Economic Development: Minister's Budget Vote Speech

Minister of Economic Development, Ebrahim Patel gave his Budget Vote Speech on the 24 April 2012

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Chairperson
Ministers Nkwinti, Peters, Gigaba and Nxesi
Honourable Members
Judge President Dennis Davis
Officials of DFIs, Commissions and Economic Development Department
Social partners, special guests and members of the public

I have the honour today to present to you the third budget of the Economic Development Department (EDD).

Eighteen months ago Cabinet adopted the New Growth Path as the framework for our economic policies. It places employment - decent work opportunities - at the centre of our efforts and aims to rebuild the productive sectors of the economy, moving away from a consumption-led, unsustainable growth trajectory.

In the past year we focussed on implementation, laying the basis for more inclusive growth and greater social equity, drawing in departments across government and social partners in business and labour.

In January last year, Cabinet set a goal: to reverse the job shedding in the economy with 118 000 job losses in 2010.

How well did we fare last year? The economy did indeed stem the job losses of the preceding two years, and according to StatsSA’s Quarterly Employment Statistics (QLFS), the economy created an average of 1 000 net new jobs a day in 2011 and employment grew by 2,8%.

The employed labour force stood at 13,49 million by year end, from a low of 12,9m in September 2010. This is an excellent start but more needs to be done, particularly to grow jobs in manufacturing and agriculture.

Gross Domestic Product (GDP) expanded by 3,1% in 2011, slightly higher than the previous year, driven strongly by consumer spending. Manufacturing production grew slower than in 2010, rising by 2,4% last year and output has not yet recovered to the levels before the global slowdown of 2009.

Mining production increased in some sectors; however, the commodity price boom of the last few years peaked and prices softened markedly last year.

Fixed investment recovered in 2011, growing by 4,4%, its best performance since 2008 though manufacturing investment is still below levels of four years ago. Foreign investment levels grew.

Demand for imports, particularly consumer items and intermediate goods, increased by 9,7% in volume terms, significantly faster than exports.

China is our largest export market, principally for raw materials but the rest of Africa, Europe and the US remain key markets for manufactured goods.

South Africa is strongly integrated in the global economy: our trade as a percentage of GDP is about the same as that of China and significantly higher than that of Brazil and the United States.

The 2008 global economic downturn therefore had a particularly sharp and negative effect on South African employment.

Global economic prospects therefore matter to us.

The International Monetary Fund’s (IMF) latest World Economic Outlook indicates continued fragile and uncertain global economic performance. China’s growth is slowing and most Organisation for Economic Co-operation and Development (OECD) countries’ growth forecasts are low or negative.

We must thus reduce our vulnerability by diversifying the economy’s sources of growth, rely more on the domestic market, local production and African integration, and ensure greater balance in our external economic relations.

Honourable Members

I wish to highlight progress under nine New Growth Path themes and conclude with the department’s spending proposals for the year.

Industrial finance is identified as a critical engine for industrialisation and jobs in the New Growth Path.

The Industrial Development Corporation (IDC), is the country’s largest industrial funding agency and two years ago, we identified the key challenges it faced.

Working closely with management, we began a systematic reorientation of the IDC to improve its impact.

Significant progress has been made, which we can all be proud of.

Last year, the IDC increased its investment target to R102 billion over five years, a substantial increase over past rates of investment. It introduced a new low-cost lending facility for jobs-rich projects, at prime less three percent. It refocused investment to the New Growth Path industrial sectors.

Over the past twelve months, IDC approvals of funding grew strongly, from R8,7 billion (bn) to R13,5billion, an increase of 55%.

At this rate of growth, the IDC is confident it will reach its new investment and lending targets.

The IDC has become faster in processing applications - turnaround times of approvals improved from an average of 82 days to 50 days.

We monitor developmental targets, starting with jobs impact, every quarter.

It is my pleasure to advise that the IDC has issued a Jobs Bond to the value of R4 billion, taken up by the Unemployment Insurance Fund (UIF), R2 billion in 2010, and based on its exceptional success, a further R2 billion this year, to promote lending with a strong jobs impact.

In November, we reconstituted the Board of the IDC and brought in fresh talent and new skills drawn from the engines of the economy, the business sector and trade unions, to reflect a diversity of experience and a strong developmental focus.

