Economic Development: Minister's Budget Speech

Address by Mr Ebrahim Patel, Minister of Economic Development on the occasion of the debate on Budget Vote 28: Economic Development, in an Extended Public Committee meeting of the National Assembly

12 Apr 2011

Chairperson

Honourable Members and Cabinet colleagues

Social partners

Officials of Economic Development Department (EDD), Development Finance Institutions(DFIs), Commissions and the Tribunal

Members of the public and friends

I have the honour today to present to you the second budget of the Economic Development Department.

In his speech to the National Assembly in June 2009, President Zuma set out the mandate of the new department as follows:

“The Economic Development portfolio will have a strong domestic focus and will ... address, amongst others, matters of macro and micro-economic development planning.”

Over the past year, we worked with colleagues across government, provinces and municipalities to give effect to that mandate.

In the context of South Africa’s challenges, this entailed drafting a New Growth Path (NGP). hat places employment at the centre of government’s work and policies.

Honourable members, colleagues,

In October last year, a phase of research, policy development and discussion culminated in Cabinet’s adoption of the New Growth Path (NGP).

The work of the department and its agencies has focussed on developing the NGP framework, supporting implementation, partnering with other departments and public entities to align the work across government to the over-arching new framework.

The new growth path sets out a vision: five million new jobs by 2020.

It identifies twin goals: increasing the economy’s labour-absorbing capacity and decreasing its carbon-emission intensity.

These goals are central to our development as a country. The key to empowering women, black South Africans, workers, the rural population and young people is to provide them with real economic opportunities – in jobs, access to resources and entrepreneurial opportunities, meaningful self-employment, and through the social economy. This is not an act of charity, but fundamental to sustained growth, to using our wide talent pool fully and to the social solidarity any society requires to prosper.

At the same time, these goals cannot remain solely government’s concern. The majority of new employment opportunities will come from outside the state. Government can support employment creation by providing infrastructure, skills and an efficient and effective regulatory environment. It must allocate its capacity and resources to encourage new opportunities in the formal sector; amongst small and micro enterprise; in the social economy, which comprises coops and other not-for-profit activities; through rural development and with support for economic development across the continent.

To achieve its aim of generating five million new jobs, the New Growth Path prioritises six jobs drivers: infrastructure development; the agricultural value chain; mining and metals fabrication; manufacturing expansion; the green economy and key services of tourism, creative industries and business services.

The New Growth Path points to big opportunities on the African continent, with its market of one billion consumers and some of the fastest growing economies in the world. It sees a key role for knowledge-based sectors that rely on information, innovation and new technologies. It sets out the jobs and development potential of rural development, the social economy and public sector.

The New Growth Path addresses alignment of macro- and micro-economic policies; a competitive exchange rate; and the micro-economic toolbox of skills development, enterprise promotion including small business and coops, competition policy to tackle monopolies and price fixing, labour policies, technology and innovation, rural development, industrial policy, trade and regional integration.

President Zuma, in the February State of the Nation Address, placed job creation as the priority of government for 2011. The Minister of Finance gave financial expression to this and the NGP in the National Budget.

We set a tough target: five million new jobs in ten years. This year we will start with relatively modest gains and ramp them up every year over the decade. The past 18 months of GDP recovery and, at the end of 2010, the increase in employment point to the realism of our objective. In the last quarter of 2010 the economy generated over 100 000 jobs – still far less than was lost in the downturn, but at last a meaningful pointer to a real turn around.

Departments will announce their specific targets and actions for supporting employment creation over the next ten weeks when they table their spending plans in Parliament. At the same time, we will move decisively to lay the basis for long-term growth and new employment-generation by addressing the economy’s structural constraints.

Honourable members,

We spent time and effort to map out a new economic path. The focus is now on action, on implementation. The President set the tone in February when he announced the steps to implement the New Growth Path.

The EDD has two roles in the implementation of the New Growth Path to

• bolster the integration of diverse government policies, programmes and projects to support employment creation
• ensure that the development financial institutions and regulatory agencies for which it is responsible become central agents in achieving a more inclusive, equitable and jobs-rich economy.

In this context, it is my pleasure to advise this House of the Budget of the Economic Development Department. I will focus on the agencies that EDD oversees and that absorb the bulk of our budget. We tabled a detailed plan for our departmental activities at the Portfolio Committee, by programme and sub-programme, which I will not here revisit.

EDD’s budget allocation this year is R594,5 million, which covers the work of the Department and agencies that report to it. This is 42% higher than last year’s allocation. Three quarters of the total, or R464,8 million, will be transferred to the DFIs and commissions for which the EDD is responsible.

