the main centres of the country which not
only provides local communities with entrepreneurial-type opportunities, but also with new
employment opportunities in once underdeveloped regions.
No tourism investment incentives are aimed to specifically encourage investment by local
communities or entrepreneurs (Ibid).
3.5 INSTITUTIONAL SUPPORT
3.5.1 The Israeli Center For Business Promotion
This is an investment marketing agency designed to be a full service organisation for
foreign companies interested in investigating direct investment opportunities in the
country. It is the responsibility of the Centre to make the world economic community
aware of what Israel has to offer to the foreign investor. Services offered by the
organisation include:
Identifying potential foreign investors, providing them with customised pre-visit
briefing material and arranging visits of interested companies to the country with
personalised service during the visits;
24
Locating strategic partners for local companies;
Arranging meetings with relevant parties;
Providing foreign entrepreneurs with information on production costs, assisting in site
location, providing trouble-shooting assistance and resolving potential
technical/management problems;
Disseminating information about Israel’s unique business advantages to relevant
parties;
Maintaining an Internet site catering for the domestic and international community
interested in expanding business ties with Israel; and
Assisting with the organisation of events in Israel that will be attended by foreign
business people (Ibid).
25
CHAPTER 4: MALAYSIA
4.1 GENERAL
Malaysia has, since its economic downturn in 1985 and 1986, become one of the most
attractive countries for investment in South East Asia.
The Malaysian economy has achieved significant growth since 1988 and sustained an
unprecedented growth of above 8% for eight consecutive years. As at October 1994, only
three years after the prime minister announced a plan to achieve the status of a
developed nation, they enjoyed a surplus on their balance budget of RM637 million.
The steady growth of the economy reduced the number of citizens living below the
poverty line from 17,1% in 1990 to 8,8% in 1994 and the country has since achieved full
employment with an unemployment rate as low as 2,9%.
In order to achieve these high levels of growth, the government adopted attractive
investment incentives and supplemented these by relaxing foreign exchange rules to
attract foreign investment (Malaysian Industrial Development Authority, 1996).
4.2 THE TOURISM INDUSTRY
The growth in the Malaysian tourism industry is an important contributor to Malaysia’s
economic expansion.
The country has a rapidly expanding tourism industry. During the period 1985 – 1992,
tourism receipts grew by 184,2%. During the same period, tourist arrivals increased by
79,1% and the average length of stay by 6,7%.
More recently, in 1995, 7,5 million tourists contributed RM9,175 million in tourist receipts
to the Malaysian economy. This represents a growth rate of approximately 25% between
1992 and 1995.
26
4.3 LEGISLATION & REGULATIONS
In 1991, Malaysia entered a new era with the announcement of the 6th Malaysian Plan,
part of a process to become a developed country by the year 2020.
This Plan incorporates “The Promotion of Investments Act” which legislates attractive
investment incentives and relaxes foreign exchange rules to encourage foreign
investment.
Tax incentives and other facilities for the tourism sector are provided for in the Promotion
of Investments Act 1986, Income Tax Act 1967, Customs Act 1967, Sales Tax Act 1972
and Excise Act 1976.
4.4 INVESTMENT INCENTIVES RELEVANT TO THE TOURISM INDUSTRY
4.4.1 Fiscal Incentives
Malaysia’s principal fiscal incentives specifically for investment in the tourism industry
include Pioneer Status, the Investment Tax Allowance (ITA) and the Industrial Building
Allowance. These incentives are designed to grant relief from taxes in various forms. The
normal corporate tax applied to companies in Malaysia is in the form of an income tax at
a rate of 30%.
Pioneer Status
With regard to the tourism industry, companies involved in the establishment, expansion
or modernisation of hotels or tourist projects are automatically eligible for Pioneer Status.
Small scale companies who manufacture products or undertake promoted activities,
some of which are listed in Annexure C (and include companies that manufacture
articles of cork, straw and plaiting materials, aircraft, pleasure and sporting boats, iter
alia), qualify for Pioneer Status if they comply with the following criteria:
The company is incorporated in Malaysia under the Companies Act 1965; and
Shareholders’ funds do not exceed RM500 000; and
27
At least 70% of its equity is owned by Malaysians; and
The company produces components for supply to the manufacturing industry; or
The company’s products are substituting imports and the local content is greater than
50% in terms of value; or
The company exports 50% or more of its total production; or
The project contributes towards the socio-economic development of the rural
population.
A company granted Pioneer Status enjoys a 5 year exemption from the payment of
income tax on 70% of its statutory income. This results in an effective rate of tax of 9%.
This exemption is increased to 85% of statutory income for Pioneer Status companies
located in certain designated areas (Grant Thornton International, 1997).
Investment Tax Allowance
Investment Tax Allowance (ITA) may be applied for by any company that would normally
also qualify for Pioneer Status.
A company granted ITA will be given a tax allowance of 60% in respect of qualifying
capital expenditure incurred within five years from the date on which the first qualifying
capital expenditure is incurred. This Allowance is however restricted to a maximum of
70% of the company’s statutory income. Any unutilised allowance can be carried forward
to subsequent years until the whole amount has been fully utilised.
This allowance is increased to 80% of qualifying capital expenditure incurred restricted to
85% of statutory income for companies located in certain designated areas (Malaysian
Industrial Development Authority, 1996).
Should a company provide technical or vocational training to the industry, an ITA of 100%
for a period of 10 years is available for set off against 70% of such company’s statutory
28
income. The balance of statutory income will be taxed at current company tax rates, and
any unutilised balance can be carried forward to subsequent years until fully utilised.
The amount of investment tax allowance utilised is available for redistribution to
shareholders as tax exempt dividends.
The investment tax allowance is also available to small firms that manufacture souvenirs,
gifts and handicrafts (Grant Thornton International, 1997).
Hotel & Airport Allowance
A 50% tax abatement for a period of 5 years for income from business relating to the
construction of hotels and airport facilities aims to increase the supply of these tourist
facilities.
Infrastructure Allowance
A company qualifies for this allowance if it is resident in Malaysia and has incurred capital
expenditure on infrastructure in respect of businesses in operation in a promoted area.
The allowance granted is 100% of qualifying capital expenditure on infrastructural
facilities such as bridges, jetties, connecting roads and substations. This allowance can
be set off against 85% of the statutory income in the year of assessment, with unutilised
portions being carried forward indefinitely until it is fully utilised.
Computers and Information Technology
Computers and information technology assets are granted an initial allowance of 20%
and an annual allowance of 40%. Total expenditure in this respect can therefore be
written off in a period of 2 years (Malaysian Industrial Development Authority, 1996).
Tax Exemption for Tour Operators
Tour operators, registered and approved by the Ministry of Culture, Arts and Tourism,
who bring in a minimum of 500 foreign tourists through group inclusive tours that enter
and exit the country either by air, sea or land, will be exempt from tax in respect of
income derived from the business of operating such tours.
29
Training & Human Resource Development
In order to encourage human resource development, the following incentives are
available to companies contributing to human resource development:
A deduction for cash contributions to a technical or vocational training institution
established and maintained by a statutory body;
Machinery, equipment and materials used for training are eligible for exemption from
import duties, sales tax and excise duties;
Double tax deduction for expenses incurred on approved training by companies
which employ fewer than 50 Malaysian workers and have paid-up capital of less than
RM2,5 million. (Companies which employ more than 50 workers contribute 1% of the
monthly wages of their employees to the Human Resources Development Fund); and
An industrial Building Allowance of 10% per annum is granted to a company which
has incurred expenditure on buildings used for industrial and technical or vocational
training.
Research & Development (R&D)
To promote R & D activities, the following incentives are available to approved companies
or institutions established to undertake R & D:
Tax exemption for a period of 5 years for carrying out R & D activities for a specified
industry;
ITA of 100% of qualifying capital expenditure incurred within a period of 10 years for
carrying out R & D activities for associate companies. This abatement is limited to
70% of statutory income in the year of assessment; and
Industrial Building Allowance in the form of an initial allowance of 10% and an annual
allowance of 2%.
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Companies and institutions not established to undertake R & D activities are encouraged
to promote R & D in terms of the following incentives:
Expenses of a revenue nature incurred by a person for research related to his
business, directly undertaken by him or on his behalf, and approved by the Minister of
Finance is eligible for double deduction;
ITA of 50% on qualifying expenditure for a period of 10 years but limited to 70% of
statutory income;
Plant and equipment used for purposes of approved research are eligible for capital
allowances; and
Double deduction is given for cash contributions made to approved research
institutions and payments for the use of the services of an R & D company
(Malaysian Industrial Development Authority, 1996).
Environmental Protection Equipment
Environmental protection equipment will be entitled to an initial allowance of 40% and an
annual allowance of 20% which will enable the full amount to be written off over 3 years.
4.4.2 Financial Incentives
No specific financial incentives are available to the tourism industry.
4.4.3 Other Incentives
Exchange Control
All payments to non-residents for any purpose, including repatriation of capital and
profits, are freely permitted, subject only to the completion of a simple statistical form for
remittances of more than RM50 000. The commercial banks are authorised to effect such
payments, irrespective of the amount.
Investment Promotion
31
The Malaysian Industrial Development Authority organises investment promotion
missions overseas and handles programmes for incoming business delegations wishing
to investigate Malaysia’s investment potential. Seminars are organised overseas to
inform potential investors about investment opportunities, industrial policies and tax
incentives. As such there are available support systems for potential investors to aid
incoming investment in the country.
Expatriate Posts
Expatriate posts are approved based on expertise, skill requirements and needs of the
company. Work permits for such posts will last for between 3 and 5 years. This is
designed to give the employer sufficient opportunity to provide a local employee with
appropriate on-the-job training.
4.5 SUCCESS OF MALAYSIA’S INVESTMENT INCENTIVES
4.5.1 Labour Force
Malaysia has a labour force which is diligent, disciplined, educated and trainable. A large
proportion of the labour force also possesses the basic skills required by industry. This
can largely be attributed to the heavy emphasis placed on technical and vocational
training incentives.
As a result of the importance placed by the Malaysian Government on training and
related incentives, there has been an increase in the number of vocational and technical
schools and industrial training institutions to employ youths for employment in various
industries. Most of these training institutions are run by government agencies, although a
number of private institutions supplement the government’s efforts to produce the skilled
workers needed by industries.
It is the Government’s policy that Malaysians are eventually trained for and employed at
all levels. Companies are encouraged to train more Malaysians so that the employment
pattern at all levels of the organisation will reflect the multi-racial composition of the
country.
32
Foreign companies are allowed to bring in expatriate personnel in areas where there is a
shortage of trained Malaysians to do the job. Foreign companies in some instances are
also allowed “key posts”, being posts that are permanently filled by foreigners.
For executive posts which require professional qualifications and practical experience,
expatriates may be employed up to a maximum period of 10 years, subject to the
condition that Malaysians are trained to eventually succeed the expatriate.
In the case of non-executive posts requiring technical skills and experience, expatriates
may be employed up to a maximum period of 5 years, subject to the condition that
Malaysians are trained to take over the posts eventually.
The incentives relating to the promotion of training and training facilities, together with the
restrictions placed on the employment of expatriates, has resulted in a large improvement
in the country’s unemployment rate. The rapid rate of human resource development has
contributed to reduced poverty and increase literacy throughout the country.
4.5.2 Industry
The Malaysian Industrial Development Authority states that the concept of granting
companies operating in promoted industries and areas “Pioneer Status” and Investment
Tax Allowances has accelerated development in earmarked industries and has
encouraged development in underdeveloped areas with significant potential.
In addition, they believe that the absence of strict exchange controls and the opportunity,
albeit controlled, to employ expatriates has promoted foreign investment in Malaysia.
4.6 COMMUNITY ACCESS
Pioneer Status, which gives investors access to investment allowances and tax
exemptions, is only granted to a company if at least 70% of its equity is owned by local
communities.
33
Another condition that is sometimes required before a company is granted Pioneer Status
is that the project contribute towards the socio-economic development of the rural
population.
Small scale entities that manufacture souvenirs, handicrafts and giftware – representing
business opportunities for the local communities – automatically have access to Pioneer
Status.
4.7 INSTITUTIONAL SUPPORT
Malaysia has an industrial development authority that facilitates general economic
development and provides support services to all investors the literature review revealed
no institutions that have been established specifically to provide support to investors in
the tourism industry.
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CHAPTER 5: IRELAND
5.1 GENERAL
Although the Irish economy was traditionally based on agriculture, Ireland has, since the
1950’s, transformed itself into a developed industrial country. In more recent years, the
services industry, including tourism, has grown significantly.
The Irish economy has performed well in recent years, growing by 10% in 1995 and 7%
in 1996.
The steady growth of the economy has improved employment rates significantly.
Employment growth in 1996 was considerably higher than the EU average (3,2% v 0,1%)
and Partnership 2000, an agreement recently negotiated, is expected to continue to boost
job creation and hence consumer spending.
To promote the ongoing expansion of the economy and maximise employment
opportunities, the Irish Government has created an attractive package of incentives for
investment and, to further encourage foreign investment, it has chosen not to implement
exchange control restrictions (KPMG, 1997).
5.2 THE TOURISM INDUSTRY
Tourism has become a fairly significant sector of the Irish economy and is making
significant contributions to Government economic plans. These contributions have
continued to grow and in 1995/96 the number of overseas visitors and foreign earnings
from tourism experienced growth of 14% and 16% respectively.
The tourism industry now represents around 4,3% of GDP.
The government’s committed policy for the successful future of Irish tourism emphasises
the crucial role that a highly focused overseas marketing programme will play in reaching
the ambitious targets which have been set by the industry (Irish Tourist Board, 1997).
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5.3 LEGISLATION & REGULATIONS
Legislation in Ireland has been drafted to encourage industrialisation and promote the
expansion of the economy. The development legislation offers attractive packages and
has excluded any foreign exchange regulations in an attempt to encourage foreign
investment.
The government introduced a twelve-year Operational Programme for Tourism in 1988 to
run in two phases up to the end of 1999. The second phase of that programme (1994 –
1999) is currently in progress.
The “Operational Programme for Tourism” is part of Ireland’s tourism policy and is a
strategy which aims to achieve growth in the tourism industry and encourages highly
focused marketing programmes.
5.4 INVESTMENT INCENTIVES FOR THE TOURISM INDUSTRY
Ireland provides a favourable environment for investment. A comprehensive range of
fiscal and financial incentives is available for Irish and foreign companies which carry on
manufacturing, research and development and service operations in Ireland. Each of
these activities could encompass the tourism industry as defined in Chapter 1.
5.4.1 Fiscal Incentives
Tax Relief for Capital Expenditure
The qualifying costs for all allowances is the total cost (construction & refurbishment
costs excluding site costs) less any grants received.
The current level of capital allowances are as follows:
Holiday cottages: 10% p.a.
Hotels / holiday camps: 15% p.a.
Plant & machinery: 15% p.a. (Irish Tourist Board, 1996)
36
Urban Renewal Relief
Special relief is available in connection with re-development in specific areas in Ireland.
The amount of the allowance depends on whether the building is owner-occupied or
rented and the area in which it is located. In the first year the rate varies from 25% to
100% and varies from 2% to 4% thereafter (Irish Tourist Board, 1996).
