Minister of Trade and Industry Budget Speech
15 May 2018
Minister of Trade and Industry, Dr Rob Davies, gave his Budget Vote Speech on the 15 May 2018
Deputy Minister Magwanishe
Director-General and officials of the Department of Trade and Industry and the
Council of Trade and Industry Institutions
Leaders of Organised Business and Labour
In the SONA delivered on 16 February 2018, President Matamela Cyril Ramaphosa spoke of a “new dawn” in which our country would put behind it the era of diminishing trust in public institutions and weakened confidence, and come together to promote higher levels of more inclusive economic growth.
What then is the contribution of the dti? We have long argued, and maintain, that achieving higher levels of more inclusive economic growth requires that we structurally transform our economy both to move to a higher value added growth path and to create more opportunities for more effective participation by all our people.
This year sees the launch of the 10th iteration of the Industrial Policy Action Plan (IPAP). In addition to outlining the Key Action Plans for this financial year and the next two, our 10 th IPAP provides an occasion for sober reflection and assessment of the dti’s trade and industrial policy interventions, over the past decade.
Madam Speaker, between 2010 and 2016, value-addition in Manufacturing grew by just 1% per annum. Over the same period, investment in the sector declined by 1.3% and employment by 0.7% per annum. However, both labour and capital productivity grew by more than 1.5% per annum while exports flourished, growing at over 5% per annum.
What do these statistics tell us? On the positive side the fact that that the export performance is substantially better than expected gives us, we would argue, a degree of comfort that our Manufacturing sector is fundamentally internationally competitive.
Also the fact that our labour productivity has grown consistently confirms that – although we have significant skills challenges in specific areas – our people are perfectly capable of operating effectively in an increasingly complex manufacturing environment.
However, the growth of manufacturing as a whole – at 1% per annum – is simply too low to propel our economy onto a new, higher value added growth path. It is too low to generate sufficient jobs in the sector itself, or taking account of the significant job multipliers in related service sectors, make its potential contribution to reducing unemployment in our country. Investment in the sector – as in our economy as a whole – has-been underperforming requiring the kind of “big push” on investment now being led by the President.
Honourable Members, through IPAP we have saved many firms and jobs. Through IPAP have protected industrial capabilities which are indispensable to SA’s long-term growth prospects. Through IPAP we have painstakingly nurtured “new” areas of economic development.
The lessons we draw from a decade of IPAP are the following:
- First, Industrial Policy Works where it is adequately resourced and where public sector funding is deployed to support industry with appropriate conditionalities. Our incentive support has saved critical industrial capabilities and jobs in a variety of sectors, especially in the aftermath of the Global Economic Crisis. The Manufacturing Competitiveness Enhancement Programme we introduced after the Crisis, (to take but one example) has assisted 1,154 firms and retained over 250,000 direct Manufacturing jobs.
§ Second, Industrial Policy Works if it is carefully designed, reviewed and responsive to dynamic global and domestic markets. A case in point is the automotive industry, where the Automotive Production and Development Programme has supported investment by both original equipment and component manufacturers of over R48.3bn since 2011 with exports hitting a record high of R171bn in 2017.
§ Third, Industrial Policy Works where there is policy certainty, programme alignment and integrated support across government for the industrialisation effort. Our response to the global steel glut is testimony to this. Through government interventions such as designation of steel for Government procurement, import tariffs, and funding support through the IDC, we have assisted the sector to weather the worst of the global steel glut.
§ Fourth, Industrial Policy Works where there is close collaborative relationship with the private-sector and organised labour. This has been evident in the Clothing, Textile, Footwear and Leather sectors where Government, Business AND Labour have joined forces to build a sector, once widely written off as a “sunset” industry.
Madam Speaker, the debate in both Government and the private-sector is now no longer whether to pursue industrial policy, but rather how to enhance its impact in manufacturing, and apply its principles to other sectors in order to unlock higher levels of more inclusive economic growth. One of the key questions we are now confronting is how to deploy our industrial policy tools to unlock our township economies, and how to maximise the developmental impact, especially in terms of jobs. As we prepare for the Jobs Summit, our negotiations with social partners will require us to make tough choices as our fiscal outlook remains constrained, but we remain positive about South Africa’s improving economic outlook.
