Revised Industrial Policy Action Plan: public hearings Day 3

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Trade, Industry and Competition

04 March 2010
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Committee, continuing the public hearings on the Revised Industrial Policy Action Plan (IPAP2), met with representatives of the Environmental Goods and Services Forum, National Aerospace Centre of Excellence, Manufacturing Sector, National Association of Automotive Components and Associated Manufacturers and South African Fruit and Vegetables Canners Association to hear their submissions.

The Environmental Goods and Services Forum representative said that a supporting set of structures was needed locally that would develop the potential for investment, jobs and competitiveness in the local EGS sector. Although there had been a commitment to alternative energy sources (particularly IPAP’s focus on nuclear energy), a large gap remained which could be filled by renewable energy sources, in particular solar power. South Africa could also offset job losses through investing in the production of electric motor vehicles. In terms of IPAP priorities, more details were needed on clean energy potentials and actions. Government also needed to facilitate the private sector investment. The electricity sector needed to be reformed. Conducting environmental impact assessments for solar and wind parks would help front-load some of these investments. In terms of legislative priorities, the 2008 Energy Act was not being applied. The Renewable Energy Act needed to be put in place. The Municipal Finance Management Act made it impossible for municipalities to buy clean energy for themselves. This also affected solar water heating programmes, which, in addition to being a major energy saver, were also very job-intensive. Members asked whether the plans were economically viable, whether there was a strategy in place for a cluster approach, and how bio-fuel production would affect food prices.

The National Aerospace Centre of Excellence said that IPAP’s proposed three-year rolling strategy with iterative scaling up and continuous improvement, could hold the promise of significant progress. However, it did not sufficiently recognise the inherent complexity of aerospace and advanced manufacturing. The fragmentation of efforts also introduced risks. The sophistication of existing South African capabilities was also underrated. There was insufficient focus in IPAP on the importance of global partnerships. Skills development had also not been addressed in IPAP. There was, at the moment, no coherent, integrated skills development strategy in place. These areas were also largely underfunded and non-aligned. There was a lack of a formalised, widely inclusive South African Airways, and Aero-Industry forum to identify priority areas. Existing capabilities should be fully used, before building new infrastructure). There was also a need to partner continentally as well as globally. The Sector Education and Training Authority funding also needed to be bolstered in order to address the allegedly insufficient numbers of trained candidates, as well as to create sustainable jobs. Members called for figures relating to transformation in the sector, asked what South Africa’s competitive advantage was in the industry, globally, and how many new jobs could be created.

The Manufacturing Sector said the Industrial Development Corporation’s (IDC) investments were dominated by export-oriented resources projects. Profits earned from their elevated domestic prices allowed the IDC to claim it was self-financing while it was effectively imposing a direct tax on downstream industries. At the same time, the Reserve Bank followed a ‘strong Rand’ policy. This had resulted in South Africa, for at least the past 30 years, having an overvalued exchange rate. Although the Department of Trade and Industry had realised what the major issues were and had sought ways, through IPAP, to address these, industrial policy alone was not enough, and an integrated economic policy was needed. Suggestions were made for improved competition policies. It was noted that the Sector Education Training Authorities were, according to a report compiled by Business Unity South Africa, considered wasteful. Members asked for the correlation was between IPAP and exchange rates, ways to stabilise the Rand, and comments on the actions of IDC, as well as comment on whether IPAP strengthened the cohesion between macro- and micro-economic variables in the manufacturing sector.

The National Association of Automotive Components and Associated Manufacturers noted that domestic sales figures for 2009 had dropped from 1995 levels, as a result of competing internationally for both vehicles and imports. The exchange rate was therefore of great importance to this industry. Local production was also in crisis, being lower than it was in 1995. Employment in this sector had decreased as less than 30% to 35% of vehicles produced locally were produced from local content. Legislation should be introduced to compel manufacturers to stipulate their local content ratio. Stipulating a set percentage of local content for manufacturers could help the industry regain the 30 000 jobs shed. Members asked whether only 30 000 people had been employed in direct manufacturing, whether there was any product diversification strategy, and whether IPAP2 introduced any paradigm shifts in this industry.

South African Fruit and Vegetables Canners Association said that the public private partnership fruit canning initiative had been established to create a sustainable platform for the long-term growth and competitiveness of the industry. This initiative resulted from recommendations following a Department of Trade and Industry analysis on how to address hardships in the industry.  The absence of an enabling environment could result in job losses and impact negatively on the struggling agricultural sector and rural communities. Industrial policy intervention was needed to stimulate job creation and uplift rural communities. IPAP 2 could assist the industry by looking into issues such as market access. Without short-term relief, the industry was in a very difficult situation. The exchange rate affected the industry in significant ways, as it was 85% export-driven. Possible IPAP interventions included the establishment of a National Food Control Agency, a zero-rating on canned fruit and vegetable products being imposed, as well as a revision of the Sugar Act. Services such as power and water must be supplied reliably and at a competitive price, infrastructure and logistics needed to be improved and an appropriate industrial upgrading assistance scheme should commence. Members asked what Government could do to influence other countries to reduce subsidies, enquired about the numbers of foreign nationals employed, and for more details on the cost structure of the industry, and the role of cooperatives.


