Industrial Policy Action Plan: media briefing by Minister of Trade and Industry

 

[PMG note: This is an unrevised transcript of the questions and answers]
Journalist: My fear is that there has been so much talk but Minister Erwin talked about leveraging the infrastructure program and we are still talking about it. Aren’t we going to miss the boat by the time the infrastructure development program is finished in three, four, five years time? We still wouldn’t have got the procurement systems up in place? Why that couldn’t be done at the same time that you were developing the policy is one question. The other question is that those job creation targets, does it imply a certain level of investment in the economy and what would that sort of estimated investment be?

Journalist: When you are talking about the concessional funding. What sort of finance are you looking at over ten years specifically from the IDC? Will they be able to cope with that sort of funding? Are you looking elsewhere at other development agencies such as the African Development Bank for example or overseas? Secondly, I presume that IPAP kicks in immediately. Is the measure of success going to be because it is focused so much on labour, is it going to achieve the 2.5million jobs target, what would be the measure of success for the IPAP?

Journalist: Call centres, business process services, can you give some idea what your plans are? These have been considered high labour intensive business within in a technological sector but momentum seems to have died. Can you give us some idea of the future please?

Journalist: Is this it?  This is not a discussion document. It is not for public hearing. Is this an action plan that kicks in tomorrow? The comments about nuclear, does this in anyway imply that you are going to support pebble bed or is this about conventional nuclear. Does it have any implications for fudgy nuclear program?

Rob Davies: I think our analysis is telling us what Linda said, that we are missing the boat on procurement, is correct. What we are proposing, I mean there have been a number of schemes that have come into place. The one which was introduced was the competitive supply development program for some of the State Owned Enterprises (SOEs). I think there have been some successes there but it hasn’t been on a sufficient scale. What we are suggesting now is a fairly significant departure of the introduction of the fleet procurement and all the other things going along with it.  So we want to start with something bite size. Let’s take eight or ten items subject it to fleet procurement, evaluate it, bring into place some of the more obvious reforms that we have identified that we need to do in the procurement realm, that’s what we are trying to do.

Yes I think we are absolutely clear that we need to achieve a much higher level of local production of the procurement. We have set ourselves the target of reducing the import leakage from 40% to 30%, I think that target can still be our target but we are not close to it at this point.

The level of investment, look at some point we are going to model it and come up with those numbers but at this moment we don’t have it. What we are saying is yes we have seen that the levels of investable funds going into manufacturing sectors is too low and that’s the basis of increasing the concessional funding. We will need to set quantifiable targets in relation to that but we are not at that point yet. We have a tight timetable to start the work on the basic model. 

On the question of when does this come into effect, it comes into effect the next financial year.

The success will be measured in terms of jobs, sustainable decent jobs that will be a major focus of attention there but also a secondary measure will be strategic industrial capacity.  Of course we need to create many more than 800 000 indirect jobs but we believe that value added sectors pull an economy forward and create the conditions under which many more jobs can be created in service sectors and so on. Service sector jobs that are based on supply and industries that are importing based on unsustainable credit extension are not going to last. You know we have to have more of a productive sector advance if we are going to make those jobs much more viable.

 Is this it, nothing else, when you get this document this is it, we are obliged to go to Cabinet, every six months with a progress report so we will be monitored on this. The portfolio committee on trade and industry will hold hearings on this but is not for us to amend it and only then do we start. As a living rolling document, whatever they say now we will take into account and if we need to make changes next year, we make changes next year. But this document is there.

Naledi Pandor: I don’t want to pre-empt any statement that Minister Hogan will make on PBMR because I think that is her prerogative. However I do think out of some of the work that has been done in the process of developing the pebble bed technology there are opportunities for extracting some of the technologies for use in energy efficiency but as to whether she will support the current attempt to create pebble bed energy source, I think that is something she will pronounce. We have had a meeting of Ministers to look at the future and she will make a statement on that regard.