This is partly because for the first time in many years, global economic prospects have begun to improve substantially. The International Monetary Fund (IMF) has raised its global economic forecast and now expects the global economy to grow by 3.1% in 2018, while Emerging Markets are expected to grow by 4.5% and commodity-exporting Emerging Markets are forecast to grow by 2.7% in 2018 as commodity prices continue to recover.
In recent years, the gap between SA GDP growth and Emerging Market growth had widened, primarily due to policy uncertainty and declining business and consumer confidence. In 2018, we have fortunately seen this gap beginning to close with National Treasury forecasting that the SA economy will grow by at least 1.5% in 2018 – and more if we get some of our programmes working more effectively.
The greater optimism in the South Africa economy is underpinned by improving confidence levels. We have seen the Purchasing Manager Index breaking the 50 index point threshold as the year began, suggesting that conditions in the domestic manufacturing sector are more favourable.
We are also encouraged to see a steady recovery in the Business Confidence Index (moving to 45 in Q1 of 2018 from 34 in Q4 of 2017). The international bank, Goldman Sachs has characterised SA as ‘the hot ‘equity market of 2018. Our challenge is to maximise the renewed confidence to implement policies that will support growth and job creation thereby addressing the triple challenges facing our country.
Already, South Africa is on a path to recovery and the government is taking action to support and sustain this trajectory. In this regard we have refocused our investment approach by enhancing investment facilitation services through the establishment of a professional inter-governmental One Stop Shop center. Its objective is to serve as a single entry point for investors in need of assistance with regulatory compliance and also to change the decision process by increasing transparency, clarifying regulations and improving the quality of service. The One-Stop Shop housed at the dti Campus in Pretoria is now fully operational. We have launched three provincial One-Stop Shop centres in the Western Cape, KwaZulu-Natal and Gauteng. We will roll out One Stop Shops in other provinces and also scale up proactive investment attraction and retention to build confidence and improve investment climate. As the President announced in his State of the Nation address, Government will be hosting an investment conferences this year. Ground work in preparation for the conference is at an advanced stage.
the dti is also contributing to the Youth Employment Service (YES) launched by President Ramaphosa in March 2018. The YES programme seeks to create one million paid internships, thereby creating the opportunity for young people to receive on the job training and crucial work experience. Companies participating in the YES initiative will be rewarded with additional BBBEE points and the notice providing for this is now out for public comment.
Honourable Members, I am happy to report that the Special Economic Zone (SEZ) programme continues to gather pace. Time constraints allow me to focus on just one SEZ. In 2017, the once dubbed ‘white elephant’ SEZ of COEGA recorded a total of more than 100,000 jobs created since its inception in 1999. Coega is home to 42 operational investors with an investment value of over R7 billion. Investment commitments, including projects already under construction, amount to over R12 billion and include BAIC, OSHO Cement, and Hella Automotives. Coega has received the coveted title of “Best International Trade Marketing Specialist” at the sub-Saharan Enterprise Awards in 2017. This makes Coega South Africa’s first Sestos win this prestigious international award. We are of course mindful that President Ramaphosa has set a target of USD100 billion in domestic and foreign investments over the next 5 years. This will require the designation of further SEZs and I am pleased to indicate that this year we plan to designate at least two more the Nkomazi SEZ in Mpumalanga and Atlantis in the Western Cape
Our efforts to promote industrial decentralisation also include our industrial park revitalisation programme. Through this we have been able to turnaround some of these long-neglected Parks and in so doing support the many thousands of jobs on these Parks. Our experience confirms the need to rethink how we view economic activities in townships and rural areas. We need to realise that we can unleash pent-up economic potential in these areas with relatively modest investment in essential economic infrastructure and supporting access to markets. Work is underway to develop a co-ordinated, government-wide programme of action to unshackle Township Industrialists. We have also budgeted R250m to revitalise further industrial parks in this financial year, including Dimbaza in the Eastern Cape and Siyabuswa in Mpumalanga.