Meeting report

Revised Industrial Policy Action Plan (IPAP2): Public hearings
Environmental Goods and Services Forum (EGSF) submission

Mr Peet Du Plooy, Chairperson, Environmental Goods and Services Forum, said that South Africa needed a set of supporting actions by Government to create the conditions for developing the latent potential for investment, jobs and competitiveness in the local EGS sector. This would achieve a two-fold goal: to rapidly create accessible jobs in job-intensive industries with an environmental pay-off, and the strategic diversification of energy sources in electricity and transport as well as the protection of natural resources such as water, soil and ecosystems. The sector was defined by natural capital gain, economic capital gain and social capital gain.

South Africa’s ‘fair share’ of the global Green Economy was estimated to stand at 1%. A study conducted by National Economic Development and Labour Council (Nedlac) found that the value of the sector stood at between R14.5 billion and R23.2 billion – between 1% and 1.6% of Gross Domestic Product (GDP). As the global low-carbon EGS was valued at $5 trillion, it meant that this sector could contribute 7% of South Africa’s GDP.

Although there had been a commitment to alternative energy sources (particularly IPAP’s focus on nuclear energy), a large gap remained. This could be filled by renewable energy sources, with solar power being the most likely to boost the sector.  Solar power, wind power, power stations and technology were also, for South Africa, strong natural resources which would allow it a competitive edge.  As 40% of the greenhouse gases emitted by South Africa were emitted on behalf of other countries, it was necessary for the country to become carbon competitive. 

The Department of Minerals and Energy (as it was then named) had set a target of 20 000 renewable energy jobs by 2013.  Considering the figures globally, South Africa could have created anything between 9 000 and 150 000 jobs locally in the sector. As only 4% of this target had been reached, drastic measures had to be put in place to meet this target. The automotive industry had seen many job losses recently. One way of dealing with this was to create electric vehicles that would be in demand in the future. In relation to investment, the major gains would lie in renewable energy (solar, wind and bio-energy), transport (electric vehicle batteries and public transport), and energy savings (solar water heating and smart meters). Major considerations when it came to competitiveness included water savings and waste water treatment, public transport and the motor industry.

In terms of IPAP priorities, more details were needed on clean energy potentials and actions. Government also needed to facilitate the private sector investment. The electricity sector needed to be reformed. An Independent System Operator would prevent Eskom dominating the sector. Conducting environmental impact assessments for solar and wind parks would help front-load some of these investments.

In terms of legislative priorities, the 2008 Energy Act was not being applied. As target-setting alone had not proven effective, the Renewable Energy Act needed to be put in place. The Municipal Finance Management Act made it impossible for municipalities to buy clean energy for themselves. This also affected solar water heating programmes, which, in addition to being a major energy saver, were also very job-intensive. Preferential Procurement also needed to be looked at , in particular how Government could buy in support for Green Economic Empowerment in the same way as Black Economic Empowerment.  

Discussion
Mr S Marais (DA) asked whether South Africa could produce electric cars competitively and whether the idea of renewable energy was viable at this stage.

Mr Du Plooy answered that an indicative cost be around R1.50 per kilowatt hour. Renewable energy was cheaper than coal power as it came from independent suppliers who were self-capitalised. The price would drop further over the next ten to twenty years. Therefore, systems needed to be put in place as soon as possible. Electric motor vehicles had the lowest barriers to entry. They were also cheap to maintain. The most expensive part in producing these was the battery, which South Africa could easily produce.

Mr S Njikelana (ANC) asked whether there was any strategy in place for a cluster approach, and if there were any prospects for a more regional approach. He asked to what extent FET Colleges had been prepared for these plans.

Mr Du Plooy answered that coordination was a major challenge and had to be addressed. A regional approach was integral to success. There were many lessons that could be learned, and many resources to be gained, from the rest of the continent. Many of the requisite skills for this sector were already in existence and could therefore migrate from other sectors.

The Chairperson asked how power points for electric cars could be achieved in a country as big as South Africa. She enquired how many jobs would be created through the rollout of solar panels. She was also concerned how a priority on bio-fuel production would affect food prices.

Mr Du Plooy answered that infrastructure existed for electric vehicles. Food crops should be excluded from the use of bio-fuels. Food security was to be prioritised over bio-fuels.