Rob Davies: I forgot to answer the question on the Business Process Outsourcing (BPO). Just to say that I think we have made good progress on the BPO and I had the opportunity to go to a BPO investment employing several thousand people, quite decent salaries, not bad conditions and basically doing services for US cell phone companies. So I think we can see some successes of this and the IPAP sees that we need to refine a few of the incentive programs. There is one called Moyentla which is about training and I think there is a number of improvements we need to be making there but essentially that program is going on. We are engaging with the service providers about some of the ways in which we need to tweak this a bit. We would like to take some of these BPO centres to other parts of the country as part of decentralising economic opportunities but it depends on the investors. It’s ongoing work and I think we have achieved some successes and I think this vindicated an initial focus on that because there are quite a few thousand people in this country that have reasonably decent employment through this industry.

Naledi Pandor: Can I also just indicate that “out of nuclear” certainly, in terms of the Integrated Energy Resource Plan, we are looking at whether there are opportunities there but also to say South Africa is doing rather well in terms of exporting and producing radio isotopes for the world market and this is an area on which we really believe we must continue to have strength. You would have seen the recent announcement by President Obama with respect to a nuclear reactor. We have a functioning one that is doing very well for South Africa in the particular area of radio isotopes and in terms of energy it’s an area we need to explore.

Journalist: Do you see IDC restructuring its investment for portfolio to free up more funds for these various projects that you are looking at and changing all its portfolio of listed investments. Also can you discuss why only the SMMEs focus on the IDC as opposed to DBSA and other ones?

Journalist: When you spoke about the high interest rate regime? Were you talking about the interest rates that are charged by the development finance institutions or were you raising issue with the interest rates set by the central bank? Another question, is there any idea how the funds allocated to the automotive investment program are going to be spent?

Journalist: Minister how do you plan to handle the question of the price of making these inputs locally rather than importing them? I see you mentioned something about allowing price matching but isn’t there a concern that this might raise the cost of infrastructure program or are you just going to tie in those people who get the original tenders through this fleet tendering process. You also say you are going to do a gap analysis on the demand requirements in domestic supply capacity. So you haven’t actually done that yet in this sector, can you clarify that?

Journalist: Could I get an explanation of this concept of procurement fleet, it’s the word fleet, which is confusing me.

Journalist: You talk about green industries like solar power, wind power and you do mention that it requires Eskom to expedite the power purchase agreement and you also say you want to increase the competition in the energy sector. I would like to understand just how much real engagement you have had with the Department of Energy and Eskom as well because by all accounts at the moment they are still dragging their heels on the PBA.

Ebrahim Patel: The DFI investment portfolio will have to be aligned to IPAP. There are two things we are seeking to do. We want to avoid investment drift so that there is greater focus to what the DFI’s do and there is greater connection between the policy instruments and the policy direction. The second thing is aside from wanting to have a greater portion of IDC resources speaking to the IPAP vision and to the action plans here. We are opening a discussion with the IDC and in Government about how to strengthen the IDC’s balance sheet. Minister Davies gave the example of the Brazilian IDC equivalent the NDES and it operates in some ways like the IDC but unlike the IDC it get’s regular cash replenishment on its balance sheet that helps to drive Brazilian investment. So the IDC largely maintains its balance sheet on dividend flows. In the case of the Brazilian example, it’s a combination of those two things that we think can bring greater industrial financing to bear on the IPAP. May I also make this point?  If we take the example from an earlier question, Madupi the power station construct, by the way if you go to Madupi today you will see 7000 workers busy on that site it’s arguably one of the largest construction sites in the southern hemisphere at the moment. But Madupi has now led to significant investment that was announced at the end of last year in large boiler parts manufacturing capacity in SA. IPAP is about scaling this up very significantly and that is the message we want to give.

Rob Davies: We are fundamentally referring to the interest rate which is charged by development finance institutions and I guess the BNDS example shows that it’s much less, I mean their long-term interest is a bit lower than ours but it’s the discount on the basic long-term interest rate which is important and which manufacturers in Brazil are getting. How is the automotive investment scheme going to work? Basically the APDP provides for the scheme, qualifying investments will be able to receive 20% by way of a grant and or credits and there is a further 10% which is available on a discretionary basis but is available for those that meet additional targets in terms of more local production, more employment and targets of that sort. That’s essentially how the scheme works. We met recently with the industry and the unions and we hammered out a set of conditions and requirements to access each of those and that work is pretty close to being gazetted so that there will be absolute certainty.