Honourable Members, incentives are an indispensable part of our industrial policy toolkit. the dti’s incentives reach every major manufacturing subsector. The World Bank reported in 2017 and I quote “overall, the additional investment generated by tax incentives exceeds the government’s foregone revenue …furthermore; the existence of large employment multipliers brings the fiscal cost of job creation to a fraction of total labour costs, especially in the manufacturing sector.”
We agree with the World Bank’s assessment. Our sectoral interventions are indeed making a very substantial contribution to the economy. From 2011/12 to January 2018, private sector investment attracted through the dti’s incentives amounted to about R326 billion and are estimated to have created and retained approximately 670,994 jobs.
Just in the last financial year, the dti supported investment worth over R40 billion through our incentive programmes.
Highlights include the Automotive Investment Scheme (AIS) which has leveraged major investments such as:
- Beijing Auto Works’ expansion of the New Era Facility in Springs, Gauteng to produce the BAW Sasuka taxi for the Southern African market. The investment into this expansion is estimated at R250 million and will create 100 new jobs.
- Ford SA’s R3 billion investment to meet rising domestic and international demand for its Ford Ranger pickup truck.
- We also welcome Isuzu Motors purchase of the Struandale plant in Port Elizabeth which belonged to General Motors. We know that this investment by Isuzu means that 1,000 jobs in the facility and 3,000 jobs in the value chain will be saved.
Madam Speaker, these major investments have come about through the provision of competitive but certainly not excessively generous incentives. In addition, we are constantly pushing local companies to do more in terms of investment, job creation and transformation. A good example of this is the evolution of VWSA’s commitment to concrete radical economic transformation, through its undertaking to support the entrance of Black Industrialists in the automotive value-chain through their Ntinga empowerment project which is in line with the Enterprise and Supplier Development element of the Broad-Based Black Economic Empowerment Codes of Good Practice.
Similar initiatives by other vehicle manufacturers must be advanced through these kinds of partnerships between the public and private sectors, while at the same ensuring higher and higher rates of local value-addition. The discussions on the successor to the APDP are progressing well and further announcements in this regard can be expected in the coming year.
the dti continues to develop new sector-specific incentives to provide focused support in job-rich value-chains. In the coming year, we will announce a new R500m incentive which focuses support on the metal and engineering value-chain which has been severely impacted by the electricity price hikes and slowing demand from the mining sector. As we have shown with our Clothing and Textiles programme, judicious use of incentives and other industrial policy tools can stabilise sectors in distress and position these for growth.
The clothing, textiles, leather and footwear (CTLF) sector has been successfully turned around through our partnership with organised Business and Labour. The combination of incentives and the designation of clothing for Government procurement has saved the sector from disaster. In addition, the partnerships with local retailers have begun to bear fruit as the benefit of a strong, local industry capable of quick turnaround times has become clear. Between 2015 and 2016, the clothing sector created over 3,000 jobs and we expect this trend to continue as the economy picks up.
In the leather sector 22 new factories were opened, supporting 2,200 jobs. Manufacturing value addition increased by 61% while productivity grew by 22% in those companies that received our incentives. In addition, 2national and 8 regional clusters have been supported through the programme which brings government together with the private sector across the textile, apparel manufacturers and retailers value-chain, together with labour to leverage local supply chain development, fast turn around and ‘quick fashions’.
Honourable Members, we implemented the Black Industrialists programme in the face of stiff opposition. I am proud that we chose to ignore the doomsayers and the results of the programme speak for themselves. The Black Industrialists Scheme announced in 2016 has exceeded our expectations. We had set the target of supporting 100 Black Industrialists by the end of the 2018/19 financial year. As of today, I am pleased to be able to report that we have already approved 102 Black Industrialists for financial support and 48 companies received market access support. This leveraged R8 billion in investment and jobs created and retained are projected to exceed 18,484 jobs.
Building on the success of the inaugural rollout of the Black industrialist Programme, we are targeting support to a further 100 Black Industrialists over the next two years. This programme remains vital to rebuild, remove trade barriers, modernize and improve prospects of growth for majority black owned and managed manufacturing companies in this economy.
Lessons from the inaugural rollout requires that support be expanded and differentiated for various categories of Black Industrialists namely, the pioneers, catch up and infant stage industrialists.