Corporate Tax Rate Relief
A reduced corporate tax rate of 10% is the major financial incentive for industry in Ireland.
The special rate applies to trading income from a range of qualifying activities, including:
The manufacture of goods in Ireland, and
The operation of Irish ships.
The relief is available until 2010. A corporation tax rate of 12,5% will apply from 1 January
2006 nationwide to trading income and this will replace the 10% rate from 2010 (Industrial
Development Agency, Ireland, 1997).
Double Tax Agreements
To preserve the benefit of the 10% tax rate, Ireland has concluded Double Taxation
Agreements to ensure that profits are not subject to double taxation in the home country.
Tax Exempt Government Securities
Foreign companies in Ireland are exempt from corporation tax in respect of interest
received from special Irish Government Securities issued to them. This encourages all
foreign investors, including investors in the tourism industry, to reinvest profits in the
foreign country as oppose to withdrawing the profits and investing them in their home
countries. Foreign investment is thus retained by Ireland.
For this exemption to apply, the investing company must be either:
37
A trading company resident in Ireland with at least 90% of the issued share capital
held by a foreign company or companies; or
A foreign company trading in Ireland through a branch or agency (Industrial
Development Agency, Ireland, 1997).
Capital Allowances
Accelerated allowances are available in certain designated urban development areas.
This allows companies in these areas to write off a substantial part of the qualifying
expenditure against taxable profits in the first year (Irish Tourist Board, 1996).
5.4.2 Financial Incentives
An important component of the incentive packages offered is the availability of generous
grants. A variety of grants which can be specifically tailored to meet the needs of each
company is available.
No fixed levels of grant assistance are quoted. Each proposed investment project is
assessed against a number of criteria. An incentive package is negotiated on an
individual basis for each investor and grant payments are structured in a way that best
suits the investor’s financing requirements.
The Industrial Development Act, 1986 outlines the type of project eligible for assistance
and before assistance is provided it must be shown that:
Financial assistance is necessary to ensure the establishment or development of the
undertaking;
The investment proposal is commercially viable;
The project has an adequate equity base;
The company has a suitable company development plan;
38
The project provides new employment or maintains employment in the State that
would not be maintained without assistance and will increase output and value added
within the economy; and
The project will generate an adequate return on investment.
The cash grants available are discussed below:
Capital Grants
Cash grants towards the cost of fixed assets are available to companies to help defray
the cost of setting up an operation. Fixed assets eligible for assistance include site
purchase and development, buildings and new plant and equipment. Where a building is
rented, a grant towards the reduction of the annual rental payments may be available
instead.
There is an increasing shift away from capital grants towards preference shares and
other repayable forms of financial assistance. Repayment mechanisms include ordinary
shares and cumulative redeemable convertible preference shares.
Agri-tourism Grant Scheme
The objective of the scheme is to provide grant aid to farmers and other rural dwellers
towards the cost of providing facilities which will enhance the attractiveness of an area for
visitors and meet clearly defined tourism demands.
Reasonable levels of grant aid are available and guidelines are available in this regard. A
minimum investment level of IP4 000 applies to all capital projects.
Business Expansion Scheme
Under this scheme, owners of certain tourism businesses can raise investment finance
for less cost than traditional borrowing sources by securing outside investors who may
obtain significant tax relief on their investment.
39
The investor will obtain tax relief on investments up to a maximum of IP25 000 per annum
and relief is available at the investor’s highest rate of income tax.
Pilot Resort Relief Scheme
A new pilot scheme for tax relief for tourist accommodation and non-accommodation
facilities in certain areas was introduced in 1995. Under this scheme, accelerated capital
allowances are available, lessors may write off construction or refurbishment expenditure
incurred against all rented income and business lessees may claim a double rent
allowance for the first ten years.
It is anticipated that this scheme will give an impetus to the essential improvement of
visitor accommodation and other tourist facilities in the specific areas to which the
scheme applies to meet the demands of the modern tourist.
It is envisaged that the scheme could encourage new and growing tourist trade to many
areas.
International Fund for Ireland
Three grant schemes have been implemented by the International Fund for Ireland:
The Tourism Amenities Development Scheme;
The Hotel & Guesthouse Improvement Scheme; and
The Community Sponsored Amenities Scheme.
The aim of these schemes is to improve the tourism facilities and amenities in order to
attract increased tourism revenue to Ireland, to assist the lower grade hotels and
guesthouses to improve the physical standard of accommodation and guest facilities, and
to assist community based groups to improve and develop amenities aimed at attracting
foreign revenue to Ireland.
Grants available are as follows:
40
Up to 50% of proposed capital expenditure in respect of the Tourism Amenities
Scheme;
Up to 33% of proposed capital expenditure in respect of the Hotel & Guesthouse
Scheme;
75% of proposed capital expenditure for the Community Sponsored Scheme, with a
maximum grant of IP100 000.
European Regional Development Fund (ERDF)
Large Tourism Projects:
Provision has been made for 4 – 6 large tourism projects costing more than IP12 million.
Maximum aid rates under this measure are 75% of proposed capital expenditure for
public sector projects and 50% of proposed capital expenditure for private sector projects.
Tourist Information and Heritage projects
New and improved tourist information offices have been provided at a number of
locations. Additional touring routes and supporting guide books and appropriate
signposting will be developed.
Public and private heritage projects will be supported where they are capable of
generating 75 000 visitors by their third year.
Maximum aid rates under this measure will be 75% of proposed capital expenditure for
public sector and 50% of proposed capital expenditure of private sector projects.
Tourism Angling
The purpose of this measure is to upgrade Ireland’s Game Angling Resources to the
highest international standards. Projects supported by this measure must;
Attract additional foreign investors;
Be readily available for tourism use;
41
Be in harmony with the environment; and
Generate economic benefit and additional jobs.
Maximum aid rates under this measure will be 75% of proposed capital expenditure for
public sector and 50% of proposed capital expenditure of private sector projects.
Special Interest Holiday Facilities
Areas to be assisted include:
Improving adventure holiday facilities;
Development of themed cycling and walking routes;
Purchase of new sea and lake angling boats;
Restoration of 30 Irish gardens including visitor facilities;
Provision for improvement of visitor facilities; and
Creation of a major centre for international equestrian events.
Maximum aid rates under this measure will be 75% of proposed capital expenditure for
public sector and 25% of proposed capital expenditure of private sector projects.
Specialist Accommodation-related Developments
Assistance under this measure will be available for specialist accommodation needs for
overseas visitors including:
Conference facilities attached to hotels with more than 30 bedrooms, subject to a
minimum overall investment of IP1 million;
The provision of touring caravan and camping facilities near major sea access points;
42
The provision of new and improved accommodation at approved outdoor pursuit
centres in remote areas;
Provision of facilities for the disabled in hotels; and
Upgrading of small and medium sized hotels up to and including 3-star hotels with a
current capacity of 100 beds.
Maximum aid rates under this measure vary according to the number of bedrooms and
range from 33,3% to 100% of proposed capital expenditure.
Employment Grants
These grants are exempt from tax and are specifically intended for companies which
create employment but do not need to invest heavily in fixed assets. Service industries,
and hence the tourism industry, is predominantly labour-intensive and could therefore
benefit significantly from such grants.
An amount is approved for each job. To ensure that this particular incentive promotes the
generation of sustainable job creation, one half of the agreed amount per job is paid on
certification that the job has been created and the balance one year later, provided the
job still exists.
Training Grants
Training grants are provided for up to 100% of the trainee and trainer costs in start-up
companies and may also cover the cost of sending personnel abroad, the salaries, travel
and subsistence expenses of training personnel and management training expenses.
Feasibility Grants
Grants are provided for the evaluation of new investment projects. These grants assist in
funding a critical stage where the viability of a project is assessed. Grant aid is available
at up to 50% of expenditure, including salaries, travel costs expenses and the cost of
consultants.
Management Development Grants
43
These enable firms to recruit expertise in management areas such as management
information systems, business planning and strategic planning. Grants of up to
IRP30 000 per person or 50% of eligible costs may be available.
Loan Guarantees & Interest Subsidies
These incentives provide an entrepreneur with an opportunity of raising finance which
might otherwise not be possible (Industrial Development Agency, Ireland, 1997).
5.4.3 Other Incentives
Exchange Control
There are no exchange control restrictions in operation in Ireland. Permission is readily
forthcoming for repatriation of profits or interest to an approved overseas investor.
Labour
Work permits for expatriates are issued for one year and may be extended on application
by the employer. There is usually no difficulty in obtaining permits for key managerial
personnel (Irish Tourist Board, 1996).
5.5 SUCCESS OF IRELAND’S INVESTMENT INCENTIVES
Ten years ago there were 670 foreign companies operating in Ireland employing 62 000
people. As a result of the attractive investment climate and the absence of restrictions on
the repatriation of profits, the number of foreign companies operating in Ireland has
grown to approximately 1 050, employing 98 000 people. This represents a 50% growth
over 10 years.
Within the tourism industry specifically, Ireland has experienced an unprecedented level
of investment in new or improved facilities and created 25 000 new jobs during the period
1988 – 1993.
44
The results of the major infrastructural expansion and development, as well as focussed
product marketing opportunities, made possible by the operational Programme for
Tourism, are now very much in evidence in Ireland. Leisure facilities, developed to high
international standards, have already been developed, and many more projects are at
various stages of completion.
In the first phase of the Operational Programme, a combined total of IP850 million from
the public and private sector was invested in tourism-related projects, and under the
current phase a further investment of IP652 million will have been made in similar
projects by the end of the century.
Reports have indicated that job creation in 1997 continued at an unprecedented pace,
and this can be attributed to the generous employment and training grants and the
positive trends in the general economy as a result of, inter alia, the attractive investment
climate.
As a consequence of the large contribution by overseas companies which have found
Ireland to be a highly competitive location from which to serve international markets,
exports now account for 75% of national output (Ibid).
5.6 COMMUNITY ACCESS
As mentioned in Section 5.4, special incentives are available to encourage the
development of urban areas in Ireland.
In addition, the “Agri-tourism Grant Scheme” provides grant aid to farmers and other rural
dwellers towards the cost of providing facilities which will enhance the attractiveness of
an area for visitors and meet tourism demands.
The “International Fund for Ireland” has implemented a “Community Sponsored
Amenities Scheme” to assist community based groups to improve and develop amenities
aimed at attracting foreign revenue to Ireland.
5.7 INSTITUTIONAL SUPPORT
5.7.1 IDA Ireland
45
IDA Ireland is a government agency which provides development services to investors,
both foreign and local.
This institution directs its support toward attracting investments which generate new job
opportunities and new technologies in the Irish economy. It also directs support towards
the further integration of overseas owned companies already located in Ireland.
IDA Ireland compiles finely tuned packages which combine the best of Irish strategic
resources with generous grant and tax incentive programmes.
The level of assistance offered by IDA to investors by way of grants is dependent on the
employment and economic impact of the proposed project on Ireland.
As a measure of control, IDA Ireland enters into agreements with the overseas
companies whereby the parent companies provide guarantees and performance targets
are agreed such as jobs created, output or market projections. These are written into
the companies’ business plans and performance criteria are closely monitored by IDA
Ireland.
The package of grants will depend on its suitability to a particular project and is likely to
vary from case to case. In particular, grants provided by IDA Ireland could comprise:
Capital grants;
Training grants;
Rent subsidies; and
Employment grants.
5.7.2 Forbairt
This organisation is designed to facilitate new start-up Irish companies and the
development of existing Irish companies. It provides a range of services and support
46
facilities which focus on the business and technological requirements of the firms. It
assists Irish companies to identify their requirements and to design the best package of
support services to facilitate their development.
Forbairt offers two types of support to Irish companies:
Operational support, the aim of which is to increase the profitability of the firms and
create a sound basis for a subsequent extension of capacity; and
Financial support for capital investment to encourage companies to expand their
capacity and increase output and job creation.
Forbairt also provides Irish companies with:
Feasibility grants;
Technology acquisition grants; and
Management development grants.
Details of these grants are provided in Section 5.4.
In addition, programmes have been specifically tailored by the organisation to help
foreign and local investors in Ireland to install and improve quality systems, reduce costs
and improve efficiency, improve skills in technology and management, source information
and technology, protect the environment and source funding for technological
development and implementation.
5.7.3 The Shannon Development Company
This is a regional economic development company for Ireland’s Shannon Region. It
initiates and supports integrated industrial, tourism and rural development with the aim of
achieving sustained economic growth in the Shannon Region.
5.7.4 Bord Failte Eireann
This organisation is responsible for the development and promotion of tourism in Ireland.
It administers a number of grant schemes which provide funds for specific tourism
47
developments in the public and private sectors. Other services provided by this
organisation include:
The provision of research data and statistics on tourism traffic and products;
Product profiles on a number of tourism projects;
Market profiles;
Advisory services; and
Introduction to financial institutions and specialist tourism consultants.
5.7.5 The Irish Trade Board
The Irish Trade Board is the State agency with responsibility for promoting and
developing trade in Ireland and overseas. It provides trade information and support
services which help identify opportunities and create demand for Irish products and
services.
Services offered by the Irish Trade Board include;
Identifying opportunities for industry;
Working with individual firms to turn opportunities into sales by providing marketing
and operational advise;
Helping buyers to buy Irish products and services;
Creating additional demand for Irish products;
Organising promotions such as trade fairs, trade missions and buyer conferences;
Providing financial incentives to encourage companies to undertake marketing
investments; and
48
Advising companies on trade matters.
5.7.6 Bank of Ireland
The Bank of Ireland is the leading provider of financial services to the Tourism and
Leisure industries.
49
CHAPTER 6: AUSTRALIA
6.1 GENERAL
Australia has an industrialised economy with a large services sector, a broad-based
manufacturing sector and large scale resource development. The information technology
industry is one of the largest growing sectors of the economy.
Australia’s underlying inflation rate was as low as 1,9% in 1995 and the economy is
presently performing well with continued low inflation and sustained economic growth of
3,25% per annum (Grant Thornton, 1997).
6.2 THE TOURISM INDUSTRY
Tourism has been a rapidly expanding sector of Australia’s economy. The country
experienced a growth rate in tourism receipts of 276% during the period 1985 – 1992.
Tourist arrivals increased by 46% during this period and average length of stay increased
by 32,5%.
More recently, international tourist arrivals increased by 24% between 1993 and 1995 to
3,725 million arrivals.
6.3 LEGISLATION AND REGULATIONS
No apparent legislation has been drafted specifically for the tourism industry. Legislation
has been enacted to develop export markets and promote participation in international
markets.
50
6.4 INVESTMENT INCENTIVES FOR THE TOURISM INDUSTRY
6.4.1 Financial Incentives
The financial incentives available in Australia relate particularly to exporters or potential
exporters. Investors are encouraged to develop export markets and to promote
participation in international markets. Available financial incentives are discussed below
(Grant Thornton, 1997).
Grants for Research and Development Projects in Small to Medium Sized
Enterprises
Grants are available for expenditure incurred by entities in research and development
activities. These grants are generally directed at small startup companies conducting
research and development projects that are not adequately supported by tax
concessions.