We have already delivered sufficient certainty for a number of automotive manufacturers to announce investments, BMW was the first one but there are others in the pipeline. Are we envisaging a big price premium? I think no in the first instance the whole logic and some of the work which was done by the Department of Public Enterprises around the competitors supply development program divided different inputs in different categories. It said there were some which ought to be able to be manufactured in South Africa without any particular incentives or premiums. The problem is at the moment those will not all be manufactured in South Africa; there are different kinds of reasons for that some of them have got to do with credit arrangements which are offered by foreign countries. You offer access to a cheap credit arrangement by a foreign country and that cracks the deal. So we will be looking at all of those things the point is that we are not looking for a big premium but we will have to discuss that in more detail whether we do offer some premium but if we do it’s not going to be a big one and the gap analysis still has to be done.

This term fleet procurement was fairly new to me when we were doing this work but I believe it’s got quite an establishment currency amongst people that understand procurement. It means we procure not just a one off but we procure a larger volume over a larger period of time. When they procure strategically they tend to identify certain productions for fleet procurement so they say what happens if you are in phase one instead of phase one being dealing from phase two and phase three, completely separate contracts. So we are saying what happens now, you want to get something and it can’t be manufactured locally so you import it and then you wait some years and phase two you need some more stuff, you put out another completely separate tender and the same things happens. So we are saying link them into a longer term thing, so phase one, phase two and phase three must all be linked together and if we are obliged to say well in phase one we haven’t got the stuff locally and we import by phase two the people who get phase one will have an obligation to produce some of it inside the country and more so in phase three. That’s the idea of the fleet procurement that’s what we want to achieve.

The question on the energy and the green, there’s this refit. This work on refit is quite critical which is the feeding tariff. And the feeding tariff that emerges I think will create the conditions and the certainty for a greener energy production to kick in on a more significant scale. There are a number of proposals and discussions about doing this quite creatively but essentially that’s the condition under which we would see solar electricity generation. You know bio energy where we would see thinks like wind power, I mean what we are saying is that when that is established our job now is to make sure those things are manufactured in the country. I mean there are real good opportunities, how is it going to be that we are going to use tons and tons of carbon to bring all the windmills in from overseas we actually need to achieve those kinds of synergies that’s where our focus us. I think it’s that refit tariff that will be critical in getting us off the ground.
 
Journalist: Just on the green issue and the DG of Energy might want to come in on this. We are aware one of the issues that’s raised in getting green generation off the ground like concentrated solar thermal is precisely this issue of concluding the purchase power agreements. In our discussions with Department of Energy our understanding is that, that function is going to be lifted out of Eskom because there are some bottlenecks in that regard so that these kind of projects can have access to the refit feeding tariffs.

Naledi Pandor: Green jobs are not just about energy. I found out recently that a journalist at the Mail & Guardian cycles to work on an electric bike. Now in China in 1998 there were 400 000 electric bikes, in 2008, 21million. E bikes are cheaper than any other form of motorised transport in China, hardly present in South Africa. I tried to get some to ride to the Budget Speech yesterday for my colleague Ministers in the Economic Cluster, I could only get two from the supplier in South Africa. So there is huge opportunities, green building materials, agriculture and forestry, manufacturing, jobs you know skills for example, persons working as insulation installers, recycling sorters, so there’s such a large arena of opportunities that we are exploring with a dedicated task team focused on this.

Journalist: When you look at the first phase of IPAP, one of the outcomes you frequently point to is that antiretroviral contract. That the bulk of it ends up being locally manufactured in assistance with the DTI, that is frequently pointed to as one of the examples of local manufacturing you are trying to drive for. Are there any outcomes from the first phase that you are able to point out? Then two when you spoke of this plan you kept picking off the three “Cs” you need to have in place. Finally on the first phase implementation, the biggest challenge was the inter-ministerial co-ordination, in this round how is that going to be overcome, is it through the new cluster system, and is it part of the new way of doing things. Are there outcomes of the first phase?

Journalist: There are lot of conditions and discussions going ahead, can we say that the IDC based on the Brazilian example is going to get regular replenishment from the fiscus. Can we say that the DFI’s are going to be able to offer concessional rates to their investors and what’s the mechanism for compelling them to do so?

Journalist: How does small business fit into this and what happened to the ten goods and services that the Department developed. It seems to have disappeared?