The pioneers consist of black industrialists approved during the inaugural window of the programme up to March 2018. For these BIs who have completed the 1st phase of their investment, support will be provided through a post investment office which will trouble shoot any barriers including regulatory hurdles to fast track their development. This office will ensure interaction and coordination between the state and each BI to resolve challenges quickly, the solutions of which will be generalised to benefit black business in particular and the manufacturing sector more broadly.
The catch up group is essentially the 2nd wave of the Black Industrialist Scheme which will run for the MTEF 2018/19 to 2020/2021. It will entail financial support for projects in-line with approved guidelines and the available non- financial support. Eligible projects will be expansion and green field projects with potential (if supported) to grow fast in a relatively short time frame. The projects will be supported through a combination of grants, loans and markets access interventions.
The 3rd leg will involve working with the department of small business development to align some of their programmes to support Infant Stage black industrialist. The support will be targeted at small companies in the manufacturing sector (particularly those in the township and rural areas) to improve their performance and prospects of growth into Black Industrialists. This leg will also involve work with other departments to develop Black industrialist type programmes in accordance with each institution’s mandate. These will include the Department of Agriculture, Forestry and fisheries, Minerals Resources, Public works, Telecommunication and postal services.
We will increase focus on access to markets particularly for the pioneers. In consultation with shareholder departments, we will set targets for SOCs for procurement of locally manufactured goods from Black Industrialists. In addition, we will expand designations in value chains where Black industrialists participate.
We will use the equity equivalent programme more strategically to support Industrialists with technical assistance and market access.
I will convene a dialogue with all approved Black industrialists who have finalized the 1st phase of their investments to discuss further areas of collaboration to grow the Black Industrialists Programme. This dialogue will include relevant entities within and outside of Government.
The emergence of the Business Process Services sector globally has presented us with an opportunity we have been seizing for several years now. Working with the private-sector (and foreign investors) we developed a support package which has essentially created a new sector in South Africa. Today, an estimated 220,000 people – many of them young people – are employed in BPS. South Africa has received numerous accolades including the European Outsourcing Association’s Offshoring Destination of the year award in 2013; the National Outsourcing Association’s destination of the year award in 2012 and the Global Sourcing Association awards in London. This year, South Africa will be hosting the Global Sourcing Association Summit; this is a confirmation of the role that SA plays in the global BPS sector.
We remain committed to stimulate manufacturing sector through the localisation programme which is an important tool for industrialisation. Looking back at localisation, the picture as of now is that we have designated with various percentage requirements ranging from 100% in clothing and textile products. We have designated a total of 23 product types that have been identified to have been procured by different organs of state from local bodies. Greater strides have been made where the policy was effectively implemented. For example, I can report that between 2015 and July 2017, over R50 billion was spent on locally produced goods that might otherwise have been imported. Major spending was on the rail rolling stock fleet procurement which amounted to over R40 billion.
However, we also acknowledge that the implementation of local content has been uneven across all spheres of government. As hearings undertaken by the Portfolio Committee have established, willful non-compliance with government policy has led to enormous import leakages to the domestic economy. We are currently working with other departments including the SOC’s to determine where government departments, SOC’s and agencies purchase goods and services and also to determine the level of local content procurement versus imports.
We are also working with a newly invigorated Proudly South Africa to capacitate industry practitioners and other stakeholders on local content implementation, while building a greater understanding and support for public procurement amid supplier development and a national Buy Local campaign.
Madam Speaker, changes that are taking place in the global trade environment have profound implications for South Africa. Powerful countries are now seemingly moving away from rules based multi-lateralism in pursuit of a blatantly partisan agenda seeking to prioritise their trade and commercial interests, while subordinating the interests of the rest of the world, and Africa in particular. There is an increase in the use of non-tariff barriers by many countries and the use of trade remedies being justified in terms of trade imbalance or national security concerns. Threats of trade wars between major economies are emerging we have already become “collateral damage” in problems not of our own making in the steel and aluminium sectors. The escalating tit-for-tat is sending shockwaves across international markets, raising concerns over a potential lose-lose outcome for the global economy. Of key concern, is the disregard of multilateral rules and principles that underpin international trade.