The highest priority for grants will be given to those entities which, with regard to the
following factors:
Aim to develop international competitive products, processes or services with
significant commercial potential;
Management capabilities of the applicant;
Have illustrated their potential to conduct the activities and seen them through to
commercial reality;
Companies that are not tax exempt, are incorporated in Australia, and have an
annual turnover of less than A$50 million including related companies in each of the
three previous financial years;
Technical strength;
National benefits; and
51
Need for research and development start funding.
The grants are generally calculated at the rate of 50% of the amount of eligible research
and development expenditure incurred by the enterprise over a project life of 3 years.
Small to medium enterprise research and development grants typically range in size from
A$50 000 to A$5 million. Project costs incurred prior to application lodgement are not
eligible.
Collaborative Research and Development Projects
This incentive was implemented in order to encourage collaborative research and
development between industry and research organisations, as well as to provide support
for new or emerging technologies that are considered strategic to the future
competitiveness of Australian industry. Funding is limited to A$1 million for up to 50% of
eligible project costs over a project life of 3 years.
Applications are available to at least one company that is not tax exempt and is
incorporated in Australia, together with at least one research institution.
Graduate-based Research & Development Projects
To encourage links between companies and public sector research institutions a joint
Commonwealth/State government programme has been established to provide up to
A$100 000 for up to 50% of eligible project costs over 2 years. 80% of the grant is paid to
the company to cover salary and other employment costs and the remainder is paid to
the institution for the provision of academic support and equipment.
Concessional Loans for the Commercialisation of Technological Innovation
Loans are awarded to small companies to undertake early commercialisation of
technological innovation in goods, systems and services. The maximum loan is 50% of
eligible project costs.
The loan spans a maximum period of 6 years. Loan drawdowns occur within the first 3
years and then a maximum of 3 years is available for the repayment of the loan.
Interest begins to accrue 3 years from the date of issue of the loan agreement and is
calculated daily at 40% of the Commonwealth Bank Index Rate.
52
Applications are available to companies with up to 100 employees (including employees
of related companies within the group) and are restricted to companies that are unable to
fund their commercialisation project adequately through commercial lending sources.
Innovation Investment Fund
This programme aims to help small, technology-based companies access equity finance
(venture capital).
The fund will provide a total of A$130 million in capital investment on a 2:1 basis with
private sector capital. The funding will allow for the creation of a small number of early
stage investment funds in the range of A$30 million to A$50 million.
Funds will be restricted to investing in companies which are commercialising technology,
with an annual revenue of A$4 million or less, averaged over the past 2 years, with a
maximum of A$5 million in any one year.
These companies are a dynamic source of economic growth, employment and exports.
Investment will be in the form of equity rather than debt.
Export Market Development Grants Scheme (EMDG)
The EMDG provides financial incentives in the form of taxable cash grants to Australian
residents who seek out and develop overseas export markets for their goods, services
and know-how. The grants are calculated on the basis of promotional expenditure
incurred, ie. 50% of the pre-sales promotional expenditure in excess of A$15 000 subject
to a maximum grant of A$200 000 and after 2 years the grant becomes subject to a
maximum level of export earnings. Additionally there must be a 50% Australian content
provision for goods manufactured in Australia.
6.4.2 Fiscal Incentives
Pooled Development Funds
Investment companies that provide equity capital for small to medium sized firms, may
apply for registration as a pooled development fund (PDF). Only shares from Australian
53
resident companies with total assets not exceeding A$50 million and carrying on certain
business operations can be taken up by PDF’s.
The taxable income from a PDF is divided into 2 components:
Small to medium Enterprise Economic Component (tax 15%)
Unregulated Investment Component (tax 25%).
Any dividend paid by a PDF is exempt from tax.
Tax Exempt Infrastructure Borrowings
For the purpose of taxation, borrowings by companies to be used in financing the
construction of infrastructure facilities (being land transport or sea transport used by the
public for a charge) that they intend to own, use or control for 25 years are treated as
follows:
Interest derived under infrastructure borrowings is not accessible to investors for up
to 15 years;
Interest paid on infrastructure borrowings is not deductible by borrowers for up to 15
years;
Profits of any kind on the disposal or redemption of an infrastructure borrowing are
exempt from tax, and losses thereon are not deductible; and
Expenditure incurred in borrowing to invest in infrastructure borrowings is tax
deductible.
Research and Development
Companies incorporated in Australia, public trading trusts and partnerships of eligible
companies are entitled to a concessional tax deduction of 125% for R&D expenditure.
The concession applies to expenditure in excess of A$20 000. Eligibility requirements are
as follows:
54
Results must be exploited on normal commercial terms and to the benefit of the
Australian economy; and
The R&D activities must contain adequate Australian content.
General Concessions
General tax concessions available include:
Expenditure on environmental impact studies which is deductible over a period of 10
years or the life of the project to which the study relates, whichever is the lesser; and
Expenditure incurred for environmental protection purposeswhich is deductible as
long as expenditure is incurred for the sole or main purpose of preventing pollution,
or treating, storing or removing pollution where the waste or pollution was caused by
the taxpayer’s income producing operation in the past, present or proposed.
6.4.3 Other Incentives
Workforce Assistance
The Australian government operates a national employment agency with the aim of
providing and improving the efficient functioning of the labour market. Its services are
provided free of charge to both job seekers and employers through a network of
numerous employment offices.
The Commonwealth Rebate for Apprentice Full-time Training (CRAFT)
This is a scheme which provides a range of tax exempt rebates to employers and
allowances to apprentices required to live away from home to take up or to remain in an
apprenticeship, the youth training programme, labour adjustment training programmes,
Australian traineeship systems and the integrated wage subsidy programme, which gives
a monetary incentive to employers to employ longer- term unemployed persons.
55
6.5 SUCCESS OF AUSTRALIA’S INVESTMENT INCENTIVES
The country’s tourism industry has expanded at phenomenal rates and contributes
significantly to the economy.
Incentives encouraging export marketing have led to an enormous influx of international
tourists to Australia, despite it being a long-haul destination.
Consequently, the increasing demand for tourist facilities experienced as a result of the
increase in visitor numbers has led to an increase of 29% in accommodation capacity
over a period of 5 years.
6.6 COMMUNITY ACCESS
No distinction seems to be made and no special concessions seem to apply to local
communities and small companies to facilitate their economic growth in the tourism
industry.
6.7 INSTITUTIONAL SUPPORT
Australia, like Malaysia, has a Department of Trade that facilitates general economic
development and provides support services to investors in all sectors of the economy.
The literature review revealed no institutions that have been established specifically to
provide support to investors in the tourism industry.
56
CHAPTER 7: SINGAPORE
7.1 GENERAL
A recession experienced by Singapore in 1985, largely due to rising land and labour
costs, prompted the Government to redefine the country’s role in the global economy. To
achieve economic growth, the government promoted capital-intensive, export-oriented
manufacturing industries that require a skilled labour force. Since this redefinition,
Singapore’s economy has recovered and grown steadily in recent years.
Actual GDP growth during 1994 and 1995 averaged 8,3% per annum and growth for
1996 to 1999 is estimated at 7% per annum.
Although growth in the economy has been high, levels of unemployment have not been
reduced and still remain higher than, for example, those in Ireland.
The Singapore Government actively encourages free enterprise by providing tax and
financial incentives to attract both local and foreign investment. These incentives are,
however, usually only granted to industries that use high technology and skilled labour
and require relatively few natural resources (KPMG, 1995).
7.2 THE TOURISM INDUSTRY
The tourism industry in Singapore does not constitute a significant portion of the
economy. In fact, the entire commerce and tourism sector accounts for less than 18% of
the economy.
Singapore’s tourism industry has, in real GDP terms, experienced declining growth rates.
Visitor numbers increased by less than 200 000 from 1995 to 1996, representing a
growth rate of approximately 2,7% (Singapore Airlines, 1997).
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7.3 LEGISLATION AND REGULATIONS
Like Australia, no apparent legislation has been drafted specifically for the tourism
industry.
Legislation enacted encourages technological development as oppose to labour-intensive
industry.
The principal investment incentives are contained in the Economic Expansion Incentives
Act and are administered primarily by the Economic Development Board (EDB).
7.4 INVESTMENT INCENTIVES FOR THE TOURISM INDUSTRY
7.4.1 Fiscal Incentives
Pioneer Industries
Income derived from a pioneer industry or product (as defined by the Minister of Finance)
is exempt from tax for 5 to 10 years after commercial business begins. Longer tax
holidays may be granted to projects that require large capital investment, advanced
technology, highly skilled employees and a long start-up period.
Although pioneer status is typically extended to high-technology, engineering, computer-
related and industrial-design products, the Minister of Finance may, in exceptional cases,
assign this status to any industry or specified product (KPMG, 1995).
Export Relief
Eligible export profits of qualifying service activities benefit from a concessionary tax rate
of 10% of the standard corporate tax rate for a period of up to 20 years. To qualify, export
sales must be at least 20% of total annual sales and must equal at least
S$100 000 a year (Ibid.).
Investment Allowance
58
An investment allowance is offered as an alternative to pioneer status and export relief.
Profits are exempt to the extent of specified percentages, up to a maximum of 50%, of
actual fixed investment in productive equipment. Enterprises may also claim general
capital allowances (which are not specific to the tourism industry), when appropriate, on
the same expenditure (Ibid).
Development and Expansion Incentive
This is applicable to manufacturing and service companies which are engaged in high
value-added operations in Singapore but which do not qualify for pioneer status.
Qualifying income of these companies is taxed at a rate of not less than 10%. The
maximum initial relief period is 10 years, with possible extension of up to 5 years and a
maximum total incentive period of 20 years (Ibid).
7.4.2 Financial Incentives
Capital Assistance Scheme
The Capital Assistance Scheme, administered by the Economic Development Board,
provides long-term, fixed rate loans of up to 70% of the cost of productive assets to
investors in the service industries. Qualifying projects must provide technological or
economic benefit to Singapore (Ibid).
Business Development Scheme
This scheme is aimed at helping small and medium-size businesses to develop business
opportunities. Businesses may receive grants of up to 50% of approved costs incurred for
studies or overseas visits. The purpose of the visits must be to:
Explore new markets;
Pursue joint-venture arrangements;
Establish business contracts; or
Participate in approved business development seminars and workshops (Ibid).
Research Incentive Scheme
59
This scheme aims primarily to develop R&D capabilities in areas of strategic capabilities,
with the long term objective of increasing the company’s competitiveness. The grant
funds between 20% and 30% of the total research spending (Ibid).
Skills Development Fund
This fund provides incentive grants for training persons preparing to join the workforce.
Such grants are awarded on a cost sharing principle and on the basis that the training
must be pertinent to the economic development of Singapore. The grants are financed
through collections from the skills development levy (currently 1%) imposed on employers
with workers earning S$1 000 or less a month.
To be eligible, a company must meet the following criteria:
Company must be registered in Singapore;
Workers must be Singaporeans, permanent residents of Singapore, or three year
work permit holders.
The grant works on the following mechanism:
S$3 per trainee per hour for in-house training programmes;
S$4 per trainee per hour for structured on-the-job training leading to national or
industry wide certification;
A flat rate of S$80 per trainee per day for overseas training programmes subject to a
maximum supportable training programme of 6 weeks (Ibid).
Enterprise Development Fund
This government fund promotes incentives to support the development, modernisation
and upgrading of small and medium-sized business entities. It comprises 2 schemes:
60
The Local Enterprise Finance Scheme is a low cost, fixed interest rate financing
program, offered through several financial institutions, initiated to encourage and aid
local enterprises to upgrade, strengthen and expand their operations.
The Local Enterprise Technical Assistance Scheme is designed to assist local
enterprises in the defrayment of costs incurred in the modernisation and upgrading of
operations through the engagement of an external expert for a limited period of time
who will impart incremental technical skills.
The level of funding may be given to the extent of 70% of the cost of engaging an
external expert for an approved short term assignment. This can be increased to 90% if
shown to be deserving.
To qualify for these two schemes, the entity must have:
A minimum of 30% local equity;
Fixed productive assets not exceeding S$15 million; and
An employment size not exceeding 200 workers. (Ibid)
Automation Feasibility Study Scheme
This scheme is designed to assist companies in identifying areas within their operations
where automation could be implemented. It provides financial grants of up to 70% of the
qualifying costs of using automation consultants to conduct an automation feasibility
study (Ibid).
Labour
No restrictions are placed on the importation of skilled workers, technicians, engineers
and managers where the employment of local workers or expatriates are uneconomical to
the investor. Similarly, no restriction is placed on expatriate employment.
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Exchange Control
No exchange control approval or formalities are required for the repatriation of funds and
Singapore residents and foreign investors are allowed to exchange currency freely.
7.5 SUCCESS OF SINGAPORE’S INVESTMENT INCENTIVES
The investment incentives offered by Singapore to local and foreign investors have
contributed to the following:
Singapore was rated as the 2nd
most profitable country for businesses to invest in.
The country has attracted investment from some of the world’s largest corporations.
Continued economic expansion – the country now has the Pacific Rim’s 3rd
highest
per capita GDP after Japan and Australia.
There has been a large increase in capital-intensive business development, resulting
in economic benefit, but delayed social benefit.
Labour-intensive industries have been phased out and replaced with high-technology
industries.
There is large scale new investment in the country, with the emphasis on promoting
employment for skilled labour. This clearly does not adequately address the issue of
poverty, which is usually suffered by the unskilled masses.
There is diminished opportunity for unskilled Singaporeans to become skilled as there
are no restrictions on the long-term employment of expatriates;
There are highly developed technology;
A marginal increase in visitor numbers and the lack of investment incentives specific
to the tourism industry resulted in minimal growth in capital investment in the tourism
industry in recent years. This is illustrated by the relatively small increase of less than
1000 new hotel rooms during 1996 throughout the entire country.
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7.6 COMMUNITY ACCESS
No distinction seems to be made and no special concessions seem to apply to local
communities or small companies to facilitate their economic growth in the tourism
industry.
7.7 INSTITUTIONAL SUPPORT
7.7.1 Economic Development Board (EDB)
This is a statutory agency which centralises all planning and development in Singapore. It
deals with enquiries of prospective investors, and evaluates the feasibility of proposed
projects and the desirability to the country. The EDB also provides technical and
consultancy services and encourages and approves applications for investments. It
liaises with other government agencies such as financial institutions for the provision of
finance and the government corporations in connection with state owned land and factory
space. An important function of the EDB is to process applications for the tax incentives
available.
63
CHAPTER 8: KWAZULU-NATAL
8.1 MACRO OVERVIEW
South Africa enjoyed strong economic growth in the 1960’s but the economy deteriorated
in the 1970’s and 1980’s when the currency weakened and inflation rose dramatically.
In 1993, real per capita income began to recover, and this recovery was sustained to the
end of 1996. GDP growth of 3 – 4% accompanied by a similar population growth rate,
however, results in a negligible change in per capita income or employment.
In recent years, domestic and international investor confidence has sagged and most
economists predicted a slowdown in growth in 1997 with an increase in inflation.
In 1996 the government set out its Growth, Employment and Redistribution Strategy to
boost the economy and promote growth. It is envisaged that this will be achieved by
attracting foreign investment (IDC, 1998).
