Rise in import duties on solar panels is a poor decision, says MacKay

Rise in import duties on solar panels is a poor decision, says MacKay

Donald MacKay

Last Friday the import duties on solar panels rose from zero to 10%. Here is what happened and why I think this decision is a poor one:

On April 17, 2017, ARTSolar, a local solar panel manufacturer, filed an application with the International Trade Administration Commission (Itac) to increase the duties on solar panels. Yes, you read right. 2017. Seven years ago.

In their application ARTSolar points out that it (ARTSolar) was pivotal in ARTSolar and Sun Edison winning a 65MW Round 2 REIPP [Renewable Energy Independent Power Producer’s Programme] project, because of ARTSolar’s local credentials. When government buys solar panels as part of REIPP, they are meant to have at least 25% local content.

Sun Edison imported all the panels from China, putting them in breach of these local content rules, although nothing appears to have happened to them, aside from going bankrupt, so at least karma.

By 2017, ARTSolar had enough, noting “it has become apparent at great cost to the industry that there is a low likelihood of any local content being undertaken locally despite the average 25% local content claims from module suppliers in the REIPP.

Here we run into two of government’s favourite localisation programmes. Duty increases and preferential procurement, both of which have mostly not worked.

Preferential procurement is incredibly difficult to manage because the Department of Trade, Industry and Competition refuses to release any data, so no one actually knows what’s going on there.

“After over R500 million in private investment in local factories, the fledgling local PV manufacturing industry is in dire shape and faces the same path as the textile industry without tariff support,” continued ARTSolar, in a serious tone.

For the 12-month period May 2021 to April 2022 (year one), just over a million photovoltaic cells were imported (the main component making up the solar panels), dropping by 75% to 255 000 cells in the May 2022 to April 2023 period (year three).

Over the same three years, the imports of assembled solar panels rose from 10 million finished solar panels in year one, to 33 million panels in year two and then down to 11.7 million in year three.

Curiously, the cells made up 44% of the value of the solar panel in year one, but this was up to 48% in year three, indicating that the process of converting solar cells to solar panels was becoming more efficient, presenting even further challenges to ARTSolar with its small capacity relative to the large, mainly Chinese producers.

In their 2017 application, ARTSolar states that it stands to lose 150 permanent jobs if the import duties are not raised to 10%. I doubt they thought it would take seven years to get their increase. They still have a website so presumably those jobs are still okay.

The Industrial Development Corporation (IDC) invested R66 million into an expansion at ARTSolar in 2022.

According to the IDC, “[t]he direct local employment created as a result of the upgrade is in excess of 200 jobs with a further 1 100 indirect jobs”.

This presumably takes the jobs in ARTSolar to around 350. Let’s be generous and round up to 500 jobs.

In the most recent 12 months, we imported R13 billion worth of solar panels.  This would have attracted R1.3bn in duties if the duties had been in place.

If we divide the duties by the number of people employed in the sector we end up with support of R2.6m per worker per year.

And lest you think that you can simply buy the panels locally from ARTSolar and not pay the duty, they appear to be the only manufacturer. Their prices will rise to follow the duties, because why wouldn’t they.

In Minister Enoch Godongwana’s 2023 budget speech he announced a tax rebate of 25% of the cost of solar panels, to a maximum of R15 000.

According to Godongwana, “[t]he solar rooftop tax incentive announced in the 2023 Budget has promoted the installation of solar panels that are now generating 5 200 MW of electricity for households and businesses”.

If these duties had been in place they would have reduced the positive benefit of the incentive and likely seen fewer solar panels installed.

Few things have harmed the South African economy more than load shedding, so it boggles the mind that increasing the cost to private individuals spending their own money to generate electricity which benefits the whole country, would be taxed for their efforts.

So, who wins with the duty increase?

Obviously, ARTSolar wins, although after waiting seven years for the decision, they may feel the shine has gone off this win.

Maybe some other people will set up production, which would be good, but will the economic benefits created by these investments outweigh the R1.3bn to be paid in duties or higher prices? Unlikely.

Every person who wants duty relief will have to sell the soul of their first-born child to get the import permit issued to get duty relief.

This is the way of things, with reciprocal agreements. The guidelines for the rebate have not been published, so perhaps I exaggerate somewhat.

Bear in mind the 25% local content requirement already in place on solar panels supplied under REIPP, already a strong protectionist measure.

This is not the path to industrialisation. You cannot tax productive investments and expect good outcomes.

When you tax investment you simply get less investment. Less investment means fewer service sector employees (yes, those count too) installing and repairing solar panels.

All that will happen is prices will rise. R1.3bn will be taken from the consumer and given to the government, the worst allocator of capital in the country.

The dream of this duty forming the foundation of a thriving solar panel manufacturing industry is simply a large opium-stuffed pipe dream.

Donald MacKay is founder and chief executive of XA Global Trade Advisors. He has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of “Business Report” and Independent Media.

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