We propose to distribute the budget as follows:

• R219,4 million for small business funding, through transfers to Khula and Samaf
• R141,8 million for the competition authorities
• R69,6 million for trade administration to International Trade and Administration Commission (ITAC)
• R34 million for agro-processing promotion to the IDC
• R23,3 million for policy development within the EDD
• R35,1 million for economic planning and coordination
• R16,3 million for economic development and dialogue and
• R55 million for administration, the Ministry and capital expenditure.

In implementing the New Growth Path, the development finance institutions have a central role to play. They provide a crucial mechanism for forging constructive and productive partnerships with stakeholders to develop our economy. They can leverage private investment on a large scale based primarily on their reserves and balance sheets – a particularly important task given that to date private investment has lagged the overall economic recovery.

The IDC in particular must play a central role to encourage new economic activities, support new job-creation and promote a greener economy. It must think ahead of the market, taking a longer-term and more developmental view than private investors. A summary of our expectations as shareholder has been tabled at the Portfolio Committee.

Last year, I mandated the IDC to review its level and cost of funding, investment focus and turn-around time on applications.

Following this review, the IDC will substantially increase the level of industrial funding and will make available R102 billion over the next five years for investment in New Growth Path priorities. This represents a 160% increase over actual approvals in the last five years and revised upward from the R66 billion in its current five-year projections.

The five-year funding will be allocated as follows:

Green industries: R22,4 billion
Mining and beneficiation: R22,1 billion

Manufacturing: R20,8 billion
The agriculture value chain: R7,7 billion
Tourism, the creative industries and high level services:R14,8 billion
Funding to distressed companies: R2,5 billion
Strategic High Impact Projects: R11,1 billion
Venture capital: R500 million

These allocations will be reviewed annually and adjusted as required.

Within this envelope, the IDC will provide R10 billion to local firms at prime less 3% for projects with a high employment impact (the ‘Jobs Fund’). It will invest between R7 billion and R10 billion in the rest of Africa, in projects with strong forward and backward linkages to our economy.

I have also asked the IDC to consider a facility to address challenges to companies from the strong rand, possibly through the Distressed Sector Fund. I expect a proposal by the end of May.

On the cost of IDC lending, interest on new IDC loans will be up to 100 basis points lower for high development impact investments, which should reduce the average cost of borrowing by 50 points. Based on existing loan profiles, this should save borrowers approximately R500 million over the next five years alone.

Honourable Members, this is a dramatic improvement in available funding, made possible by greater use of the strong balance sheet of the IDC.

Ensuring sufficient funding is only the first of three steps needed for money to flow into productive investment. The other steps are to resolve constraints on investment (for example ensuring adequate infrastructure), and for private sector partners to step forward to access the funding. EDD will work closely with the IDC to address all three steps.

The state also has a role in supporting small and micro enterprise and the social economy, including co-ops. These activities are crucial for providing new economic opportunities, but continue to face difficulties in accessing private financing. Government must provide a comprehensive system of support and incubation for smaller producers, which require access to affordable inputs, markets and skills as well as funding.

The EDD budget transfers R219 million to small business development. In addition, Khula and Samaf will deploy a further R381 million from their own resources, and the IDC a further R2,2 billion to promote small and micro-businesses this year, totalling R2,8 billion in all for small, meduim and micro enterprises (SMME) support. Other departments also have programmes to support small and micro enterprise.

We are planning a two-pronged re-organisation of our agencies in order to strengthen support for small and micro enterprise.

First, Khula currently provides funding to small businesses only through financial intermediaries who on-lend to small businesses. These facilities will now be supplemented by a new direct-lending facility, Khula Direct, with an allocation of R55 million this year.

Second, the President announced our intention to combine Khula, SAMAF and the IDC small business loan-book in order to improve our lending to smaller enterprises. The process has started. We propose retaining Khula as the brand name of a wholly-owned subsidiary of the IDC, with an expanded focus on micro-finance and support for social economy enterprises. We will now consult on this model.

In addition, EDD has partnered with the University of Johannesburg to set up an Academy for the Social Economy to train and mentor cooperatives and other social enterprises.

Honourable members,

As our agencies roll out their spending plans, we can build on our successes.

In May last year we launched the first Jobs Development Bond, with a R2 billion capital issue by the IDC taken up fully by the UIF. The bond provides low-interest loans to private sector projects with above-average employment impact. To date, the facility has approved deals involving R1,5 billion to create 10 047 jobs and save 7 186 jobs, resulting in an employment impact of 17 233 jobs.