Journalist: On fleet procurement you have all these different parastatals and public entities all over, where is the procurement going to be centralised to ensure that a fleet is made of it and that the procurements are optimised. 

Journalist: The making of all these goods I think it’s like machinery and things like that, heavy things made out of metal, steel. There is still a problem with steel price and the Competition Authorities haven’t managed to do much about that. Isn’t that a big stumbling block to all of this?

Ebrahim Patel: First are we saying we know that there will be regular replenishment from fiscas; no we are not saying that. We are looking at means to strengthen the IDC’s capacity and there are a number of ideas that have been pursued. At the moment the IDC has significant investable funds and we need to ensure that funds hit the target much more clearly.

 Are we going to do it at a concessional rate? The IDC offers concessional rates at the moment in respect of some of the investment, the question is are we focusing it in the areas with the greatest capacity, 1, employ people and 2 to build the strategic industrial capacity that Mr. Davies spoke of.

The 3^rd question was the mechanism to address this or to compel them, I don’t think you need a mechanism to compel, I think the boards of the DFI’s are recognizing the importantance for the DFI’s to operate within a strategic framework and Government as shareholder sets that broad framework. The role of the Corporate Governance structures, the boards is to obviously interpret the detail, to make sure that the management adheres to proper procedures and so on. So I don’t think there is attention or difficulty there, I think they are all saying we have engaged with the boards of the DFI in the case particularly here with the IDC and there is certainly a strong support for the idea of an I-pap of an IDC that aligns its activities to the broader objectives and goals of Government. So I think that deals with the dire questions that were asked.

On the question of cadres, we had a very interesting experience last year when we assembled a team of economists from across the world, one of them best know was Jospeph Stiglets with a whole team of people with him. The question was asked to him can SA implement industrial policy given all the constraints in capacity within the State, are we not different to China or South Korea. The answer that the panel on economists gave was very constructive; they said it’s a myth that you had a problem free implementation of policy in East Asia. The key there was that as they implement it they evaluated it, what worked was strengthened and supported, what didn’t work the plug was pulled quickly, so they learned by doing. That is what the I-Pap is seeking to do is to say that we are moving into this direction there will be regular reviews, there will be adjustments that have to be made from time to time. But its not a question of being frozen into inactivity because we are waiting for all the answers that can come, its implementing, learning from implementing, making the adjustments. And that’s the message I think that comes out of I-Pap.

Rob Davies: Let me just say that I don’t think that the anti-retroviral tender issue was one of the big achievements in the first I-pap, on the first slide we presented we indicated what we thought the achievements were. They were the development of the I-Pap architecture, they development of the clothing and textile architecture, there were the strength of the competition legislation and the BPO Program, things of that sort. Those were the things we think we achieved. The question of anti retroviral is a question of when and whether we subject that procurement to a fleet tendering process, that’s something which we still have to discuss with our colleagues in Health and its down there as one possible example but when and how is something which still remains to be decided.

As to the resourcing; I think you will notice that although I have said that we have had budget lines for some of the programs which we have there like the Automotive Investment Scheme, like the Clothing and Textile incentive and like some of the other incentives. The main focus is not that what we need to be doing is providing incentives on an ever enlarging scale for industries, that’s not what we are saying. We are saying that what seems to be the lesson from the Brazilian case is not bad but an increasing volume of concessional funding coming from dedicated industrial development DFI’s, that’s I think what we are saying, and then also, to leverage the procurement and things like that. So there is much more of a focus on off budget rather than on budget items there.

What does this mean for SMME’s, this not an SMME development program but SMME’s will be able to locate their own activities in the context of a greater shift towards labour exporting activities, I think that also means greater opportunities for smaller businesses, that’s basically what we are looking at. For example in the auto sector our focus is on components manufacturing which are smaller businesses and all of this is focusing on the more labour intensive parts of particular value chains that we support. We are going to be doing further work in the course of the year to try to boost our SMME programming in a number of ways. I think that’s a separate stream of work, related but not the same. We also want to come up with a much stronger cooperative policy and what you will see coming out of the cluster is a little bit of a strategic shift in which we are saying that in the past we perhaps thought that the focus should be on those SMME’s which could make it up ladders to join the formal economy and become export orientated industries and so on. We are saying that we need programs that are going to address the reality that many will continue to be involved in the informal sector but if they improve their income generating capacity and boost the quality of those activities that would be a significant contribution to growth in the country. But that is something which will emerge.