KwaZulu-Natal outperformed South Africa as a whole between 1988 and 1993 in terms of
real growth in GDP, and increased its percentage contribution towards the National GDP
during this period.
KwaZulu-Natal attracted significant investment over the last 6 to 7 years in comparison to
other provinces. In the 1996 financial year, new investment in the province created
approximately 22 300 new jobs.
Despite KwaZulu-Natal’s positive performance in comparison to the national averages,
unemployment rates remain high. Consequently, poverty remains high and socio-
economic development low, particularly in rural areas.
The government of the Province of KwaZulu-Natal has a vision for its development. This
includes the creation of a competitive and entrepreneurial environment which will attract
64
business and investment, through policies designed to bring about a development
strategy, a supportive infrastructure, stability and tolerance, competent management and
skilled labour, and access to global and national markets.
8.2 THE TOURISM INDUSTRY
The region enjoys a comparative advantage in the tourism sector and has one of the
largest tourist infrastructures in the country.
In 1995, the private economy was worth an estimated R55 billion in KwaZulu-Natal.
Figure 8.1 below presents an overview of the contribution made by each of the sectors to
KwaZulu-Natal’s economy during that year. This chart illustrates that Commerce and
Tourism (including wholesale, retail, catering and accommodation) was the second
largest sector in KwaZulu-Natal after the manufacturing sector. The Commerce and
Tourism industries accounted for roughly 20% of the total value of the private sector.
Figure 8.1: Composition of the Private Economy in 1995: KwaZulu-Natal
Source: KwaZulu-Natal Marketing Initiative (1997)
KwaZulu-Natal enjoys approximately a quarter of the country’s domestic tourism market
but a comparatively small share of the international market.
Manufacturing
(R19,8bn)
36%
Construction (R2,2bn)
4%Commerce & Tourism
(R11,0bn)
20%
Electricity (R1,1bn)
2%
Transport (7,2bn)
13%
Mining (R1,1bn)
2%
Finance (R9,9bn)
18%
Agriculture (R2,7bn)
5%
65
The region has high potential for further growth and development. The potential for
tourism, however, still needs to be exploited in KwaZulu-Natal, and tourist and
recreational developments need to be encouraged to facilitate the promotion of this
industry.
8.3 LEGISLATION & REGULATIONS
Legislation and Bills have been drafted that set out the Government’s Growth,
Employment and Redistribution Strategy and Reconstruction and Development
Programme which are based on stimulating entrepreneurial activity and broad-based
development.
In addition, Government White Papers have been developed in respect of, inter alia:
The Development and Promotion of Tourism;
Local Government; and
The Conservation and Sustainable Use of South Africa’s Biological Diversity.
8.4 CURRENT INVESTMENT INCENTIVES OFFERED IN KWAZULU-NATAL
The National Government has developed and promoted a number of policies to
encourage new investment and foster economic growth, especially in areas away from
the main urban centres.
Predominantly, current legislation emphasises national issues rather than local issues.
There thus remains a need for provincial government to ensure that KwaZulu-Natal
becomes the pre-eminent area of investment through cutting edge reform and by
lobbying for the drafting of appropriate “local specific” legislation.
66
It is the provincial government’s policy to offer encouragement to foreign companies
wishing to invest in the province in order to provide a stable environment and high levels
of employment.
The national policy measures by which the development strategy is being pursued are
dealt with below.
8.4.1 Fiscal Incentives
Accelerated Depreciation
This is a tax incentive allowing depreciation at the following rates:
33, 3% per annum for new industrial plant and machinery which is brought into use
not later than 30 September 1999;
10% per annum for industrial buildings the construction of which commenced not
later than 30 September 1999 and brought into use not later than 31 March 2000
(KMI, 1997).
Tax Holiday
A tax holiday is granted to companies which embark on new industrial projects in
specified industries (see Annexure A) after 1 October 1996, with a capital investment in
land, buildings, plant and machinery in excess of R3 million.
A project is entitled to a tax holiday if the following qualifications are met:
The project is in a specified industrial area;
The project is situated in a tax holiday area;
The project will generate a minimum human resource remuneration of 55% of value-
added.
67
A tax holiday period of 2 years will be granted for each of the above criteria which are
met. In other words, a maximum tax holiday period of 6 years (where all three criteria are
met) can be granted under this scheme.
The tax holiday period must be taken advantage of within 10 years of the year in which
the project first generates income. However, the applicant can elect the 6 year tax holiday
period within those 10 years at his own discretion. At the end of the 10 years any unused
tax holiday is forfeited.
The tax holiday takes the form of zero-tax in the tax holiday period, and covers all taxes
on income, including normal tax and secondary tax on companies (KMI, 1997).
Tax Free Relocation Grant
This grant is available to foreign investors to recover the costs of importing and installing
new machinery. The grant is limited to a maximum of US$250 000.
8.4.2 Financial Incentives
Small Medium Manufacturing Development Programme
This programme provides incentives to new projects in the manufacturing industry with
capital investment in land and manufacturing plant and machinery not exceeding R3
million. The components of this programme are the Establishment Grant, the Profit-Based
Incentive and the SMME Relocation Incentive.
The Establishment Grant aims at offering assistance to industries during the start up
phase of establishing their businesses by means of a three year grant, payable in twelve
quarterly cash payments. The value of the grant is calculated at 10,5% of total
operational assets, subject to the recognition of a maximum investment of R15 million.
The newly established business is required to maintain a reasonable level of employment
and all plant, machinery and equipment is required to be kept productively in use in a
ongoing manner to qualify for the concession. Furthermore, payment is subject to the
maintenance of owner’s equity of at least 10%.
68
The Profit-Based incentive is payable for the three years following the termination of the
Establishment Grant. This incentive comprises a cash grant equal to 25% of profit before
tax but is limited to the lesser of:
The annual establishment grant; or
R315 000.
The SMME Relocation Incentive allows approved projects involving relocations from
abroad a tax-free grant of up to US$50 000 (KMI, 1997).
Job Scheme
This scheme provides low interest loans to any company creating at least 10 jobs at
R100 000 per job or less. By increasing the production capacity, it is envisaged that
employment opportunities will increase. The low interest rate applies for the full loan
period with a maximum of six years. Low interest rate finance in terms of this scheme is
limited to R40 million per project (IDC, 1998).
Eco-Tourism Scheme
This scheme is aimed at conservation areas under the control of the conservation
authorities and private game parks or reserves in excess of 10 000 ha. It provides
financing for the development of new projects and the expansion and improvement of
existing facilities. It does not provide financing for the acquisition of game.
This scheme has been implemented to promote the provision of accommodation and,
less often, infrastructure. It generally does not provide assistance in the acquisition of
land, although it may provide financial assistance for the acquisition of land to
conservation authorities.
The financial assistance provided could take one of two forms:
Loan finance with repayment terms tailored to suit the cashflow of the project; or
Risk participation where the promoters are unable to provide sufficient equity capital.
69
Ruling Industrial Development Corporation (IDC) interest rates as available to small and
medium sized enterprises apply, although finance provided to conservation authorities for
the acquisition of land may be offered at more favourable interest rates.
Private game parks and nature reserves are required to have their management plans
approved by the relevant conservation authority and owners, members or shareholders
are required to finance at least 40% of total assets. No predetermined limit has been set
for financial assistance of this nature (IDC, 1998).
General Tourism Scheme
This scheme promotes the renovation, refurbishment and extension of existing
accommodation facilities and occasionally, new developments.
The General Tourism Scheme provides financing to businesses providing
accommodation to bona fide tourists and will normally be in the form of loan facilities with
repayments tailored to suit the cash flow of the applicant. Interest rates are determined
depending on the size of the applicant’s proposed investment.
To qualify for this financial assistance, the applicant is required to:
Be registered and graded for tourism promotion by SATOUR, or be eligible for such
registration and grading after implementation of the proposed project;
Turnover from accommodation (including meals) should represent at least 70% of
total turnover; and
The owners, members or shareholders should finance at least 40% of total assets.
The maximum funding per project under the General Tourism Scheme is limited to R20
million.
Under both the Eco-tourism Scheme and the General Tourism Scheme, the following
conditions apply:
70
Financing is considered on a project-by-project basis and the minimum loan amount
per application is R300 000;
Facilities should be suitable to accommodate foreign tourists and the development
should have a track record, or the potential, of providing international tourists with
acceptable service;
No establishment providing self-catering accommodation exclusively, or providing
semi-permanent or permanent residence will qualify;
No timeshare or shareblock scheme will qualify; and
The proposed project must be economically viable, and the economic viability of
every project will be subject to evaluation by the IDC (IDC, 1998).
Economic Empowerment Scheme
The Economic Empowerment Scheme is available to entrepreneurs from historically
disadvantaged backgrounds. Owners’ funding of at least 33% of the total funding
requirement is preferred in the case of a manufacturing company to ensure the long term
viability of the project.
The scheme allows for a larger than normal contribution of the project funding from the
IDC (IDC, 1998).
Venture Capital Scheme
This scheme is available to small and medium sized industries and aims to stimulate the
development of various products or the establishment of new ventures for the products
with good growth potential. The final financial package will depend on the level of risk and
the undertaking’s profit and growth potential. This will be determined by means of a
thorough feasibility study conducted by the IDC.
The IDC also offers equity to support the capital structure of the undertaking. Equity
participation can consist of either ordinary or preference share capital, or both.
71
In addition, the IDC provides the entrepreneurs with a buy back option on a mutually
accepted commercial basis. The level of participation of the IDC in the undertaking is
determined on an individual basis, however, the IDC would be represented on the
undertaking’s board (IDC, 1998).
Entrepreneurial Development Scheme
Finance is made available to all emerging industrialists wanting to establish new, or buy
existing business, but have limited experience in managing industrial enterprises. The
proposed business is required to have one or more of the following attributes:
Asset base of between R500 000 and R3 million;
Loan requirements exceeding R200 000;
Limited capital funding resulting in a need for equity participation by IDC to ensure a
sound funding structure;
The need for ongoing monitoring to ensure that budgets are achieved.
This scheme requires owner’s funding of at least 33% of total funding or total assets to
ensure long term viability, however, qualifying emerging industrialists can contribute a
lower amount with the IDC providing a larger than normal contribution of the total funding
(IDC, 1998).
International Tourism Marketing Assistance Scheme (ITMAS)
This scheme provides for the partial compensation to businesses of certain costs incurred
in respect of activities aimed at promoting foreign tourism to South Africa.
Special provision is made for emerging tourism enterprises (Category A) that comply with
certain criteria to receive more favourable benefits.
These emerging enterprises must be independently owned and managed and meet two
of the following:
Have been in existence for less than 3 years;
72
Have less than R5 million annual turnover; or
Have less than R2 million operating assets.
Category B refers to all other tourism enterprises.
In order to qualify for the scheme, the following criteria must be met:
The enterprise must be registered to participate in ITMAS at the Department of
Environmental Affairs and Tourism;
The enterprise must be trading for commercial gain, be a member of a recognised
tourism organisation, be appropriately equipped to conduct business in the
international marketplace and must have participated in a Satour organised
international exhibition or must be formally approved by Satour to participate in future
events.
The following schemes are available:
Individual sales/marketing trips, outward selling tourism missions and outward
recruitment missions;
Exhibition assistance;
Production and distribution of international tourism marketing material.
(i) Sales and Marketing Missions
Individual Sales and Marketing Trips
Financial assistance will be granted as follows:
A daily allowance of R800 for a maximum of 14 days will be provided to one person
per company, per trip for a maximum of 3 selling trips per company, per annum;
A subsidy of 80% and 50% of an economy air ticket (for Category A and B
enterprises respectively); and
73
Transportation costs of marketing material to a maximum of R1 000.
In order to qualify for this financial assistance, application must be submitted 1 month
prior to departure and the applicant must keep a minimum of 1 confirmed appointment
per day.
In order to claim the financial assistance the applicant must submit:
Copies of air tickets and hotel bills;
Copies of passport showing departure and re-entry date stamps in South Africa;
A full report, indicating tourism or potential tourism success and names of clients
visited.
Companies eligible for discounted tickets will only be reimbursed based on the full fare, if
proof is provided that the discounted ticket was declined.
Outward Selling Tourism Missions and Workshops
These can only be arranged by an acknowledged tourism organisation, the Department
of Environmental Affairs and Tourism or by the relevant Departments of Tourism of the
Provincial Governments. Applications for the period 1 April of one year to 31 March of the
following year are considered on an annual basis and must be submitted by 31 January
for “in principle” approval.
Applications must reflect dates and countries to be visited, objectives of missions,
potential of the market explored and a statement detailing estimated costs.
For the final approval, the applicant must supply the following information:
Names of participant companies;
Products to be marketed;
Itinerary of the mission.
74
In order to claim the financial assistance, applicants need to submit the same
documentary proof and passport particulars as under individual sales trips, full reports
indicating success or future success, and, in the case of workshops, full information of
participants.
Outward Investment Recruitment Missions
These missions can only be organised by the Department of Environmental Affairs and
Tourism or by the relevant Departments of Tourism of the Provincial Governments.
(ii) Exhibition Assistance
Financial assistance provided under this scheme includes:
50% of the cost of the stand rental, construction of a shell etc up to a maximum of
R20 000;
Category A and B respectively qualify for an 80% and 50% subsidy on economy air
ticket and R800 per day for the duration of the exhibition;
Transportation cost of promotional materials up to R3 000 per exhbition.
All enterprises qualify for a maximum of 3 exhibitions per annum and, apart from
exhibitions organised or approved by Satour, a maximum of 8 companies will be assisted
for a particular exhibition.
Depending on the budget allocation to ITMAS and the number of Category A enterprises
participating in INDABA, a fixed amount is granted to these enterprises to partially cover
their travel, accommodation and participating costs.
(iii) Production and Distribution of International Tourism Marketing Material
Assistance under this scheme will only be provided to individual companies and is only
available for materials that were specifically produced for the international markets. A
maximum amount of R10 000 and R20 000 per annum per company for Category A and
B enterprises respectively will be awarded for the production and international distribution
of marketing material.
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In order to claim the financial assistance, the applicant must submit:
An example of marketing materials produced and distributed;
Proof of payment and invoices providing full details of all relevant expenditure;
An affidavit stating that the materials were specifically produced for international
marketing;
Where applicable, a confirmation from an overseas agent that materials were
received and distributed on behalf of the applicant (Department of Environmental
Affairs & Tourism, 1998).
8.4.3 Other Incentives
Spatial Development Initiatives (SDIs)
Spatial Development Initiative (SDI) programmes are strategic investment initiatives led
by national government aimed at unlocking the inherent and underutilised economic
development potential of specific spatial locations in South Africa. International
competitiveness, regional co-operation and a more diversified ownership base represent
cornerstone principles of the programmes.
The ultimate product of each of these SDI’s will be a number of “anchor projects” to be
marketed at investment conferences or directly to potential investors. It is envisaged that
Government will facilitate the development of these anchor projects and that the success
of these projects will be used to encourage further investment in each of these regions.
Because the Tourism Industry has been recognised as the industry having the greatest
potential in southern Africa, many of the areas that have been earmarked for fast-track
development include tourism components.
Large areas within the promoted regions have been recognised as areas of great natural
beauty, lending themselves to eco-tourism projects, hotel and resort developments.