Adding in the jobs saved through the Distressed Sector Fund, a total of 24 600 jobs were saved or created in the past financial year and about 38 000 since the two Funds were established.

The Green Economy will be a focus of EDD work in the year ahead. We believe 300 000 new jobs are possible in the green economy by 2020 if we move with speed to provide the right regulatory and investment environment.

The Minister of Energy recently released the Integrated Resource Plan that projects a doubling of South Africa’s energy generation over the next 20 years, with up to 40% of new capacity from green or renewable energy. This will create a market for significant private investment.

To support it, the IDC will provide R25 billion over the next five years for green economy projects, from a dedicated Green Economy fund and through green component projects funded separately. Our new infrastructure will involve localisation plans for components, to maximise employment creation.

This is integrated government: linking infrastructure, industrialisation and development strategies to benefit our people.

A good example is the IDC project to co-fund a solar water-heater project for low-income housing that has installed 38 000 units up from 25 000 reported in the February SoNA debate – while strengthening local manufacture of the heaters. The project will install a further 80 000 units in the year ahead.

In another example of integration, DFIs provided R270 million in bridging funding to small businesses who had won government contracts in the past financial year. Again, we attained more through coherent combination of procurement, service delivery and financing activities.

Cabinet recently revised procurement regulations for the whole of government and public entities to mandate localisation in designated sectors. This is a significant new instrument to promote job creation and industrialisation, including for infrastructure components.

We are establishing a system for all government departments to report on their jobs impact. Existing incentives will be refined where appropriate to ensure greater employment outcomes. Government policy instruments, ranging from tariffs, score cards, licenses to procurement and quotas, will increasingly contain conditions or reciprocal commitments on employment and investment.

Honourable members,

To promote investment in priority sectors, we will approach key institutional investors, including retirement funds locally and abroad, who seek long term growth projects.

Investor interest in the NGP is high, evidenced in the recent visit of the Deputy President to the United States and the visit last year by the President to China. We plan an investment roadshow later this year to the US to showcase opportunities for investment in our productive sectors.

We also aim to mobilise investors to invest in Africa’s development. Africa’s total infrastructure needs are estimated at $93 billion a year. This is a sound commercial prospect given the continent’s growth, as well as a contribution to equitable globalisation. For South Africa, it is a significant market for infrastructure components as well as the long-run benefits of a more developed and prosperous region.

My colleague Minister Rob Davies announced a revised Industrial Policy Action Plan (IPAP2) a few days ago. IPAP2 is a key engine of the New Growth Path, and we work closely with the DTI to ensure its success.

Our two agencies – ITAC and the Competition Commission – also play a crucial role in ensuring a more supportive environment for job-creating growth.

We are improving trade administration through reforms in ITAC, including significant shortening of timeframes for trade remedy and tariff investigations. ITAC also introduced reciprocal investment and employment commitments from applicants who seek either an increase or a reduction of duties.

We also need to harness the energy and resources generated by effective competition in the economy. For this purpose we are upgrading the resourcing for the authorities and also working to ensure a strong legal framework.

The competition authorities stepped up their work to promote stronger competitiveness and tackle monopolies and price-fixing with a number of innovative approaches and new remedies.

The Commission addressed upstream cost drivers in the agriculture and food value chain. It reached a settlement with Sasol in which the company agreed to divest from several fertiliser manufacturing plants, selling five of its six plants, which in turn should lead to greater competition in the industry.

An outstanding example of the Commission’s pro-active approach was the settlement reached with Pioneer Foods on cases related to maize and wheat milling, baking, poultry and eggs. Ending excessive pricing in these areas is critical both to ensure food security and to control inflation. Under the agreement, Pioneer not only agreed to reduce flour and bread prices, but a share of its fine – some R250 million – will establish an Agro Processing Competitiveness Fund to support new entrants and agricultural research and development. These funds appear on our budget as a transfer to the IDC. The Commission has been monitoring prices on flour and bread to ensure the company lives up to its agreement. The company also agreed to increase its new investments by a further R150 million with an anticipated increase in jobs.

The Competition Tribunal levied fines totalling R788 million over this past year, a 61% increase over the previous year.

In the year ahead, a big focus of the competition authorities will be on the construction industry. The Commission identified 70 cases of possible price-fixing or collusion, many involving public infrastructure projects. Some R29 billion worth of contracts are under scrutiny. The Commission has set up a fast-track settlement process and appealed to construction companies to come forward, disclose and settle these matters expeditiously.