The question of metals fabrication industries, they are not all steel but steel is a very significant product in metal fabrication we acknowledge that, that’s why we gave that slide, that’s one of the things we will have to grapple with. Yes we haven’t cracked it yet with the Competition authorities but are we going to keep trying to get a competitive steel price, you bet, absolutely, so I think that will be our message there.

Blade Nzimande: There is one question which relates to inter-ministerial co-ordination, indeed that is a big challenge but it’s not going to be easy to overcome that challenge but I can assure you that over the last three or so meetings of the cluster we had 80% attendance of Ministers and what Minister Davies has referred to as the new growth path has been really crafted by the cluster and not one Department. Thank you

Rob Davies: One of the 3 C’s I did talk about was co-ordination that was one of the problems that we faced before, I think we have a much better spirit to try to address the co-ordination questions in the cluster and also I think through the work that the Economic Development Department can play. Thank you.

 

 

National Assembly Statement on IPAP2 by Dr Rob Davies,
Minister of Trade and Industry: 18 February 2010

Speaker,
Members of the Cabinet,
Honourable Members of this House

Today we are tabling before Parliament and also making public, the 2010/11 – 2012/13 Industrial Policy Action Plan (IPAP).IPAP2, as it has become known, builds on the National Industrial
Policy Framework (NIPF) and the 2007/8 IPAP. It represents a significant step forward in scaling up our efforts to promote long term industrialisation and industrial diversification beyond our current reliance on traditional commodities and non-tradable services. Its purpose is to expand production in value-added sectors with high employment and growth multipliers that compete in export markets as well as compete in the domestic market against imports. In so doing, the Action Plan also places emphasis on more labour absorbing production and services sectors, the increased participation of historically disadvantaged people and regions in our economy and will facilitate, in the medium term,

SA’s contribution to industrial development in the African region.

 

As a country, South Africa has no alternative to the course of action we propose. Manufacturing and other productive sectors of the economy, are the engines of long-term sustainable growth and job creation in developing countries such as our own. However, SA’s recent growth was driven to too great an extent by unsustainable growth in consumption, fuelled by credit extension. Between 1994 and 2008 consumption driven sectors grew by 7.7% annually, compared with the productive sectors of the economy which grew by only 2.9% annually. This has meant that even at the peak of our average annual growth - 5.1% between 2005 and 2007 - unemployment did not fall below 22.8%.

 

Manufacturing – which constitutes a sizeable chunk of our value added production – has not enjoyed sufficient dynamism. This is mainly because the relative profitability of manufacturing has been low as a result of a number of factors. These include:
· A volatile and insufficiently competitive currency;
· The high cost of capital relative to our main trading partners; particularly that channelled towards value-added sectors such as manufacturing, resulting in a too limited allocation of capital to these sectors;

· The monopolistic provision and pricing of key inputs into manufacturing;
· An aged, unreliable and expensive infrastructure system;
· A weak skills system; and
· The failure to adequately leverage public capital and other large and repetitive areas of public expenditure.

The negative, unintended consequences of this growth path are manifold they include large and unsustainable imbalances in the economy, continued high levels of unemployment and a large current account deficit. These weaknesses have been exacerbated by the global recession. Taken together these challenges are enormous and make it critical that we upscale our industrial policy efforts, building on the achievements of the 2007/8 IPAP.

 

The 2010/11 – 2012/13 Industrial Policy Action Plan rests on four cornerstones, which are spelt out in detail in the full IPAP2 document which is being tabled today. First, government intends to develop proposals to enhance access to concessional industrial financing for investment in IPAP priorities, and other productive sectors on terms comparable to those of our major trading partners. Increased investment in these sectors will generate a mix of import replacement and exports which will help to lower the current account deficit and reduce balance of payments risks. Increased supply in productive sectors will help lower price pressures and hence will assist in moderating inflation. It will also contribute to the medium-long term objective of diversifying the structure of our economy. Second, government will revise procurement legislation, regulations and practices to enable the designation of large, strategic and repeat or ‘fleet’ procurements in a range of sectors.
This will aim to sequentially increase competitive local procurement and supplier development opportunities, minimize ‘leakages’ from the domestic economy, and support meaningful Broad Based Black Economic Empowerment (B-BBEE) in all 3 spheres of government and in SOE’s.

