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Dec 02, 2011

Trade aspects of capital projects

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By: Pieter du Plessis

By nature, large capital projects, such as the construction of any new or expanded mine or manufacturing facilities, present themselves with a near-infinite number of challenges. In the space where professionals like geologists and engineers operate, problems are identified and overcome, and new and innovative solutions are found. Project plans are developed and executed on time and within budget, or that, at least, is the aim.

Being within budget and on time can be achieved if there are no surprises. Considering the number of variables having an absolute and direct impact on success, it is, perhaps, not surprising that some of the less-mission-critical, but still costly, aspects of a large capital project are often overlooked.

A simple question about the preferred location of a proposed new facility can pose interesting questions. While the loca- tions of mines are mostly determined by Mother Nature, developers of manufacturing, processing and assembly facilities need to consider whether locating the planned facility in an industrial development zone (IDZ), for example, should be considered. The answers are not as obvious as often portrayed and often require a bit more attention at the bankable feasibility study stage.

Whenever a large capital project relies on imported components and materials, the cost implications of customs duties can be significant. The appropriate classification of the items to be imported is essential and, under certain circumstances, the South African Customs Act provides for very large equipment imports to be cleared duty free. To qualify for this benefit, however, one needs to apply to the South African Revenue Service for a ruling, and this ruling must be issued before the first shipment arrives.

Another interesting matter is the customs valuation of the items imported, particularly if sourced from a related party. Transfer pricing and customs valuation concerns are different (often opposing) sides of the same coin that require attention before equipment orders are placed and contract terms finalised.

Logistics service providers need to be chosen carefully and detailed clearing instructions need to be prepared to avert delays at customs, resulting in interest and penalties being levied on imported materials and components. Often, the financial loss on account of interest and customs penalties is insignificant, compared with the cost of project delays caused by delayed component deliveries. It has been proven time and time again that the time and cost invested at the outset, clarifying, agreeing and documenting clearing instructions with logistics service providers, prove to be insignificant, compared with the often expensive and time-consuming fix-ups once the project is being executed.

Once operational, a new manufacturing concern may require duty protection in order to establish itself, or even protection against unfairly priced imports. Under certain circumstances, these aspects require attention, even prior to construction – during the bankable feasibility study stage.

The possibility of accessing government support in the form of targeted grant programmes or preferential corporate tax allowances also warrants attention. Often, projects need to apply and obtain approval in terms of existing programmes well before construction begins or, in some instances, even before equipment is ordered or contracted for. As these stages are reached fairly quickly following completion of a bankable feasibility study and obtaining board approval for the project to go ahead, most of the groundwork related to accessing significant levels of government support needs to be done when the bankable feasi- bility study is nearing completion.

Based on our experience gained while consulting to large investors in capital projects, from both an international trade and a customs perspective, as well as a government incentive perspective, these matters are often overlooked

Little of the above affect the engineering and design of a project. These issues do, however, impact on timely completion and the extent of project cost overruns at the hand of unplanned customs and logistics costs or missed opportunities to access government support.

 

  • Du Plessis is a director at xikhovha advisory - pduplessis@xa.co.za
Edited by: Martin Zhuwakinyu
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