Mr Theo Loocke, Vice President of National Association of Automotive Components and Associated Manufacturers, said that he could assist with the question. It was more important to produce more passenger vehicles than it was to produce electric motor vehicles at the moment. In a scarce resource environment such as South Africa, importing expensive lithium batteries in order to produce electric motor vehicles did not make sense.

Mr Du Plooy responded that improving South Africa’s battery industry would go a long way towards addressing this issue.

The Chairperson asked for a more detailed report on the issues highlighted in the presentation.

National Aerospace Centre of Excellence (NACoE) Presentation
Mr Rudolph Louw, Director, NACoE, said that the aerospace industry was grateful for the opportunity to make a submission on IPAP, as it had not previously been a formal part of Government policy documentation. IPAP’s proposed three-year rolling strategy, with iterative scaling up and continuous improvement, held the promise of significant progress. Advanced manufacturing was a cross-cutting area as it not only applied to aerospace but other sectors such as transport and energy.

Airbus expected that South African airlines would need to acquire 172 new aircraft worth $23.3 billion over the next 20 years. The Boeing current market outlook estimated that the market value for Africa for the next 20 years stood at $70 billion.

Key elements mentioned in IPAP 2 in terms of aerospace and advanced manufacturing included leverage fleet procurement of South African Airways (SAA) and the South African National Defence Force (SANDF). The key action plan that mentioned components and materials regarding these procurements, the National Industrial Participation Programme (NIPP) and the Competitive Supply and Development Programme (CSDP) needed revision. The key action plan for aerospace envisioned having three small, medium or micro enterprises (SMMEs) housed in the Centurion Aviation Village by the fourth quarter. Another notable feature related to South Africa’s titanium beneficiation programme.

However, IPAP did not sufficiently recognise the inherent complexity of aerospace and advanced manufacturing. The fragmentation of efforts also introduced risks. The sophistication of existing South African capabilities was also underrated. In addition, there was lack of recognition in IPAP of the importance of global partnerships.

In Government initiatives, strategies and plans, too much focus was placed on design, development and the manufacturing industry (which made up less than 20% of the sector). Aerospace was, however, more complex and consisted of other areas such as air traffic management, general aviation, military aviation, airlines and other matters. The career opportunities that this sector presented were of a highly technical nature and included aero-design engineers, draughtsmen, materials experts and mechanical and electrical engineers. Lower-level job opportunities were also created.

The other area which had not been addressed in IPAP was that of skills development. There was, at the moment, no coherent, integrated skills development strategy in place. Further Education and Training Colleges (FET), universities, and Universities of Technology were also largely underfunded and non-aligned.
Existing Government aerospace initiatives were the Aerospace Industry Support Initiative (AISI), the National Aerospace Centre of Excellence (NACoE),and the Centurion Aerospace Village (CAV). Their main focus lay in creating a supplier-buyer portal, developing skills, doing industry-focused research and development, conducting awareness and facilitation campaigns, and creating a supplier base with mentorship. Current manufacturing initiatives included the Aerospace Manufacturing Processes and Material (AMPM), and the Advanced Manufacturing Technology Strategy (AMTS).

The NIPP had not been directly leveraged by SAA procurement. The CSDP was also a challenge to implement, especially in relation to SAA. The Defence Industrial Participation (DIP) had been successful, as SANDF acquisition had been well linked.  In terms of public aeroplane purchases, SAA needed to upgrade its fleet, though it was not certain when this would take place. The South African Air Force had had to upgrade its transport and maritime patrol fleet. There was a lack of a formalised, widely inclusive SAA / SA Aero industry forum to identify priority areas.
In terms of existing capabilities and facilities, significant infrastructure and capabilities existed, which should be utilised to the full extent before building new infrastructure. There was also a need to partner continentally as well as globally. The Sector Education and Training Authorities TETA and MERSETA funding also needed to be bolstered, in order to address the alleged shortage of sufficient numbers of trained candidates, as well as to create sustainable jobs.  

The sector enjoyed successful relationships with partners such as Airbus R & T, Volvo-Aero, Rolls Royce/Allison, BAE Systems and Carl Zeiss.

Discussion
Mr B Radebe (ANC) asked for a breakdown of the sector. He asked for its transformation figures. He commented that under-funding of TETA and MERSETA needed to be looked at.

Mr Louw answered that, as the sector was not formalised, there were not any concrete figures relating to this. IPAP had now provided the sector with the opportunity to address this issue.

Mr A van der Westhuizen (DA) asked whether these plans were economically viable and sustainable. He also enquired what was South Africa’s advantage in the aerospace industry.

Mr Louw answered that the cost-cutting technological advances made within this industry had afforded it the opportunity to grow into a sustainable and competitive industry.