This is an important investigation for government since the NGP relies heavily on cost-effective infrastructure, with investments set at over a quarter trillion rand a year. We must ensure the money is not captured by corruption or price-fixing and collusive tendering.

The Competition Act provides - in section 12 A(3) - for the competition authorities to take account of four public interest considerations, which includes employment, in assessing merger applications. They are the impact of a proposed transaction on: particular sectors or regions; employment; the ability of small businesses and enterprises owned by black South Africans to become competitive and the ability of national industries to compete in international markets.

Last year, the Competition Tribunal approved three mergers subject to employment conditions. We welcome the focus by the competition authorities on employment, appropriate in a country with one of the world’s highest rates of unemployment. We will in future emphasise public interest considerations more in engaging with parties to mergers.

Honourable members and colleagues,

Government is committed to developing partnerships to achieve the New Growth Path goals. Indeed, since most employment will be created outside the state, partnerships are critical for our success.

In the debate on the State of the Nation Address, the National Assembly heard of steps by the auto industry to expand levels of investment in South Africa and introduce new models for production in local factories. These were made possible by auto-sector partnerships with government - the DTI’s MIDP incentive scheme, the IDC’s lending facility and the training layoff fund.

In the past year, we also engaged in social dialogue with business and labour, who agreed to work closely with government to unlock the economy’s jobs potential. As a first step, business, labour and government made far-reaching commitments towards a Skills Accord, to be finalised within the next few months.

In the discussions, businesses are requested to train artisans and technicians beyond their immediate needs; use their training facilities to the full; provide internships for graduates from Further Education and Training (FET) colleges and universities and increase expenditure on training.

Organised labour is asked to recognise that persons trained in excess of company needs are not employees but trainees, that SETA governance needs to be improved and that Sector Skills Plans must align to the New Growth Path.

Government committed to set targets for state-owned enterprises to train artisans at significantly higher levels and ensure that businesses can access the National Skills Fund to finance skills expansion.

This is part of a larger set of Accords and agreements being forged around the New Growth Path, covering amongst others the green economy, small business development, savings and investment.

EDD is also committing budget resources to build the capacity of social partners to engage on economic, industrial policy and enterprise development issues.

Honourable members,

We have a responsibility to improve youth employment and green development. Government is developing a comprehensive youth employment strategy.

For this financial year, I will mandate EDD and its agencies to take two steps: provide internship opportunities for young graduates from FET colleges and Universities; and take demonstrable actions to improve their environmental impact. By the end of May I will provide this House with details of those commitments.

Finally, let me briefly turn to the resourcing of the EDD itself. In the year ahead we will strengthen the Department further. On 1 April, EDD had a staff complement of 91 members, which is 93% of the targeted figure for the past financial year, and we advertised for around 50 more positions. In addition, the department must manage substantial transfers to the entities it oversees - the IDC, Khula and South African Micro Finance Apex Fund (SAMAF), the Competition Commission and Tribunal; and the International Trade Administration Commission (ITAC)  as well as develop appropriate procurement policies.

Colleagues and friends,

Let me end by expressing my gratitude to those who have worked to make our young department a success: President Zuma for the foresight in establishing a department focused on economic development and for his support, with that of Deputy President Motlanthe.

Previous Deputy Minister Gwen Mahlangu-Nkabinde (now Minister of Public Works) for her contribution, new Deputy Minister, my colleague over many years Enoch Godongwana and departmental staff, led by the Director-General.

The support of Ministers Nkwinti, Pandor, Davies and Gordhan in the Cluster Coordinating team has been invaluable, including in shaping the content and piloting the New Growth Path through the many processes of government. EDD works closely with many Departments and my thanks to colleagues in the Economic and Employment Sector for so strongly embracing the ideas in the New Growth Path. Thank you to heads of agencies, Ministry staff and members of the Economic Advisory Panel.

I am grateful to the commitment and engagement of the Portfolio Committee of Economic Development.

And finally, I appreciate the support of my family.

We have outlined today very concrete commitments, resources and outcomes from government. To the private sector and to organised labour we say, we are ready to partner and we need your commitment. Invest, work with us.

We know we still have far to go. Implementing the New Growth Path will require effort, dedication and initiative on the part of my department and our agencies. But our achievements so far lay a strong foundation for the work ahead. We can and we will meet the challenge of creating five million new jobs by 2020.

Issued by: Economic Development Department
12 Apr 2011