I thank the previous board members and wish the new Board under Chairperson Monhla Hlahla well.

Let me highlight some significant investments.

IDC support for Ford encouraged the company to invest R3,4 billion here, and select SA as one of only three global production hubs for the Ford Ranger, for export to 148 countries, supporting jobs in Ford and its supplier companies.

The IDC financed a project to use discarded plastic bottles as feedstock to produce polyester fibres for domestic use and exports, creating 110 jobs in the Propet factory in Milnerton. With additional funding, 90 new jobs will now be created by July, with an estimated 5 000 jobs in the informal sector for people who collect and recycle the plastic bottles.

The IDC provided support to Bell Equipment during the 2009/10 economic downturn, which sustained the company during a difficult period. I visited the factory in Richards Bay recently, and saw the company expanding production of earth-moving equipment. It rehired 1000 workers in the past 18 months, bringing its employment to 3 500 persons.

The expansion of an existing large shallow open-cast platinum mine and processing plant in North West, with potential for downstream beneficiation in future, will create about 10 000 jobs in construction and mining, and the local community will own 27% of the expanded mine.

The Agro-Processing Fund approved nine projects for a total of R66 million including a small pasta manufacturer, two dairies and a producer of dried fruits and nuts.

The jobs impact of IDC work is encouraging, with net approvals last year expected to create 30 127 new jobs and save a further 11 000 existing jobs.

I am pleased to announce that the IDC will now issue a R5 billion Green Bond to be taken up by the Public Investment Commission (PIC), with a 14 year tenure.

I wish to thank the IDC management for their efforts to transform the Corporation to reflect new shareholder requirements.

The next area, Honourable Members, is competition policy, which is given prominence in the New Growth Path.

We inherited an economy with high levels of what we may call “lazy capitalism” characterised by monopolies, price-fixing, market segmentation and corporate collusion.

A dynamic economy that can create large numbers of decent jobs require strong, competitive enterprises.

Over the past year, the Competition Commission dealt with 472 cases. I wish to highlight the construction industry probe, which found widespread evidence of collusion. The Commission identified about 200 different projects where bids were effectively rigged, including Soccer World Cup stadia and some freeways. Twenty one construction firms have come forward to admit involvement, including the top 5 construction firms.

The Competition Tribunal granted consent orders worth R345 million in the past year and heard 63 merger cases. In 11 cases, it imposed conditions, two thirds related to competition conditions and four cases with requirements around employment.

Competition is vital but our legislative framework does not subscribe to a trickle-down approach that assumes competition alone will ensure desired developmental impact.

The Act actively mandates the competition authorities to consider public interest criteria, including impact on employment and linked industries when evaluating proposed mergers and acquisitions.

We emphasise these legally-mandated criteria in our engagement with the competition authorities.

A stronger public-interest competition regime is emerging.

The settlement with Pioneer Foods provided for reparations to consumers through lower prices of bread and flour. R250 million of the fine imposed was set aside for an IDC-managed Agro-Processing Fund which will promote new entrants and job creation.

When Japanese company Kansai took over local paint manufacturer Freeworld Coatings, it undertook to retain employment and industrial capacity in South Africa and invest in expanded production and research and development.

Last week I met with the President of Kansai and he was optimistic about the prospects of the company locally, and is working with us to more than double industrial capacity and jobs.

Walmart applied to take over Massmart in late 2010. We requested a binding commitment to support and strengthen local suppliers and respect worker rights. When it declined to do so, we argued the case at the Tribunal and Competition Appeal Court.

These efforts had a very positive impact.

More than 500 retrenched workers are reinstated. A supplier development fund has been mandated - its terms are the subject of an expert investigation.

The thoughtful judgement of the Competition Appeal Court expanded the jurisprudence and endorsed our view that, in considering mergers and acquisitions, public interest criteria in the Act are not cosmetic but fundamental. We nominated Nobel Laureate Professor Joseph Stiglitz as the government expert on a Committee that will report to the Courts on appropriate conditions within the next few months.

Of course, Honourable Members, these interventions have not been without controversy and criticism. But government cannot take the easy road when doing so will damage employment and industrial capacity.