Several nature reserves are also in the pipeline. The key objectives of the tourism led
SDI’s are:
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To generate sustainable economic growth and development;
To generate sustainable long term employment creation;
To maximise the extent to which private sector investment and lending can be
mobilised into the process; and
To exploit the opportunities that arise from the development of tourism and eco-
tourism developments for the development of SMME’s and for the empowerment of
local communities.
The government will facilitate financially and environmentally sustainable investments that
will promote short-, medium- and long-term benefits to the local economy by liaising with
local communities to encourage their support of the proposed development and fast-
tracking infrastructural development such as, inter alia:
Roads to improve access to the sites identified for development;
Sewerage systems, water and electricity; and
Telephone cables.
Standard Credit Guarantee Scheme
The objective of this scheme is to enable entrepreneurs to access funding from banks for
the purpose of the establishment, expansion or the acquisition of a new or existing
business.
The scheme is accessible to SMMEs that are independently owned, with assets of less
than R2 million before financing. SMMEs must meet the needs of the bank’s normal
lending criteria, and the maximum indemnity is 60-70% of a maximum facility of
R600 000 (Department of Trade & Industry, 1997).
Emerging Entrepreneur Scheme
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The objective of this scheme is to enable emerging entrepreneurs to access funding from
banks for the purpose of the establishment, expansion or the acquisition of a new or
existing business.
The scheme is accessible to SMMEs that are independently owned, with assets of less
than R2 million before financing. SMMEs must meet the needs of the bank’s normal
lending criteria, and the maximum indemnity is 60-70% of a maximum facility of
R750 000 (Department of Trade & Industry, 1997).
Export Marketing and Investment Assistance Schemes (EMA)
This scheme, available to all exporters, aims to assist exporters with market research,
trade missions and exhibitions and provides financial assistance for the following:
Primary exports market research;
Outward selling trade missions;
Exhibition assistance.
The EMA Scheme is designed to assist exporters to participate in new markets and
expand existing markets. The Department of Trade and Industry must, however, approve
any expenditure prior to it being incurred (Ibid).
Feasibility Studies and Environmental Impact Studies
These are conducted, in certain circumstances, by the KZN Tourism Authority and the
KwaZulu Finance and Investment Corporation.
Training Programmes
The Hospitality Industries Training Board (HITB) have introduced a programme, Ubuntu –
We Care, which is a customer care programme directed towards the service industry.
The programme aims to educate South Africans on the significance of the tourism
industry.
The HITB offers, in addition to the above programme, a grant and levy scheme which is
designed to cover a portion of the costs of training. A fixed amount is determined annually
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for each category of training, based on current costs, industry training needs and the
projected availability of funds.
Levies are collected from employers operating in the tourism industry and who are legally
liable to pay such levies.
In order to become eligible for a training grant, an employer must have:
Paid all levies due;
Not recoverd the cost of training from the employees;
Undertake the training in South Africa; and
Register internal training with HITB.
In addition, the training must have been presented by a competent trainer, achieved the
training objectives and been of value to the organisation (Hospitality Industry Training
Board, 1997).
8.5 SUCCESS OF SOUTH AFRICA’S INVESTMENT INCENTIVES
The tax holiday offered in South Africa has only been introduced recently and hence no
formal measurement of its success is yet available. A significant amount of interest has,
however, been expressed in this incentive and we are aware of many new projects that
have commenced to take advantage thereof.
It is believed that the accelerated depreciation, although a useful incentive, is not
significant enough, we believe, to influence an entrepreneur to invest in South Africa.
Consequently, this incentive is rarely used in isolation and we are therefore unable to
measure the effect it has had on the development of the economy.
As is the case of the tax holiday, the Establishment Grant and the Profit Based Incentive
were only introduced in October 1996 and there is therefore no indication at this early
stage as to their success in promoting investment in South Africa. There are, however, a
number of new projects that have taken advantage of these schemes.
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The provision of risk finance to SMMEs is regarded by the IDC as a vital component of its
overall objectives to facilitate job creation and entrepreneurial development and to foster
increased participation of all sectors of the population in the mainstream economy.
Nationally, over the past 5 years, the IDC has approved financing of approximately R2
billion for over 1 100 SMMEs, creating approximately 35 000 new direct job opportunities
in the process and generating an additional R3 billion in annual export earnings.
70% of the SMMEs assisted by the IDC are located outside the main metropolitan areas
and 14% of the facilities provided were in respect of new start-ups.
The IDC approved financing in excess of R3,1 billion to 384 entities in 1996/7. Of this
total financial assistance given, R72 million related to the Eco- and General Tourism
Schemes.
Since the IDC’s initial involvement in eco-tourism and general tourism projects, financing
totalling R213 million has been approved to a total of 57 ventures in this sector. This has
resulted to the creation of over 1 200 new direct employment opportunities, the
maintenance of more than 2 000 existing job opportunities, the establishment of 1 430
new beds and the refurbishing of accommodation facilities with a capacity of 2 240
existing beds (IDC, 1998).
8.6 COMMUNITY ACCESS
No incentives as favourable as those offered in Ireland seem to be available to rural
communities in KwaZulu-Natal. Incentives available to local investors, though not
necessarily for the benefit of rural communities, include the Emerging Entrepreneur
Scheme, the Entrepreneurial Development Scheme and the Economic Empowerment
Scheme.
Unrealistic conditions which cannot be met by rural communities are sometimes set. For
example, in order to qualify for the Economic Empowerment Scheme, owner’s funding of
at least 33% of the total funding requirement is preferred.
This makes it very difficult for the local communities to access these incentives.
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8.7 INSTITUTIONAL SUPPORT
KwaZulu-Natal Tourism Authority (KZNTA)
The KwaZulu-Natal Tourism Authority is a service-oriented organisation that
stimulates the development and promotion of tourism in the province. It is regarded
as both an initiator of projects and an assistant in the co-ordination of key role
players in the industry.
The KwaZulu-Natal Tourism Authority has identified the need to create a climate
conducive to investment in tourism development in the region and has recognised
that there is no single body available to provide all the necessary information to the
investor. It has also noted that clear tourism incentives are lacking in the province
of KwaZulu-Natal.
The task of the KwaZulu-Natal Tourism Authority is to prepare data on development
opportunities in order to encourage new investment in tourism plant and
infrastructure in the region. It aims to investigate and recommend investment
incentives.
Services provided by KwaZulu-Natal Tourism Authority include:
Working with the KwaZulu-Natal Finance Corporation and the KwaZulu-Natal
Marketing Initiative to create a “one stop shop” to provide the relevant data and
to advise potential developers and to ensure a speedy implementation of the
development;
Setting up and maintaing a database of strategic tourist information through the
Information and Research Division regarding information on procedures and
legislation/regulations affecting tourism development and of existing tourism
plant and activities;
Providing an efficient and thorough tourism research and information
dissemination service for the province of KwaZulu-Natal;
Identifying and implementing key research projects for the Tourism Authority;
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Dealing with tourism and trade enquiries;
Holding annual “opportunities think-tanks”;
Ensuring on-going identification of existing and potential tourism development
node points. This includes an evaluation of the demand and potential viability of
development as well as the facilitation of development;
Continued participation in the promotion of tourism development and marketing
areas including motivation of appropriate land-use plans;
Actively seeking out tourism investment opportunities and promoting those
opportunities to potential investors;
Identifying initiatives for future infrastructure development necessary to support
tourism development; and
Preparation of Environmental Impact Assessments on proposed investment
sites (KwaZulu-Natal Tourism Authority, 1998).
KwaZulu-Natal Marketing Initiative (KMI)
The KMI is a voluntary and independent association of major role-players in the
province who, as Primary Members, jointly facilitate inward investment. Potential
investors in the region benefit from communicating with what is literally a
professional and comprehensive one-stop service.
The services and products offered by the KMI network of members inc lude:
Pre- and post-establishment support, including feasibility studies, liaison with
government departments, marketing, technical and financial analyses, and
assistance with legal formalities and regional regulations;
The lease or sale of tourism premises or properties;
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Property loans, working capital loans and furniture, fittings and equipment and
vehicle loans for tourism projects;
A wide range of professional services and the availability of an information
database Web Site on the Internet;
Introduction to key contacts, such as auditing firms, legal practitioners, material
suppliers, environmental and conservation bodies and shipping operators
(KwaZulu-Natal Marketing Initiative, 1997).
KwaZulu Finance and Investment Corporation Ltd (KFC)
The KFC is KwaZulu-Natal’s provincial finance development corporation. The KFC
is committed to the socio-economic empowerment of the people of KwaZulu-Natal.
An important KFC role is that of a financier of sustainable tourism development
projects in KwaZulu-Natal, whilst co-operating with other institutional role-players
with the task of tourism development in the province, such as the KwaZulu -Natal
Tourism Authority and the KwaZulu-Natal Marketing Initiative.
The services and products offered by the KFC are as follows:
The provision of a wide range of tailor-made financial packages which include
property loans, working capital loans and furniture, fittings, equipment and
vehicle loans for tourism projects;
Joint venture/risk sharing or equity participation in selected projects;
Custom-built tourism plant (lodges and hotels);
Pre-establishment support for tourism projects in which the KFC has a financial
interest. Such support includes obtaining approval for establishment and
dealing with the requirements of the Environment Conservation Act;
A project management service during the establishment process of a tourism
project; and
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A company administration and property management service is also available to
projects in which the KFC has a financial interest.
Industrial Development Corporation (IDC)
The mission of the IDC is to assist in the financing of new and established private
sector enterprises in order to promote industrial development. The IDC’s aim is to
facilitate employment creation and foreign investment in the region and strives to
promote the economic empowerment of emerging entrepreneurs. The IDC
recognises the need to promote entrepreneurial tourism development in KwaZulu-
Natal since the industry has significant potential regarding employment creation.
The IDC’s mandate, policy framework and objectives are largely influenced by the
policies of the Growth, Employment and Redistribution Strategy and the
Reconstruction and Development Programme which are based on stimulating
entrepreneurial activity and broad-based development.
The services offered by the IDC include:
Encouraging the development of emerging and medium-sized entrepreneurs by
means of financial risk sharing, providing development advice, customer and
aftercare services and arranging access to foreign capital at reasonable rates;
Offering programme management facilities to the Government should it decide
to introduce and fund financing schemes in pursuit of specific industrial
development programmes;
Promoting economic empowerment by reserving a portion of the proceeds from
the sale of mature assets for investment in schemes aimed to facilitate the
economic empowerment of historically disadvantaged people;
Participating in the governance of the Government’s National Empowerment
Fund; and
Establishing an Equity Fund for sharing of risks of emerging entrepreneurial
adventures (IDC, 1997).
Small Business Development Corporation Ltd (SBDC Ltd)
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The SBDC Ltd provides investment capital and business support to small and
medium businesses that do not have access to capital. Businesses may either be in
the start-up phase or in the process of expansion.
The services offered by the SBDC Ltd are divided into four categories:
Equity partner – This is available to exceptionally viable businesses with an
above average expected Return On Investment (ROI). Limited security and
owners equity is offered and the SBDC Ltd shares in the future profits and
capital appreciation of the business.
Loan partner – If a business wants to expand or an entrepreneur wants to
establish a viable business and does not have access to capital markets but has
an acceptable capital structure and security acceptable to the SBDC Ltd.
Risk partner – Available to a business that wants to expand or an entrepreneur
that wants to establish a viable business but does not have access to capital
markets nor an acceptable capital structure and/or security. The SBDC Ltd
shares in the future profits and capital appreciation of the enterprise by
shareholding in the business. Once the loan is repaid, this shareholding can be
repurchased by the entrepreneur at market value.
Property partner – This is available to an entrepreneur who has invested all
his/her capital in the business and requires capital for premises. The SBDC Ltd
evaluates the viability of the business and merits of the property to the
operating business before deciding to finance the deposit against the second
bond over the property. The primary financier provides the bulk of the purchase
price against the first bond over the property. The SBDC Ltd in turn obtains a
share in the property-owning company, which the entrepreneur may repurchase
after repayment of the loan at the difference between the market value and the
original price (SBDC, 1996).
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CHAPTER 9: RECOMMENDATIONS
9.1 PRE-REQUISITES
The creation of an environment that will stimulate investment in tourism plant,
infrastructure and resources can only be achieved once a stable environment facilitating
the promotion of tourism and the encouragement of tourists to the region exists.
In other words, a successful tourism investment climate that encourages capital
investment in tourist facilities is entirely dependent on sufficient demand for such
facilities. Consequently, KwaZulu-Natal will need to increase the flow of foreign and local
tourists to the province and create additional demand for its natural and man-made
facilities and attractions. Naturally, this will make the supply of additional facilities more
viable and encourage new development.
In order to encourage an increasing number of tourists to the province, it is of paramount
importance that the macro issues affecting tourism, three of which are mentioned below,
are given the urgent attention that they desperately require.
(i) Safety and Security
As is demonstrated in Kessel Feinstein Consulting’s “Tourism Talk Southern Africa”,
there is a strong correlation between a country’s tourism industry and its political and
social stability.
In this regard, effective measures need to be taken to control criminal activity in the
province in an attempt to improve the poor perceptions that currently exist regarding the
safety and security of tourists in KwaZulu-Natal.
The curtailment of crime will reduce the negative impact of crime on KwaZulu-Natal’s
tourism arrivals statistics and give international governments less reason to discourage
their citizens from visiting the province.
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The White Paper on the Development and Promotion of Tourism in South Africa clearly
outlines the procedures that need to be followed to ensure the safety and security of all
tourists. These include:
“To undertake both short and long term actions and strategies to reduce crime and
violence on tourists in collaboration with relevant organisations such as the South
African Police”. These actions could, for example, involve training members of local
communities and encouraging them to patrol crime-infested areas in order to
discourage criminal activities. These patrols could be sponsored by large private
enterprises or rely on donations from the general public, as is usually the case with
the Car Guards that currently patrol our car parks.
“Provide adequate information to visitors that will help to improve their safety and
security”. Naturally, this must be done with discretion and in a diplomatic manner so
as not to discourage tourists from visiting KwaZulu-Natal.
“Co-ordinate co-operation among appropriate stakeholders to work together to
ensure the safety and security of all tourists”. Local business communities who have
a direct interest in the curtailment of crime should be encouraged to become more
active in movements such as “Business Against Crime”.
(ii) Health and Sanitation
The maintenance of good health and sanitary conditions are imperative if tourists are to
be encouraged to visit the province.
This is particularly relevant in underdeveloped areas that are earmarked for the
development of tourism infrastructure and the promotion of natural attractions and cultural
heritage sites.
To illustrate the possible negative impact of poor sanitation conditions on tourism, the
U.S. State Department, through its Emergency Center Department, issues travel
advisories to warn Americans considering going abroad about adverse conditions that
might be found in specific destinations. Internationally, it is not unusual for governments
to advise against travel to war zones or unhygienic areas as a means of protecting the
well being of its citizens. KwaZulu-Natal can ill afford international tourists being
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discouraged from visiting the province and measures need to be taken to ensure that
governments have no reason to do so.