In our view, for trade to be fair, it must encourage the integration of countries, especially developing economies into the global system of trade in a way that supports and encourages economic diversification on. This is critical to meeting Africa’s development aspirations. When the Doha Development Agenda (DDA) was launched in 2001, it proclaimed that the “needs and interest of developing countries” would be placed “at the heart of the work programme”. These principles remain in our view essential if the global trading system is to contribute to the promotion of inclusive growth and sustainable development. But in the detailed Doha Round of negotiations we saw this principle largely ignored in practice with the result that the Doha Round is now on the verge of collapse.
Furthermore, the 4th Industrial Revolution: the emergence of digitized technologies like robotics, 3D printing, the Internet of Things etc., are predicted to lead to disruptive changes in production across entire value chains. These changes are taking placing in the context of a visible absence of inclusive growth.
Madam Speaker, in the context of unilateralism and threatening trade wars, the development integration agenda we are pursuing in Africa becomes even more relevant. Africa therefore needs to prioritise the implementation of the development integration agenda that combines market integration with cooperation to promote industrial and infrastructure development. There is also a need to both defend and pursue Africa’s trade and developmental interest, including by strengthening coordination and alliances with other like-minded WTO Members to preserve policy space. Sustainable development, Honourable Members, will only be possible if we focus on industrial upgrading, economic diversification and employment generation. This will require the use of all policy tools, hence the dictates that we preserve policy space needed to support industrial development. It also requires a developmental approach to trade policy. Fundamentally, the way we set tariffs must support industrial development.
Boosting intra-Africa trade and building an integrated African market by leveraging on a market of over 1 billion people with a GDP of over US$3.3 trillion, is a key priority for South Africa. Given escalating trade protectionism in key export markets around the world, regional integration arrangements offer South Africa an opportunity to expand into new markets.
In keeping with the development integration agenda, African countries are pursuing industrialisation so as to promote structural transformation of their economies. South Africa needs to partner with the African continent in its ambition to industrialise. In this regard, South Africa pursues an investment led strategy into the continent. An investment led strategy would imply that focus should be on developing a focussed outward investment approach into key sectors in the continent. Most of SA’s investments are concentrated in Southern Africa due to the SADC Trade Protocol and the Investment chapter in the Finance and Investment Protocol. These should be used as building blocks for an Africa-wide FTA and investment framework. SADC is therefore an important platform on which to build from. The investment-led strategy will have a direct correlation to export promotion as it will promote the development of regional value-chains on the basis of complementarities. The advantage of this strategy is that SA will be contributing to industrialisation of the African continent while also achieving its own development objectives. In this regard, South Africa, in line with the development integration approach, will negotiate FTAs that will accommodate Member States’ sensitivities to ensure that countries have the necessary policy space to promote industrial development.
The agreement establishing the African Continental Free Trade Area was signed by 44 AU member states on 21 March 2018. Due to outstanding work in the negotiations and the need for the agreement to be subjected to domestic legal processes, South Africa was not yet in a position to sign the agreement at the time of the recent Extra-ordinary Summit of African Union Heads of State and Government in Kigali, Rwanda. However, South Africa is committed to the agreement, we have urged the African Union Commission to conclude the outstanding work as soon as possible in order to enable signature of the complete agreement at the earliest available opportunity and to commence Phase II of the negotiations in August 2018.
Madam Speaker, in the context of markedly improved growth prospects for Africa, alongside intensifying global competition for access to Africa’s resources and growing markets, the need to integrate African markets is increasingly important. The TFTA and the AfCFTA both offer an opportunity to create larger economies of scale, a bigger market and improved prospects for the African continent to attract investment and boost intra-Africa trade.
In respect of SACU, the review of the agreement establishing SACU was agreed to by the SACU Summit that was held in June 2017. Through the review, our aim is to transform SACU into a development integration arrangement. This includes the review of the revenue sharing formula to make provision for a financing mechanism to facilitate the implementation of cross-border industrial and infrastructure projects.
Honourable Members, South Africa shares many policy pursuits and orientations with other developing countries. The country therefore engages in alliances with these countries to achieve stronger positions in global fora. Such alliances include BRICS, the G77 and G20.