Honourable Members, I turn now to small business development where the New Growth Path identified the need to support entrepreneurship with a more rational and integrated institutional framework for small business public funding.

I was particularly pleased to launch the Small Enterprise Finance Agency (SEFA), yesterday and welcome the chair of the Board Ms Sizeka Rensburg and newly-appointed Board members.

The new agency consolidates Khula Finance, the SA Microfinance Apex Fund (SAMAF), and the IDC small business lending book. SEFA will offer loans initially up to R3 million.

By reducing the number of agencies, we estimate annual savings in excess of R20 million through cutting duplication of costs and services. That money can flow into more lending to small businesses rather than the bureaucracy.

But it is not simply cost-cutting that motivated the amalgamation – we want a better service to small businesses, a one-stop shop for funding.

The China Development Bank and the IDC signed an agreement today to access US$100 million for small business lending at favourable terms based on a 10 year tenor. This is about R800 million and will boost the IDC’s capacity to support SEFA.

The availability and cost of funding to small businesses is vital but not sufficient. More need to be done to strengthen technical skills and promote market access.

We were pleased therefore to sign a cooperation Agreement with the SA Institute of Chartered Accountants today, to train 100 Accountants to support small businesses and to set up a Business Hub to provide technical assistance to small and medium enterprises (SMEs). Government will make R6 million available to support this important initiative.

SEFA will have R2 billion available over the next three years for lending, through fiscal transfers, reserves and a R921 million shareholder loan from the IDC.

I visited Roodepoort with Deputy President Motlanthe recently, as part of the anti-poverty campaign. We met Mrs Fikile Zikhali who ran a shoe-manufacturing cooperative, Ujima Bakwena. They faced difficulty with accessing leather and with their technical capacity. Earlier today, Mrs Zikhali signed an agreement with Mossop Leather and United Fram that will save the coop at least R200 000 a year.

The green economy, Honourable Members, is shaping the next wave of industrialisation and is a key sector in the New Growth Path (NGP).

Following the release of the Green Jobs Report, we concluded an Accord on the Green Economy in November last year, which signalled a partnership between social partners to seize this opportunity for South Africa. It contained clear commitments by each partner, with measurable targets.

About 250 000 solar water heaters have now been installed in SA, a solid step towards the million target. This has been a partnership between a number of departments and public entities.

We worked with industry to manufacture more of the units in SA. In January this year, the South African Bureau of Standards (SABS) approved a new factory in Alrode with a capacity to produce 8 000 units a month.

The IDC committed about R5 billion in industrial funding for projects in the DoE green energy programme, including to support entry of community empowerment groups.

The department unblocked projects in green energy stuck in bureaucratic delays, for example a wind farm in Coega in the Eastern Cape.

South Africa hosted a very successful COP17, EDD was part of the technical team in the negotiations and the showcasing of South Africa’s green economy potential to visitors and investors. A communication package of visuals, posters and touch-screen videos has been developed. This exhibition is on display at parliament and I encourage Honourable Members to visit the stand. It will be taken on a provincial road-show to bring the green economy message to our people.

I turn next, Honourable Members, to infrastructure development, the first jobs driver in the NGP.

Last year, Cabinet set up the Presidential Infrastructure Coordinating Commission, headed by the President and Deputy President. It produced an Infrastructure Plan, which integrates the actions of the state and lays the basis for economic development, job creation and social inclusion.

Last week, we released details of the plan and its 17 Strategic Integrated Projects at the Economic Development Conference on Infrastructure, where it was widely and very warmly supported by the private sector, trade unions, community groups and academics.

At the request of the President, I chair the Secretariat responsible for the day-to-day work of the Presidential Infrastructure Coordinating Commission (PICC), and draw on the department for planning, costing and evaluation services, and to work with a technical team drawn from people across the state.

It has been a real privilege to work with a committed group of Ministers and Deputy Ministers on the PICC.

Honourable Members, localisation is vital to reverse deindustrialisation pressures and strengthen our capacity to design and make things.

Steps have been taken to implement this.

We signed a local procurement Accord with the business sector, including the 85 largest companies, and with labour and community partners, which sets an aspirational target of 75% local content with concrete commitments, the first agreement of its kind in South Africa.