(iii) Service Standards
Training grants should be administered as is currently being done by the HITB with a
particular focus on friendliness, efficiency and high standards of service. It is often cited
that foreign tourists have been disappointed with service standards in the province, and
usually rate the level of service received in KwaZulu-Natal as lower than those received
in the Western Cape. This issue needs to be addressed by operators and all
organisations involved in training those employed in the tourism, hospitality and leisure
industries.
9.2 LEGISLATION
9.2.1 Tourism Policy
Fundamentally, whether it be at the local, regional, national or international level, it is
government policy that will determine the goals and objectives and provide the guidelines
for tourism development.
In order to create a successful tourism investment climate, it is imperative that a realistic,
workable tourism policy is developed and adequately communicated to all relevant
parties, including promoting a sense of “ownership” in the heart of every member of the
general public.
At the outset, the formulation of a tourism policy (and hence the creation of a successful
tourism investment climate) in KwaZulu-Natal requires the identification of the province’s
goals and objectives.
Discussions with local government officials and a review of the report compiled by
Graham Muller Associates on the Tourism Development Delays in KwaZulu-Natal
revealed a number of objectives that have been identified by the province.
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According to Mr Ian Dixon, Director, KZN Department of Economic Affairs and Tourism,
KwaZulu-Natal’s main objective regarding the tourism industry is “To realise tourism
potential in specific localities to the benefit of local communities, the environment and the
economy. There is a need to unlock latent tourism potential.”
Specific objectives identified include, inter alia:
To create sustainable employment opportunities;
To encourage the generation of income;
To promote economic growth and development;
To enhance quality of life for all people in the province;
To enhance the environment;
Capacity building and skills upliftment; and
To promote infrastructural development.
A clear plan for tourism development will optimise the potential benefits associated with a
growing tourism industry and ensure that the objectives mentioned above will be
achieved. These objectives can be significantly fulfilled if a clear plan for tourism
development is created expressly to optimise the potential benefits offered by a growing
tourism industry.
As discussed in the White Paper on the Development and Promotion of Tourism in South
Africa, a tourism policy, if effectively drafted, will:
Make the opportunity for and benefits of tourism and recreation in KwaZulu-Natal
universally accessible to residents of KwaZulu-Natal, other South African provinces
and foreign countries;
Eliminate unnecessary trade barriers to the KwaZulu-Natal tourism industry;
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Promote quality, integrity and reliability in all tourism and tourism-related services
offered to visitors to KwaZulu-Natal;
Give leadership to a representative of all those concerned with tourism, recreation
and national heritage preservation in KwaZulu-Natal;
Ensure the compatibility of tourism and recreation with other national and provincial
interests in energy development and conservation, environmental protection, and the
judicious use of natural resources; and
Harmonise, to the maximum extent possible, all Federal activities in support of
tourism and recreation with the needs of the general public, the State, Provincial and
Local Governments and the tourism, hospitality and leisure industry.
It is envisaged that a workable tourism policy will encompass the following issues, inter
alia:
The duties of the provincial tourism authority; and
The establishment of a tourism policy council to administer the tourism policy and
report to Provincial Government on travel and tourism matters.
9.2.2 Other Legislation
Our proposals to facilitate the creation of a successful tourism investment climate will
require new clauses to be drafted in the South African Income Tax Legislation to promote
development in the tourism industry.
A Bill on Environmental Issues will need to promote responsible, sustainable tourism and
eco-tourism. Not only will it need to make Environmental Impact Studies a pre-requisite of
any significant investment, it will also need to encourage the development of tourism
facilities in areas where tourism offers an alternative land use to industries that have the
potential to damage the natural resources.
As is documented in the Tourism White Paper, environmental management will also need
to include the promotion of sustainable and responsible consumption of water and energy
in tourism plants and the encouragement of sustainable waste disposal and recycling.
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Legislation will need to be drafted to ensure that local government employs responsible
land-use planning procedures, adequately maintains public health and sanitation and
facilitates the establishment of appropriate public services so that the investment climate
can be improved at a regional level.
Furthermore, Local Government must accept responsibility for the promotion of social
and economic development. By effectively promoting social and economic development,
the issues of crime and violence, unemployment and education will naturally be
addressed. Furthermore, it is the responsibility of local government to encourage the
involvement of communities and community organisations in matters affecting them
directly and indirectly.
These issues are dealt with in the White Paper on Local Government
9.3 REGULATIONS
Despite the fact that many potential tourism benefits can be realised by the
implementation of investment incentives, consideration does need to be given to a
number of problems associated with their implementation. These are briefly discussed
below.
9.3.1 Abuse of Incentives
As has been the case in the past, investment incentives are often abused by investors
leading to costs being incurred by Government while the benefits are enjoyed by the
investors. In these circumstances, very few benefits flow to the economy and the
objectives set at the time of implementing the incentives are not met.
Abuse of incentives includes fiscal and financial incentives claimed by investors who are
not eligible to do so by:
Misstating forecasts and projections to reflect a business incorrectly as being
financially viable; or
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Misstating financial results where incentives are dependent upon business levels or
on achieving budgets.
9.3.2 Loss of Revenue
The tourism industry is potentially an extremely lucrative one. The implementation of
fiscal incentives will, for the duration of the incentive period, result in the loss of
government revenue from this industry, either as a result of a tax exemption or as a result
of a reduction in the tax rate.
Mitigating factors are, on the assumption that the incentives implemented are effective,
that:
Unemployment rates will be significantly reduced and this will result in a reduction in
government expenditure in the form of unemployment insurance payments (and will
also have the effect of reducing crime rates);
In the case of a reduction in the corporate tax rate, the attraction of additional
investment will result in additional contributions to government taxes, albeit at a lower
corporate tax rate;
Once the industry is established and incentives are no longer deemed necessary,
revenue earned by government will be significantly increased.
9.3.3 Complicated Income Tax Legislation
Our current legislation is often regarded as one of the most complicated systems in
operation. Further complications will arise with the introduction of additional tax holidays,
double deductions, accelerated capital allowances and the conditions which have to be
met in order to qualify for these tax benefits.
The problem associated with this issue is twofold:
In the short term, people who are knowledgeable about the income tax legislation are
limited in number. Until people are adequately trained, regulation of the system may
need to be managed by people who do not have the level of competence necessary to
ensure effective regulation, possibly resulting in a loss of tax revenue by Government.
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One of the aims of introducing incentives in KwaZulu-Natal is to encourage local
communities, with the assistance of the incentives, to become involved in the
economic activities within the province. Complicated incentives may not be
understood by all local investors and the benefits intended by their implementation
may not be realised, rendering their existence somewhat futile.
9.4 REGULATION
To guard against the potential problems associated with incentives, strict regulation
procedures are required.
To prevent the abuse of incentives as discussed in Section 9.2.1, regulations could
include:
The requirement of a certificate from a firm of registered accountants and auditors
confirming that an investor’s claim is not materially misstated; or
The establishment of a government organisation to police the system and assess the
reasonableness of each claim. It is envisaged that the Tourism Policy Council or the
Provincial Tourism Authority would be responsible for this function.
To guard against the unnecessary loss of government revenue as discussed in Section
9.3.2, strict regulations will need to be implemented to ensure that only those tourism
entities that are unquestionably entitled to fiscal and financial incentives are awarded
them. Again, it is envisaged that accounting and auditing firms, the Tourism Policy
Council or the Provincial Tourism Authority will fulfill this function.
Accurate application by Government of the South African Income Tax Legislation is the
responsibility of Inland Revenue officials. Individuals at the Provincial Tourism Authority
acting in an advisory capacity to local and international investors will, however, need to
undergo comprehensive training to provide them with a thorough understanding of the
income tax legislation. This will place them in an appropriate position to deal adequately
with any queries relating to fiscal incentives or other income tax matters from investors.
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9.5 INCENTIVES
The basic economics of the tourism industry suggest that success will be achieved by:
Increasing the demand for tourism and the flow of visitors to KwaZulu-Natal;
Encouraging the supply of tourism facilities by investors, both local and foreign, and
Providing investors with economic stability.
As mentioned in Section 9.1, a successful tourism investment climate is one that
encourages capital investment in tourist facilities and encourages sufficient demand for
those facilities and the province will therefore need to find the means to increase its
visitor numbers.
Apart from addressing macro issues such as crime and violence, health and sanitation, a
number of policies can be adopted by the Government and the private sector to increase
tourism demand in KwaZulu-Natal.
9.5.1 Policies To Increase Tourism Demand In KwaZulu-Natal
If investment in the tourism industry was encouraged by the implementation of fiscal,
financial and other incentives, but tourism demand remained static, the tourism,
hospitality and leisure industry would suffer from over-capacity. In this perspective, not
only must financial instruments to encourage new investment be created, financial
products aimed at tourism demand that will benefit hotel occupancy rates and usage
levels of other tourism infrastructure need to be introduced.
A number of tools are available to the provincial and local government with which to
generate foreign and domestic demand for the province’s travel services and facilities
and thus increase earnings. These tools are discussed below.
(i) Aggressive Marketing
Consumer Marketing
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It is believed that the public promotion of tourism to KwaZulu-Natal should primarily take
place through a provincial governmental tourism office. Throughout the world today,
governments take an active role in their region’s tourism sectors.
KwaZulu-Natal officials have devised a campaign to promote the entire province and its
activities as opposed to each sub-region concentrating its efforts on a separate marketing
campaign. One cannot underestimate the importance of promoting an entire destination
rather than a specific attraction at the destination.
This does not imply that tourism marketing budgets be reduced at local government level,
but rather that local governments concentrate their marketing efforts on attracting tourists
to their destinations once the tourists have arrived in the province as opposed to having
to spend their budgets in the overseas markets.
The provincial government should also not under-estimate the importance of attracting
foreign tourists to the province. This is primarily because foreign tourists spend, on
average, six times more than domestic tourists. In fact, because of the nature of the
domestic tourists in KwaZulu-Natal, they will often spend even less than this statistic
suggests as a result of their low disposable incomes.
Trade Marketing
If regional development of tourist facilities in underdeveloped areas is promoted then
through public awareness programmes and the power of effective marketing campaigns,
tourists can be encouraged:
To take advantage of facilities experiencing low occupancy levels when more popular
attractions are inaccessible due to over-crowding and congestion (ie. expand the
tourist’s choices of facilities);
To travel to areas which suffer from high unemployment but possess viable tourist
attractions; or
To take holidays in the off-season periods to minimise the effects of what is currently
a seasonal industry.
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By encouraging tourists to make use of facilities in less developed regions, for example
cultural heritage sites, further new development will be encouraged in these regions,
creating new job opportunities for the local residents. Increased tourist activity will also
lend itself to increased opportunities for entrepreneurship within the local communities,
for example, the production of souvenirs and gifts, conducting short tours into the local
residential areas, etc.
Investor Marketing
It is imperative that the potential benefits of investing in the province are communicated
effectively to potential investors. Investor conferences and road shows hosted by
parastatal marketing authorities should be used to demonstrate the province’s positive
attributes and to deal with any concerns or queries that foreign and local investors might
have. Other forms of investor marketing are discussed below.
Marketing Incentives As a result of the potential benefits of effective marketing, paramount importance needs
to be placed on incentives to encourage marketing activities. Marketing efforts need to be
encouraged to increase both the domestic and the foreign markets.
Fiscal Marketing Incentives
In order to promote private marketing efforts in the international markets without a
substantial outlay of funds by the provincial government, fiscal incentives which allow a
double deduction of marketing expenses for tax purposes are suggested. To regulate
this incentive, before an investor becomes eligible for the double deduction, the onus will
need to be on him to prove that his international marketing efforts were of benefit to his
project.
In addition, to ensure that only valid marketing expenditure is claimed, the deduction
should be properly “audited” by the South African Revenue Service.
Financial Marketing Incentives
On the assumption that sufficient government funds are available locally, financial
incentives similar to those adopted in Australia, Malaysia and Ireland and currently
offered in South Africa by the Department of Environmental Affairs and Tourism, should
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be offered in KwaZulu-Natal. These incentives specifically promote export marketing by
providing financial assistance to investors involved in international exhibitions and
outward selling trade missions.
Other Marketing Incentives
Of greater importance to the KwaZulu-Natal tourism industry is the efficient marketing of
the entire province by the KwaZulu-Natal Tourism Authority. It is essential that this
organisation be given a realistic budget (commensurate with the benefits of tourism
marketing) to act effectively on behalf of all tourism projects in attracting foreign and local
tourists to the province.
Similarly, local governments need to be given adequate budgets to promote local
attractions, to facilitate workshops that disseminate information and encourage local
communities to participate in the tourism industry and to promote the establishment of
local publicity associations.
As has been the case in the Australian States, effective marketing will significantly
increase visitor numbers, increase the demand for tourist facilities and consequently
should lead to the attraction of large scale new investment.
(ii) Responsible Planning
Efforts devoted to conserving areas of natural beauty and maintaining resort areas and
sightseeing attractions will significantly affect long term tourist numbers.
Because biodiversity is often adversely affected by planning and development decisions
and actions, the White Paper on the Conservation and Sustainable Use of South Africa’s
Biological Diversity addresses issues relating to poorly planned, unconstrained
development and suggests preventative measures that can be taken to guard against
such development.
It is vital that these measures be adopted by all investors and developers in order for
KwaZulu-Natal to maintain its unique biological resources that attract tourists to the
province.
(iii) Financial Instruments aimed at Tourism Demand
97
The holiday cheque system has been implemented in France and is currently under study
in Portugal.
The holiday cheque is a means of payment for tourism services and can only be used to
pay for services rendered by participating tourism establishments. It is envisaged that
these establishments would offer the bearers of holiday cheques certain benefits during
out of season periods.
In Portugal, the holiday cheque will be acquired by employees by saving over a period of
time and will be co-financed – part of the nominal value will be acquired by the employee
and the remaining part will be financed by the employer as an employment fringe benefit.
Conceptually, if a similar scheme is implemented in KwaZulu-Natal, on the condition that
it complied with all banking regulations, it would afford the blue-collar worker the
opportunity to travel and, at the same time, would increase the demand for tourist
facilities during off-peak seasons.
(iv) Elimination of Travel Barriers
A number of governmentally imposed impediments to international tourism presently exist
and include:
Nontariff barriers, such as travel allowance restrictions which limit the amount of
exchange residents of a country may purchase from banks to cover travel expenses
incurred abroad and limitations on duty-free allowances for returning travellers;
Tarifflike measures, such as airport departure or exit taxes that artificially increase the
price of travel services obtained abroad.
In order to stimulate international tourism globally, these barriers to international travel
need to be eliminated. Provincial Government needs to lobby for the national government
to encourage other countries to remove these by participating in the international
mechanisms currently in place such as trade discussions and the General Agreement on
Tariffs and Trade (GATT).
9.5.2 Policies to Stimulate Capital Investment in Tourist Facilities
98
The construction of new tourist and travel facilities and the maintenance of existing
facilities in order to attract tourists to the region are important vehicles for economic
growth and development.
In order to encourage capital investment in the province, it is imperative that the potential
investor is offered a climate conducive to profitability.
KwaZulu-Natal’s primary goal in creating a successful investment climate should be to
attract large amounts of new foreign capital investment. Viable new investment would
facilitate high levels of job creation and encourage on-the-job training for the local labour
force. As was the case in Ireland, this should reduce unemployment, facilitate skills
uplifment and enhance the quality of life in KwaZulu-Natal.