Third, government will deploy its trade policies more strategically. This includes intensifying the campaign led by SARS against practices such as customs fraud, under invoicing, smuggling and illegal imports - all of which profoundly undermine productive capacity and employment in the economy. Trade policy instruments such as tariffs will be deployed on a strategic basis underpinned by the imperatives of our sector strategies. Standards, Quality Assurance and Metrology (SQAM) institutions and practices – otherwise known as Technical Infrastructure – will be strengthened to support the development, accreditation and enforcement of standards and bolster other measures to create, scale up and resuscitate certain industries. Fourth, anti-competitive practices will be targeted, particularly where these concern intermediate inputs to downstream Labour absorbing production as well as consumer goods to low income households. This applies especially to products such as carbon and stainless steel, chemical polymers, fertilizers and aluminum, amongst others and will build on the very positive achievements of
the Competition authorities in the recent past.

These cross-cutting interventions will underpin focused and significant interventions in three clusters of sectors. First, sectors including metals fabrication, capital and transport equipment, green and energy saving industries and agro-processing, will be qualitatively new areas of focus of industrial policy. Second, we will build on and broaden interventions in sectors which were identified in the first Industrial Policy Action Plan, namely, automotives and components, medium and heavy vehicles; plastics, pharmaceuticals and chemicals; clothing, textiles, footwear and leather; bio-fuels; forestry, paper, pulp and furniture; cultural industries and tourism and Business Process Services (or Call Centres.) The third cluster focuses on sectors in which we have the potential to develop long-term advanced capabilities: nuclear, advanced materials and aerospace. In each of these sectors a careful and strategic combination of policy instruments is set out in some detail in the IPAP2. IPAP2 is a product of extensive collaborative work by the Economic Sectors and Employment Cluster of Ministers. Its adoption by the National Cabinet follows extensive engagement with other Departments, state owned enterprises (SOE’s), government agencies and institutions. It has been widely canvassed with Labour and business organizations. IPAP2 is one component of a broader effort to integrate inter-related policies to place us onto a new growth path –work that is being led by the Minister of Economic Development, Ebrahim Patel. IPAP2 is now a public document.

 

The Portfolio Committee on Trade and Industry has scheduled public hearings to allow for further consultation. It will be formally presented to the NEDLAC Trade and Industry Chamber in the near future. The dti remains open to further concrete proposals and suggestions to strengthen the action plan. IPAP2 is a ‘living document’ which outlines a range and combination of industrial policy interventions and instruments to address the critical challenges of our economy. IPAP will from now on take the form of a three year rolling action plan, which will be strengthened and refined on an annual basis. IPAP will identify the lead and partner departments and institutions responsible for its implementation. It underlines the necessity for the integration and alignment of the work of government departments and institutions. It identifies the constraints and risks, economic rationale, economic outcomes and Key Action Plans (KAP’s) for each one of these actions. It attaches ambitious but realizable timelines to this work. Its implementation will be reviewed and monitored against these measurable actions and it will be the subject of annual amendment and strengthening. It is estimated that the IPAP will result in the creation of 2 477 000 direct and indirect decent jobs over the next ten years. It will diversify and grow exports, improve the trade balance, build long term industrial capability, grow our domestic technology and
catalyse skills development. It is neither a wish list nor a set of unattainable objectives. It is an action plan which, like any other, will require sustained and focused work and perseverance if it is to succeed – which it must do. Above all it is a call to our workers, our industry and business leaders, our public servants and our citizens at large, to join hands with government to build our economy and a better life for all. By working together we can do more.

In conclusion, I wish to thank the staff of the dti and in particular the DG, Tshediso Matona and the DDG of the Industrial Development Division, Nimrod Zalk, who have worked on the policy and action plan. I also want to thank officials from other government departments who participated in the regular IP meetings we held to produce the current IPAP. My gratitude also goes to my fellow Ministers in the Economic Sectors and Employment Cluster for their contributions and support. Finally I am indebted to Deputy Ministers Thandi Tobias-Pokolo and MariaNtuli.