Cabinet approved procurement regulations that require all public entities to procure designated goods only from South African manufacturers. The first designated products are bus bodies, power pylons, rolling stock, canned vegetables, clothing, textiles, footwear and leather, set-top boxes and oral solid pharmaceuticals.

The Infrastructure Plan has a strong localisation component, for the purchase of trains, boilers, earth-moving equipment, turbines and other key inputs.

My colleague Minister Rob Davies recently released the updated version of the Industrial Policy Action Plan, which is the manufacturing driver of the New Growth Path, to increase competitiveness of local companies.

South Africans do not always know where to buy locally produced goods and services. To address this, we commissioned Proudly SA to drive more focussed marketing and buy local campaigns and compile a database of local suppliers. To this end, EDD has made available R8 million in funding. We have today reached an agreement with a local manufacturer to buy conference files at a lower price than the imported product and make a saving of about R35 000 a year to boot.

Honourable members, the clothes we wear, the cars we buy and the food we eat all provide an opportunity for us to make a difference.

I turn next to African development, a key means to achieve the NGP goal of widening and deepening our markets.

Ten months ago, President Zuma hosted talks of 26 African heads of state and government to promote a free trade area involving 600 million people across the continent, from the Cape to Cairo. It will create a large market for our goods and an opportunity to expand continental economic development. The summit agreed to finalise terms within three years.

Complementing this, the PICC identified eleven infrastructure projects, ranging from road transport along the east coast of the continent, and from Angola, as well as energy projects such as the Democratic Republic of Congo’s Grand Inga and Mozambique’s Cesul project, and the Lesotho Highlands water project.

The IDC and Development Bank of Southern Africa (DBSA) continue to invest in other African countries. Currently, the IDC portfolio extends to 20 other countries on the continent, with a market value of R19 billion.

Last year we worked for the first time with the Namibian competition authorities, on the Walmart matter, deepening policy coordination within the region.

Honourable Members, economic development rests on skills and infrastructure, hence their importance in the NGP.

In 2009, EDD set up a training layoff fund, now administered by the Department of Higher Education and Training (DHET), which provided support to workers faced with retrenchment.

I recently visited the BMW plant in Rosslyn in Pretoria to launch the new 3-series production facility. The company had used the training layoff fund during the recession and with economic recovery, it invested R2,2 billion in upgrading the operation, almost doubling its production of cars to over 90 000 units, 85% aimed at the export market and it is employing 600 additional workers in well-paid decent jobs.

In July last year we concluded a National Skills Accord working closely with Minister Nzimande and social partners.

EDD completed a survey of engineers, artisans and other key skills in the public sector recently and are developing a skills framework with DHET for infrastructure.

EDD sponsored a course at Wits University which provided training for 90 provincial public sector officials.

Finally, Honourable Members, I address the NGP’s biggest value-add - its call for integration and coordination across government.

The most successful example in the past year was the formation of the PICC which brings together half of Cabinet, the nine Premiers, metro mayors and South African Local Government Association (Salga), providing a structure where all economic decision-makers in the public sector sit together to drive implementation.

Other examples of coordination which include EDD are Inter-Ministerial Committees nationally, MINMECs which bring Ministers, MECs and local government representatives together, and social dialogue.

We met with social partners in the past twelve months to draft various Accords to implement the New Growth Path. I wish to thank the leaders of Business, Labour, the Community constituency and Nedlac for their hard work.

Last week EDD convened a Conference on Infrastructure and Development that provided an excellent platform for ideas and proposals to strengthen the Infrastructure Plan.

At global level, the department supported my work with BRICS colleagues on economic development.

Department

I wish now to turn to steps taken to improve the department’s internal capacity and Budget spending this past year. EDD staff numbers increased by 26%.

We also tapped into additional personnel without incurring any cost for the department, through secondment of staff on a part or full time basis by other public agencies to the PICC technical team hosted at EDD, and by drawing on the staff of the IDC. This is part of building a 21st century delivery capacity, using networks of talent and capacity, not only using own staff.

The department’s projected spending for financial year 2011/12 excluding transfers is expected to be about R91 million, or 105% higher than the preceding financial year. The department’s capacity to utilise its allocated Budget has significantly improved.