The most effective way for KwaZulu-Natal to attract foreign investment is probably by
way of fiscal and other incentives.
KwaZulu-Natal’s secondary goal should be to encourage local investment and
entrepreneurship, particularly by the local communities in underdeveloped areas.
On the assumption that KwaZulu-Natal will strive to achieve these goals, all potential
benefits relating to the development of the tourism industry could become achievable.
Based on the primary and secondary goals identified, consideration needs to be given to
the possible implementation of fiscal, financial and other incentives.
(i) Fiscal Incentives
If one considers that there is an “international pool of funds” available for investment,
countries have to compete to provide an attractive investment climate that will draw
foreign investment. Due to an erratic economy and a perception of high levels of
violence, South Africa is perceived to be a riskier destination for investment capital than
many of the other developing countries. Consequently, to remain competitive in the
international arena, simple investment criteria dictate that higher returns will be required
to compensate for the increased risk. Therefore the incentives should be focused at
increasing profitability rather than facilitating the initial investment.
99
The deteriorating exchange rate further exacerbates the need for high returns on foreign
investments. Conversion of local profits into a foreign investor’s home currency will result
in low returns on his original investment unless the investment climate enhances a
foreign project’s profitability.
In other words, an investor will only invest in a foreign country when the project’s “$
return” is commensurate with his normal required rate of return.
Fiscal incentives, for example tax holidays or a reduction in the corporate tax rate, do not
require an immediate outflow of provincial funds as would financial assistance such as
grants and loans.
It does need to be recognised, however, that fiscal incentives will need to be
implemented nationally rather than at a provincial level. It is therefore imperative that the
benefits of tourism development be communicated by Provincial Government to
government officials at a national level so that they can be encouraged to implement the
necessary fiscal incentives. It needs to be demonstrated that, if carefully researched and
effectively implemented, the benefit of enticing investment in the tourism industry to
KwaZulu-Natal will outweigh the costs associated with carefully planned, implemented
and regulated fiscal incentives.
Possible fiscal incentives are discussed below. In order to be in a position to recommend
one fiscal incentive over another, economic impact studies would need to be conducted
to assess the likely cost and potential benefit of each option.
Tax Holiday
The concept of “Pioneer Status” implemented in Malaysia, Singapore and Ireland could
possibly be introduced by South Africa (and hence KwaZulu-Natal) and encompass the
tourism industry as well as those industries currently enjoying the tax holiday in the
manufacturing industry. This would result in easy implementation of a tourism related
fiscal incentive as the legislation will not need to be redrafted. Instead, tourism
businesses could simply be incorporated into the existing provisions for the tax holiday
with need only to determine the entry criteria to the scheme.
100
The existing tax holiday allows a maximum tax holiday period of six years within the
qualifying enterprise’s first 10 years of operation, dependent on the conditions discussed
in Section 8.3.
Reduction in Corporate Tax Rate
Most of the countries analysed offer promoted industries a reduction in the corporate tax
rate for a specified period of time. The reduced corporate tax rate offered to the tourism
industry investors in the countries analysed ranged between 9% and 25%. In order to
encourage development in depressed locations and stimulate growth in these regions, a
corporate tax rate even more preferential to that mentioned above is sometimes offered
to investors operating in predefined promoted areas.
In the case of KwaZulu-Natal, this form of incentive is possibly more appropriate than a
tax holiday, as it facilitates the collection of taxes from a potentially lucrative industry
from the outset. In contrast, no taxes can be collected from an industry enjoying a tax
holiday and government expenditure and incentive programmes in respect of the tourism
industry will have to be funded from taxes collected from other industries.
Based on the current corporate tax rate of 35% imposed in South Africa, and those
imposed on the tourism industries in the countries that offer a reduction in the corporate
tax rate, a reasonable tax rate to encourage development in the tourism industry in
promoted areas of KwaZulu-Natal could probably be around 20%.
Capital Allowances
Accelerated capital allowances on tourism facilities and partial tax exemptions for income
earned by construction companies involved in the development of tourist facilities would
encourage investment in the tourism industry without requiring an initial outflow of funds
by the government. This is particularly useful for developing regions like KwaZulu-Natal
which often do not have the resources to provide financial assistance to developers and
operators of tourist facilities in the form of government loans or grants.
Historically, accelerated capital allowances have only been available to hotel owners. In
this regard, to encourage investment in all components of the tourism industry as
discussed in Chapter 1, a much broader definition of the recipients of these accelerated
101
capital allowances needs to be created and should encompass all players in the primary
tourism industry as defined in Chapter 1.
Double Deductions for Marketing Expenditure
This incentive is discussed in Section 9.4.1.
(ii) Financial Incentives
With the deterioration in the South African currency, financial incentives such as set up
grants awarded to foreign investors will continue to become less effective. In addition, as
mentioned above, a foreign investor may well place more importance on profitability than
on financial assistance to facilitate an initial investment.
Consequently, financial incentives will not encourage foreign investment in KwaZulu-
Natal as effectively as has been the case in Ireland. Instead, financial incentives might be
more effective in the facilitation of local investment.
In light of the fact that a key economic objective is to use tourism to aid the development
of rural communities (White Paper on the Development & Promotion of Tourism in South
Africa), it is believed that an incentive to promote the involvement of the local
communities in tourism development successfully is to offer discretionary grants, low
interest loans, repayment moratoriums on loans and loan guarantees to members of
previously disadvantaged communities.
Each of these financial incentives is discussed below.
It is envisaged that the nature of the financial assistance given to applicants will depend
on the following considerations, inter alia:
Financial resources available to the Development Fund, a government fund which
would be established and administered in accordance with the Provincial Tourism
Policy;
The financial requirements and constraints experienced by the applicant;
The market viability of the project;
102
The financial feasibility of the proposed project; and
Other funding alternatives available to the applicant.
Grants
A fund which awards discretionary grants to local investors setting up or expanding a
viable project is considered one of the most effective forms of financial assistance to
promote local investment. Because this incentive involves awarding an investor a cash
grant, to avoid abuse of the system, policing of the schemes will need to be strictly
adhered to.
When application is made by the investor for a grant, to ensure that the grant is awarded
to deserving projects:
The market and financial viability of each project will need to be demonstrated;
A high ratio of sustainable jobs to capital investment will need to be a pre-requisite;
and
A reasonable investment (a function of the applicant’s personal asset base) in the
project will need to be made by the applicant himself so that he has an interest in the
performance of the project.
Once a grant has been awarded, ongoing evaluation of the performance of the
successful applicant’s project in relation to budgets will need to be made.
No financial return is earned by a development fund which awards grants, and this factor
needs to be considered.
Low Interest Loans
Low interest loans will naturally improve the profitability of any geared project and will
thus be an effective incentive for local investors. Because most foreign investors usually
already have access to low interest loans in their home countries, this form of financial
103
incentive would not play a significant role in attracting foreign investment and should
consequently be reserved for the benefit of local investors in the tourism industry.
Attention needs to be drawn to the fact that low interest loans, as in the case of grants,
require an outflow of cash by the fund set up to facilitate development. The loan will,
however, during the period of the loan term, earn the development fund a return, albeit a
low one.
Equity Participation
The problems associated with equity participation are similar to those for grants and low
interest loans in that an initial outflow of cash is required at the outset when a developing
province, such as KwaZulu-Natal, may not have the resources required at its disposal.
On the assumption that independent feasibility studies are undertaken and equity is only
injected into viable projects, from a government development fund’s point of view, equity
participation would be more beneficial than low interest loans to promote local investors.
The return earned by the fund’s capital injection would be market related and
commensurate with the success of the project invested in. It is for this reason, inter alia,
that there has been a shift away from capital grants towards equity participation in
Ireland.
Credit Guarantee Scheme
A credit guarantee scheme would provide an investor who has no collateral, access to
loans which he would otherwise be denied. Because this investment incentive does not
involve an initial outflow of cash, if local government carefully assesses the viability of
each project eligible for this assistance, the potential risk of default by the investor will be
minimised.
Promotion of Employment Creation
Bearing in mind the limited resources available to a developing country, financial
incentives to encourage job creation in KwaZulu-Natal would not be necessary if the
creation of sustainable employment opportunities was a pre-requisite for an investor to
qualify for any of the fiscal or financial incentives available.
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(iii) Other Incentives
Work Force Assistance
The concept of a provincial tourism industry employment agency operated by a
government organisation (preferably the KZN Tourism Authority for reasons discussed in
Section 9.8) will assist investors, particularly foreign investors, in sourcing appropriately
skilled labour.
The aim of such a programme would be to provide and improve the efficient functioning
of the labour market. The elimination of the administrative nuisance of sourcing
employees who posses the basic skills required for the tourism industry could well
enhance the attractiveness of KwaZulu-Natal’s investment climate, particularly to a
foreign investor.
This incentive can be provided to investors at minimal cost to local government – the cost
of maintaining a database of prospective employees in the tourism industry.
A similar programme has been adopted by the Australian government and has, according
to the Australian Tourist Commission, been operating effectively since its inception.
Tourism Potential
The attention of foreign investors will need to be drawn to the enormous potential for
tourism and the unique cultural and physical attributes in KwaZulu-Natal. As will be
discussed in Section 9.8, it is envisaged that it will be the responsibility of the provincial
tourism authority to communicate tourism investment opportunities to foreign and local
investors.
Training Schemes
It is important that the state and provincial governments promote the labour force as
being diligent and amenable to training. In addition, relevant training programmes with
appropriate curricula need to be devised and offered to prospective employees in the
tourism industry.
105
It is recommended that the current schemes offered by the HITB remain in place and that
only approved courses qualify for subsidisation. This will ensure that maximum benefit is
obtained by the employees and their prospective employers as only reputable courses
will be supported.
9.6 INAPPROPRIATE INVESTMENT INCENTIVES
The importance of investment incentives to encourage growth within the tourism industry
has been stressed in previous sections. However, it must be noted that when
inappropriate investment incentives are implemented by government, the positive effect
of developing a mature tourism industry within a relatively short period of time could be
negated by the negative impacts of unconstrained tourism development on social and
environmental issues.
9.6.1 Unconstrained Development
Due to the sensitivities of the natural environment, any investment incentives designed to
encourage unconstrained development by foreign investors, local entrepreneurs and the
local communities could result in the depletion of KwaZulu-Natal’s natural resources.
This, in turn, would eventually result in a declining tourism industry.
In order to prevent developments that are detrimental to the environment, it is essential
that environmental impact studies are carried out for all proposed projects. This is already
envisaged in the current legislation.
As these studies can be costly, local communities and investors who demonstrate an
inability to afford them should be given professional advice and assistance (financial or
otherwise) from the KZN Tourism Authority, the organisation established to facilitate
tourism development.
9.6.2 Fiscal Incentives
A fiscal incentive for a limited period of time will need to be carefully drafted and
consideration will need to be given to the possible actions an investor will take at the end
of the holiday period. After the tax holiday period foreign investors may consider the
merits of withdrawing their business profits from KwaZulu-Natal as opposed to reinvesting
106
them in the province. Should this be the case, the knock-on benefits of the original foreign
investment will be limited.
In this regard, a fiscal incentive will be inappropriate unless effective government
marketing programmes are in place to maintain the attractiveness of KwaZulu-Natal’s
investment climate after the fiscal incentives are withdrawn.
An additional consideration is that, because the tourism industry is potentially a lucrative
one, a significant amount of government revenue would be forfeited by offering investors
in this industry a tax holiday period. In KwaZulu-Natal, where government funds are
urgently required, the cost to the provincial government of an incentive such as this may
exceed the potential benefits.
9.6.3 Financial Incentives
The ineffectiveness of providing grants to foreign investors has already been discussed in
Section 9.6.2. The appropriateness of awarding grants to foreign investors and low
interest loans to local investors is purely dependent on the resources available to the
government.
9.6.4 Labour Force
One of KwaZulu-Natal’s key objectives is to create employment opportunities for the local
labour force at all levels of the employment spectrum. By placing no restriction on the
importation of skills or employment of expatriates for indefinate periods of time, as is
done in Singapore, no motivation would exist for foreign investors to facilitate skills
transfer or train the local work force.
In order to achieve the province’s objective of adequate representation of all races and
genders at all levels of the employment spectrum, investors should only be given
authority to employ expatriates if no appropriately skilled local person is available to fill
the position.
Even in the case where, as mentioned above, an expatriate is employed, the duration of
his work permit should be determined by the length of time required to provide a member
of the local labour force with the appropriate on-the-job and theoretical training required
to fill the vacant position.
107
However, as many foreign investors might wish to retain key foreign personnel due to
experience, quality, trust, etc., legislation should make this possible under exceptional,
predetermined circumstances.
Companies need to be encouraged to train their workforces extensively by offering them
partial reimbursements in respect of the cost of the training programmes implemented.
This incentive to train staff has already been implemented in KwaZulu-Natal, and
throughout South Africa by the HITB, as discussed in Section 8.
The considerable benefits of appropriately trained staff who understand the concept of
“customer care” should be communicated to all employers in the industry to further
encourage them to implement staff training programmes.
9.7 COMMUNITY ACCESS
To ensure that the benefits of future tourism development in the province are also
enjoyed by previously disadvantaged communities, it is recommended that:
Stringent requirements and conditions to qualify for financial aid (in the form of loans
or grants) are relaxed in circumstances where previously disadvantaged individuals
or communities are able to demonstrate, beyond reasonable doubt, the financial
feasibility of a proposed project.
It is envisaged that this will encourage entrepreneurial activities by previously
disadvantaged communities.
Easily comprehensible documents be prepared and widely distributed to previously
disadvantaged communities on:
the advantages of local community development,
the financial assistance available to local communities, and
the operational support obtainable to them.
It is believed that there is only limited awareness by local communities of the
assistance and benefits available to them and it is envisaged that such a document
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will increase awareness and encourage local communities to take advantage of the
assistance offered.
Tourism-related investment be encouraged in areas that are currently
underdeveloped despite their huge tourism potential. It is suggested that preferential
treatment be given to investment in pre-determined regions by way of, for example, a
tax rate which is more favourable than that for a similar business in an area that is not
being specifically promoted.
It is envisaged that benefits such as the creation of employment opportunities and
wealth generation will flow to those living in the promoted areas.
9.8 INSTITUTIONAL SUPPORT
To facilitate growth and development of the tourism industry in KwaZulu-Natal, it is
imperative that investment incentives be easily accessible to developers and investors in
this industry. Where incentives are the cause of frustration as a result of red tape
associated with the application thereof, a disincentive to invest in the province will result.
In this regard, it is considered vital that there is one clearly designated organisation to
deal with investment related queries and, at very least, deal with the applications and
administrative functions relating to the investment incentives.
It is therefore recommended that, in addition to the broad range of services already
offered by all the institutions mentioned in Section 8.7, and the effective marketing of the
province as a tourist destination:
The KwaZulu-Natal Tourism Authority (or similar organisation) be actively marketed
as the initial point of contact for local and foreign investors. It is envisaged that this
organisation will be in a position to direct investors to the relevant “support”
organisations based on the nature of the enquiry. This will clarify any uncertainty that
investors currently have regarding which organisation to approach and make
KwaZulu-Natal a more “investor friendly” province.