South Africa’s membership of BRICS has been one of the key strategic partnerships of the democratic South Africa and is a key platform for promoting South-South trade and investment. With a combined GDP of $16.6 trillion in 2016, BRICS countries jointly contribute 22% of the world’s GDP and constitute 17% of world trade. South Africa’s participation in the BRICS may provide opportunities to build its domestic manufacturing base, enhance value-added exports, promote technology sharing, support small business development and expand trade and investment opportunities. We believe that this is more likely to be achieved through participation in the value chains of these countries.
This year South Africa chairs the BRICS. The overarching directive of South Africa’s chairs-hip in the economic work stream includes practical cooperation with a view to promote investment; value-added trade; sharing of information and experiences on Intellectual Property; cooperation on technical regulations and standards; and sharing experiences on small and medium enterprises development among others. The BRICS formation also provides an opportunity to exchange views on an inclusive multilateral trading system in view of developments in the WTO.
The 10th WTO Ministerial Conference in Buenos Aires in December 2017 failed to reach any significant multilateral outcomes and this is a reflection of a longstanding divergence amongst members on how to advance the multilateral trading system. For many developing countries, including South Africa and other African countries, the failure to make any advance on our developmental priorities is a source of growing frustration. Beyond this, we are also concerned by more direct efforts to further reduce the scope for developmental trade and industrial policy. The discussion would need to acknowledge that the rules from the Uruguay Round are imbalanced and prejudice our trade and development interests in areas such as agriculture, industrial subsidies and local content rules. These imbalances are to the disadvantage of developing countries. There is a need for a better balance and for rules that are developmental and foster inclusive growth and development. In this regard South Africa working with other developing countries is working hard to ensure that these principles are embodied in meaningful rules going forward.
Madam Speaker, we have stressed our achievements because they represent an important example of government, business and labour working together to grow the economy and create jobs. South Africa must of course confront our triple challenges of poverty, inequality and unemployment. But we believe that we have the tools at our disposal to do so.
Going forward, we will expand and sharpen our support to develop our labour intensive sectors such as agro-processing, clothing and textiles, furniture, and the metals value-chain in order to create the much needed jobs particularly for youth.
We believe that there is synergy between industrialisation and transformation; the two must happen together. However, we cannot transform our economy as long as there are import leakages which undermine our industrial effort. To this end, we have requested the Office of the Auditor General to audit compliance with local procurement prescripts.
We welcome the Auditor General’s clean audit reports for the 2016/2017 financial year for both the department and most of our agencies. A clean audit means the dti’s 2016/17 financial statements were free from material misstatements and there were no material findings on the reporting of performance objectives or non-compliance with legislation. The clean audit is an indication that we are committed to good governance and clean administration that will lead to better service delivery to the department’s stakeholders, investors and aspiring entrepreneurs. I also want to applaud the Companies and Intellectual Property Commission (CIPC) for its first clean audit, a noticeable improvement from when the organisation was called Companies and Intellectual Property Registration Office (Cipro). CIPC has implemented an ICT modernisation strategy and improved on its financial governance leading to much improved performance and service delivery.
the dti agencies that also achieved clean audits include the Companies Tribunal, National Consumer Tribunal, National Gambling Board, National Lotteries Commission, National Metrology Institute of South Africa, National Empowerment Fund, Export Credit Insurance Corporation of South Africa Limited and the South African National Accreditation System.
Madam Speaker, the promotion of gender equality and the empowerment of women are central to the mandate of this administration. We cannot be seen as pursuing transformation policies in the economy without doing it ourselves. Our target for women employed in senior management positions for 2017/2018 was 50% and I am happy to report that we exceeded that target, currently, 51 % of senior management positions in the department are occupied by women. Of those women, 31% are African, 4 % coloured, 11 % Indian and 6 % White.
These achievements I have reported on represent the culmination of years of continuous improvement, requiring diligence and commitment from all staff members in the dti. I commend them all for our collective achievements. I want to further express my thanks to the Deputy Minister, Bulelani Magwanishe for his unwavering support, to the Portfolio Committee for being such able partners in our journey and finally to the Director-General for his superb efforts in growing the dti brand.
And we will continue to strive to make our journey ever forward, never backward.
I commend this budget to the House
I thank you