Looking forward, the key priorities in the year ahead are to implement the Strategic Plan and strengthen the various areas of work referred to today. I wish to single out a few areas.

1. Roll-out of the infrastructure plan of government, focussed on implementation and consensus building

2. Strengthen institutional capacity: in EDD to strengthen its staff and impact; in the IDC to develop its project pipeline pro-actively; in the competition authorities to conduct investigations into market abuse; and in ITAC to monitor the impact of trade flows.

3. Focus on the employment impact of policies: of the finance agencies, the competition authorities and trade commission (ITAC).

4. Improve small business performance, including through step-by-step rollout of SEFA across the country, strengthen its direct lending capability, increase the disbursement to small business and work to lower the costs of bureaucracy and overheads. The department will commission a study on how to improve the economic development impact of small business spending across the three spheres of government and place proposals before Cabinet. I have today established an advisory committee to put proposals to me, consisting of Mr Thami Mazwai, Ms Sizeka Rensburg and Ms Monhla Hlahla.

5. Finalise with the Department of Trade and Industry further support for coops.

6. Strengthen links with provinces and local government, including via the Minmecs and PICC. This year we will train 200 local government officials in economic development capacity, drawn initially from five municipalities - Mogale City, Govan Mbeki, Pixley Ka Seme, Ethekwini and Joburg

The budget allocation for the 2012/13 financial year amounts to R672.7 million, of which R523 million goes as transfers to agencies and institutions associated with EDD. The department’s budget for operations and capital spending is R149 million.

We propose to distribute the Budget as follows:

• R169 million small business funding to SEFA;
• R172.8 million for the competition authorities;
• R73.7 million for trade administration to ITAC;
• R108 million to the IDC for the Agro-processing Fund;
• R60.1 million for administration, the Ministry & capital expenditure;
• R29.1 million for economic policy development;
• R42 million for economic planning and coordination and
• R18.1 million for economic development and dialogue.

Honourable Members

South Africa today is vastly different from the country that the founding members of today’s African National Congress lived in when they met in Mangaung in 1912 to resist the planned 1913 Land Act.

We pay tribute to those who fought for a better future for all South Africans. I wish to recognise and welcome three visitors to parliament today.

Ms Ann Kotane, daughter of the late Moses Kotane, Mrs Martha Mahlangu, mother of the late Solomon Mahlangu and Lethu Ngcobo, a scholar from Durban.

Fifty years ago this past December, Chief Albert Luthuli, ANC President, stepped on a plane to Oslo, to receive the Nobel Peace Prize, the first South African to do so.

In December last year, Geoffrey Qhena and I made an appeal for contributions to provide solar water geysers to a nominated township or rural area. We raised R802 000 from corporates, unions and visitors to the EDD stand at COP17.

We selected Ilhembe as the area where 500 solar water geysers would be installed. Groutville, home of Chief Albert Luthuli, is in Ilhembe.

Installation started in late January, using locally-produced water-tanks, and all 500 units were installed six weeks later, bringing hot water to a poor community and paying tribute to the memory of Chief Luthuli.

But there is one more element to this story.

During Cop17, Lethu Ngcobo’s mother brought him to visit the Expo. He saw the board for pledges to install solar water geysers, and pulled his mom by the arm and said, let me give some money. He took R10 from his pocket and paid it over to the staff.

This young man showed a spirit of solidarity that we need as we build an inclusive economy able to create five million new jobs by 2020.

Honourable Members, please join me in applauding young Lethu.

I wish to acknowledge the support given by President Zuma and Deputy President Motlanthe the past twelve months. Colleagues on the PICC and the Economic Cluster, including Ministers Nkwinti, Davies, Pandor, Gordhan, Gigaba, Nzimande, Peters and Ndebele, Nxesi, as well as Rob Davies, have all made EDD’s work a success.

I thank my ex Deputy Minister Enoch Godongwana, previous and current acting Directors-General Richard Levin and Saleem Mowzer, Heads of Agencies, staff in the Ministry and Department for the work they performed during this period. I thank members of the Portfolio Committee for the always friendly spirit in which you have engaged with me and to my family for their support.