Investment brochures detailing specific investment opportunities and demonstrating
their market viability and financial feasibility be prepared and effectively presented at
109
international investment forums. It is envisaged that this will provide exposure of the
investment potential in KwaZulu-Natal to the international market and encourage
foreign investment.
Motivational workshops be held for local communities in which the opportunities
available to them are discussed and brainstorming sessions are encouraged. It is
envisaged that this will stimulate an entrepreneurial spirit amongst rural communities
and encourage the development of underdeveloped regions.
Managerial and operational support be provided to small entrepreneurial enterprises
and local communities. It is envisaged that this “hand-holding process” will boost the
confidence of local communities and unemployed individuals and give them the
encouragement they need to start their own businesses.
Effective marketing campaigns be created and directed to the international tourist
market so that a larger slice of the foreign tourist market can be captured by
KwaZulu-Natal. It is envisaged that this will stimulate the demand for tourist facilities
within the Province which, in turn, will improve the market viability of any potential
investments in KwaZulu-Natal’s tourism industry.
Activities organised by the KZN Tourism Authority should include:
Special events, entertainment and cultural activities to attract domestic and
international tourists;
Overseas investment promotion missions;
Investment programmes for incoming business delegations wishing to investigate
KwaZulu-Natal’s investment potential;
Overseas seminars to inform potential investors about investment opportunities in the
province and investment incentives; and
The development of an “Investment Pack” providing potential investors with viable
business opportunities and potential business partners.
110
9.9 CONCLUSION
Tourism is a dynamic industry with a potentially bright future in KwaZulu-Natal. Increased
tourism will produce a number of benefits such as employment, economic growth and
development, goodwill and the enhancement of the quality of life.
The basic need for a successful investment climate is a carefully planned tourism policy
that will ensure that the appropriate supply and demand components are available to
support the tourism industry in KwaZulu-Natal.
In order for these benefits to be realised, increased planning, coordination and evaluation
of the tourism policy adopted by KwaZulu-Natal is essential. In addition, peace, prosperity
and an amiable environment are the keys that best open the door to tourism growth.
These issues need to be addressed at the outset so that the province can achieve growth
in the tourism industry and provide opportunities for economic development, job creation
and international trade.
A strategy to promote quality development needs to be implemented. Unless tourism
development is an integral part of the province’s overall economic development plan, and
there is a balanced approach to the development of tourist infrastructure and services,
the economic benefits alluded to throughout our analysis may be shortlived.
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BIBLIOGRAPHY Carlton International Trade Centre. 1996. Guidebook to Doing Business in South Africa. Department of Environmental Affairs and Tourism. 1998. Promotional Material – International Tourism Marketing Assistance Scheme. Department of Tourism and Trade (Ireland). (Date unpublished). “Tourism 2000” – Guide to the Operational Programme for Tourism 1994-1999. Department of Trade and Industry. 1997. Incentive Schemes. Department of Trade and Industry. 1997. Export Incentives. Department of Trade and Industry. 1997. A Guide to Exporting for Small, Medium and Micro Enterprises. Editors Inc. 1998. South Africa at a Glance. Graham Muller Associates. 1997. Research Report – Draft Analysis of Tourism Development Delays in KwaZulu-Natal. Grant Thornton International. 1997. Doing Business in Australia. Grant Thornton International. 1997. Doing Business in Ireland. Grant Thornton International. 1997. Doing Business in Malaysia. Grant Thornton International. 1997. Doing Business in Singapore. Hospitality Industries Training Board. 1997. Training Resource Directory. Industrial Development Agency. (Date unpublished). Ireland Promotional Material.
112
Industrial Development Corporation. 1998. A Kaleidoscope of Facilities. Israeli Investment Centre. 1997. Israeli Promotional Material. Irish Tourist Board and Bank of Ireland. 1996. Guide to Business Taxes Reliefs. Kessel Feinstein Consulting’s. Tourism Talk Southern Africa. KwaZulu-Natal Marketing Initiative. 1997. Investing in KwaZulu-Natal. KwaZulu-Natal Tourism Authority. 1998. Business Plan. KwaZulu-Natal Marketing Initiative. (Date unpublished). Investing in KwaZulu-Natal – A Regional Investment Profile for International Investors. KPMG. 1997. Investment in Malaysia. KPMG. 1997. Investment in Ireland. Law, C. M. 1992. Urban Tourism and its Contribution to Economic Regeneration. Urban Studies 29 (3/4): 599-618. Malaysian Department of Trade and Industry. 1996. Malaysia – Investment in the Manufacturing Sector: Policies, Incentives and Facilities. SATOUR. 1997. The South African Domestic Tourism Market. SATOUR. 1998. A Survey of South Africa’s International Tourism Market. Singapore Airlines 1997 Small Business Development Corporation. 1996. Annual Report. Techno Deycan, 1998. KwaZulu-Natal Review – A Review of Industry and Commerce 97/98.
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The Europa World Book. 1997. Australia – An Introductory Survey. The Europa World Book. 1997. Malaysia – An Introductory Survey. Wasson, G. 1997. World Tourism Organisation Study on Tourism Taxation. Paper presented at a conference by the World Tourism Organisation in Spain, January 1997. White Paper on Conservation and Sustainable Use of South Africa’s Biological Diversity – July 1997. White Paper on Development and Promotion of Tourism in South Africa – June 1996. White Paper on Local Government (Draft) – December 1997. World Tel Singapore. 1997. Singapore – Investment Incentives. World Tourism Organisation. 1994. National and Regional Tourism Planning, Routledge: London. World Tourism Organisation. 1996. Directory of Multilateral and Bilateral Sources of Financing for Tourism Development, WTO Madrid: Spain. World Travel and Tourism Council. 1996. The 1996/7 WTTC Travel and Tourism Report, Insight Media Ltd.
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A ANNEXURE
Summary of Significant Tourism Investment Incentives
Australia
Israel
Ireland
Malaysia
Singapore
South
Africa
GENERAL:
Promoted activities
X
X
X
X
Promoted areas
X X
FISCAL INCENTIVES:
Income tax exemption
X X
Preferential tax rate
X X X
Special tax exemption for
tour operators
X
Tax concessions –
environmental impact
studies
X
115
Accelerated capital
allowances
X X X X X
Australia
Israel
Ireland
Malaysia
Singapore
South
Africa
FINANCIAL
INCENTIVES:
Set up grant aid
X X X
Equity participation
X
Concessional loans
X X
Loan guarantees
X X
Interest subsidies X
Employment grants
X
Feasibility grants X X
X
OTHER INCENTIVES:
Restrictions on expatriate
posts
X
X
116
Workforce assistance X
Tax exempt government
securities
X
117
B ANNEXURE
List of Promoted Activities and Products - Malaysia
List of promoted activities and products which are eligible for consideration of pioneer status and investment tax allowance under the Promotion of Investments Act 1986 LIST OF PROMOTED ACTIVITIES AND PRODUCTS – GENERAL I. Agricultural production II. Integrated agriculture III. Processing of agricultural produce IV. Forestry and forestry products V. Manufacture of rubber products VI. Manufacture of palm and palm kernel oil products and their derivatives VII. Manufacture of chemicals and petrochemicals VIII. Manufacture of pharmaceutical and related products IX. Manufacture of wood and wood products X. Manufacture of pulp, paper and paperboard XI. Manufacture of textiles and textile products XII. Manufacture of clay-based, sand-based and other non-metallic mineral products XIII. Manufacture of iron and steel XIV. Manufacture of non-ferrous metals and their products XV. Manufacture of machinery and machinery components XVI. Manufacture of transport equipment, components and accessories XVII. Supporting products/services XVIII. Manufacture of electrical and electronic products and components and parts
thereof XIX. Manufacture of professional, medical, scientific and measuring devices/parts XX. Manufacture of photographic, cinematographic, video and optical goods XXI. Manufacture of plastic products XXII. Miscellaneous
Souvenirs, handicrafts or giftware XXIII. Hotel business and tourist industry
Establishment of hotels
Expansion/modernisation of hotels
Establishment of tourist projects
Expansion/modernisation of tourist projects XXIV. Film industry Infrastructure
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LIST OF PROMOTED ACTIVITIES AND PRODUCTS – GENERAL
119
B ANNEXURE
List of Promoted Activities and Products – Malaysia
List of promoted activities and products for small scale companies under the Promotion of Investments Act 1986 LIST OF PROMOTED ACTIVITIES AND PRODUCTS – SMALL SCALE COMPANIES I. Agricultural Processing II. Forestry and Forestry Products III. Manufacture of Rubber Products IV. Manufacture of Palm and Palm Kernel Oil Products and their Derivatives V. Manufacture of Chemicals and Pharmaceuticals VI. Manufacture of Leather and Leather Products VII. Manufacture of Wood and Wood Products VIII. Manufacture of Pulp, Paper and Paperboard IX. Manufacture of Textiles and Textile Products X. Manufacture of Clay and Sand-Based, Products and other Non-Metallic Mineral
Products XI. Manufacture of Iron and Steel and their Products XII. Manufacture of Non-Ferrous Metals and their Products XIII. Manufacture of Handtools XIV. Manufacture of Motor Vehicles, Components and Accessories XV. Manufacture of other Transport Equipment XVI. Assembly and Manufacture of Electrical and Electronic Products and
components and Parts Thereof XVII. Manufacture of Kitchenware XVIII. Manufacture of Furniture XIX. Manufacture of Souvenirs and Handicrafts XX. Manufacture of Toys XXI. Manufacture of Footwear XXII. Manufacture of Sports Goods and Equipment XXIII. Manufacture of Jewellery and Related Products XXIV. Manufacture of Plastic Products
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C ANNEXURE
Industries Approved for the Tax Holiday Incentive – South Africa
The qualifying industries are limited to the following groups (4 digit division) which forms part of “Major Division 3” of the Standard Industrial Classification of all Economic Activities (Fifth Edition) issued by the Central Statistical Service in January 1993, and which have been identified as qualifying industries for purposes of the industry component: SIC-CODE
INDUSTRY DESCRIPTION
3013 3020 3041 3044 3051 3052 3111 3112 3121 3122 3123 3129 3130 3140 3150 3161 3162 3170 3210 3221 3222 3223 3229 3231 3232 3239 3241 3242
Processing and preserving of fruit and vegetables Manufacture of dairy products Manufacture of bakery products Manufacture of macaroni, noodles, couscous and similar farinaceous products Distilling, rectifying and blending of sprits; ethyl alcohol production from fermented materials; manufacture of wine Manufacture of beer and other malt liquors and malt Preparation of spinning of textile fibres; weaving of textiles Finishing of textiles Manufacture of made-up textile articles, except apparel Manufacture of carpets, rugs and mats Manufacture of cordage, rope, twine and netting Manufacture of other textiles not elsewhere classified Manufacture of knitted and crocheted fabrics and articles Manufacture of wearing apparel, except fur apparel Dressing and dyeing of fur; manufacture of articles of fur Tanning and dressing of leather Manufacture of luggage, handbags and the like, saddlery and harness Manufacture of footwear Sawmilling and planing of wood Manufacture of veneer sheets; manufacture of plywood, laminboard, particle board and other panels and boards Manufacture of builders’ carpentry and joinery Manufacture of wooden containers Manufacture of other products of wood; manufacture of articles of cork, straw and plaiting materials Manufacture of pulp, paper and paperboard Manufacture of corrugated paper and paperboard and of containers of paper and paperboard Manufacture of other articles of paper and paperboard Publishing of books, brochures, musical books and other publications Publishing of newspapers, journals and periodicals
121
SIC-CODE
INDUSTRY DESCRIPTION
3249 3251 3252 3260 3352 3353 3354 3359 3371 3379 3380 3421 3422 3423 3424 3425 3426 3429 3541 3542 3543 3553 3559 3516 3562 3563 3564 3565 3569 3571 3572 3573 3574 3575 3576 3579 3580 3590 3610 3620
Other publishing Printing Service activities related to printing Reproduction of recorded media Manufacture of paints, varnishes and similar coatings, printing ink and mastics Manufacture of pharmaceuticals, medicinal chemicals and botanical products Manufacture of soap and detergents, cleaning and polishing preparations, perfumes and toilet preparations Manufacture of other chemical products not elsewhere classified Manufacture of rubber tyres and tubes; retreading and rebuilding of rubber tyres Manufacture of other rubber products Manufacture of plastic products Manufacture of non-structural non-refractory ceramicware Manufacture of refractory ceramic products Manufacture of structural non-refractory clay and ceramic products Manufacture of cement, lime and plaster Manufacture of articles of concrete, cement and plaster Cutting, shaping and finishing of stone Manufacture of other non-metallic mineral products not elsewhere classified Manufacture of structural metal products Manufacture of tanks, reservoirs and similar containers of metal Manufacture of steam generators, except central heating hot water boilers Manufacture of cutlery, hand tools and general hardware Manufacture of other fabricated metal products not elsewhere classified Manufacture engines and turbines, except aircraft, vehicle and motor cycle engines Manufacture of pumps, compressors, taps and valves Manufacture of bearings, gears, gearing and driving elements Manufacture of ovens, furnaces and furnace burners Manufacture of lifting and handling equipment Manufacture of other general purpose machinery Manufacture of agricultural and forestry machinery Manufacture of machine-tools Manufacture of machinery for metallurgy Manufacture of machinery for mining, quarrying and construction Manufacture of machinery for food, beverage and tobacco processing Manufacture of machinery for textile, apparel and leather production Manufacture of other special purpose machinery Manufacture of household appliances elsewhere classified Manufacture of office, accounting and computing machinery Manufacture of electric motors, generators and transformers Manufacture of electricity distribution and control apparatus
122
SIC-CODE
INDUSTRY DESCRIPTION
3630 3640 3650 3660 3710 3720 3730 3741 3742 3743 3750 3760 3810 3820 3830 3841 3842 3850 3860 3871 3872 3879 3910 3921 3922 3923 3924 3929
Manufacture of insulated wire and cable Manufacture of accumulators, primary cells and primary batteries Manufacture of electric lamps and lighting equipment Manufacture of other electrical equipment not elsewhere classified Manufacture of electronic valves and tubes and other electronic components Manufacture of television and radio transmitters and apparatus for line telephony and line telegraphy Manufacture of television and radio receivers, sound or video recording or reproducing apparatus and associated goods Manufacture of medical and surgical equipment and orthopedic appliances Manufacture of instruments and appliances for measuring, checking, testing, navigating and for other purposes, except industrial process control equipment Manufacture of industrial process control equipment Manufacture of optical instruments and photographic equipment Manufacture of watches and clocks Manufacture of motor vehicles Manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers Manufacture of parts and accessories for motor vehicles and their engines Building and repairing of ships Building and repairing of pleasure and sporting boats Manufacture of railway and tramway locomotives and rolling stock Manufacture of aircraft and spacecraft Manufacture of motor cycles Manufacture of bicycles and invalid carriages Manufacture other transport equipment not elsewhere classified Manufacture of furniture Manufacture of jewelry and related articles Manufacture of musical instruments Manufacture of sports goods Manufacture of games and toys Other manufacturing