Ms C Kotsi (COPE) asked how many new jobs could be created in this industry. She asked if there was there any plan in place to integrate into the rest of Africa. 

Mr Louw answered that although there were no figures regarding this, again because the industry was not formalised, it was known that for every one engineering job created, three to nine other jobs were created. The only other countries with aerospace design, manufacture, and research and development capabilities were Egypt and Morocco. There was a conscious effort to engage the rest of the continent in this sector.

The Chairperson asked for clarity around the “‘claimed’ lack of sufficient numbers of trained candidates”. She asked if the sector had any long-term plans to draw previously disadvantaged communities into the industry. She also asked what the constraints were in getting and maintaining global partnerships.

Mr Louw answered that, as the sector was not formalised, there were no fixed figures regarding this. The sector had very focussed outreach programmes, which targeted schools from previously disadvantaged communities.

The Chairperson asked for a more detailed report in writing.

Manufacturing Sector submission
Mr E Wessels, representative of the Manufacturing Sector, said that the reason for South Africa’s high unemployment rate was structural distortions that had been created by a system of “crony” capitalism. The Industrial Development Corporation (IDC) systematically invested in first-stage mineral processing industries which manufactured industrial raw materials. The IDC’s investments were dominated by export-oriented resources projects. In order to make its investments profitable, the IDC used its influence with Government to impose import tariffs and direct import controls on their products. This allowed IDC to raise its domestic prices above international levels, and above the price levels at which it was exporting. Profits earned from these elevated domestic prices allowed the IDC to claim that it was self-financing, whilst it was effectively imposing a direct tax on downstream industries.

At the same time, the Reserve Bank followed a ‘strong Rand’ policy. While many countries with depleting deposits of raw materials had established ‘sovereign wealth’ funds, the Reserve Bank used all the foreign currency that South Africa earned to keep the Rand as strong as possible. This had resulted in South Africa, for at least the past thirty years, having an overvalued exchange rate.
Through IPAP2 it would seem as though the Department of Trade and Industry had realised what the major issues were and had sought ways to address these. Industrial policy was, however, not enough. What was needed was an integrated economic policy, which included monetary policy.

A competition policy, which would make any systematic discrimination against local customers illegal, would force companies to sell locally at the same price at which they were exporting. This, however, carried with it the risk of losing these companies. This risk could be minimised through effective exchange rate policy.

The Manufacturing Sector did not believe that a strong rand was necessary in a developing country such as South Africa. The inflationary consequences of a depreciation had been exaggerated. The rand revenues of exporters would rise and fall in direct proportion to the exchange rate, but global inflation did not.

It was noted that Business Unity South Africa had compiled a research report into Sector Education and Training Authorities, and found them to be wasteful. For instance, MERSETA had trained 720 people at a cost of approximately R4.175 million each. Industry had, however, been engaging with the Department of Higher Education to address these issues.

Discussion
Mr Njikelana asked what correlation there was between IPAP and exchange rates.

Mr Wessels answered that anything done through IPAP2 would be ineffective unless there was an integrated exchange rate policy.

Mr Marais asked whether the weak rand was good for technology, as it had to be imported at that rate. He asked what had been contributing to lack of competitiveness, and what could be done to help in dealing with these challenges.

Mr Wessels answered that the overvaluation of the rand had made it difficult for the country to export, as well as to compete with imports.

Mr Radebe asked what could be done to stabilise the rand. He wondered what it was that the IDC was doing incorrectly. He asked for the sector’s attitude towards import tariffs. He wanted the sector to provide a more detailed report on the approximately R5 million spent per person trained.

Mr Wessels answered that one way of doing this would be to follow the example that Chile had set by introducing’ speed bumps’. According to this, if a foreign entity invested locally but withdrew that investment after less than one year, a tax would be imposed.  The IDC was little more than an industrial conglomerate. In many instances, when it was called upon by the domestic industry, it had competing interests.

The Chairperson asked how effectively IPAP2 had managed to strengthen the cohesion between macro- and micro-economic variables relating to the manufacturing sector.

Mr Wessels answered that the Department of Trade and Industry could force suppliers to adopt export parity pricing as opposed to import parity pricing. Depreciating the currency would prevent some of these suppliers being negatively affected.

National Association of Automotive Components and Associated Manufacturers (NAACAM) submission
Mr Theo Loocke, Vice-President, NAACAM, said that domestic sales figures for 2009 had dropped from what they were in 1995. This was a result of competing internationally for both vehicles and imports. The exchange rate was therefore of great importance to this industry. Local production was also in crisis, being lower than it was in 1995. In terms of the industry’s cost make-up, materials used for the components it produced made up between 40% and 60% of the product’s selling price. The cost of capital made up a small portion of its competitiveness, at only 8%. In order to address this, the exchange rate situation needed to be examined.
There were seven major automotive manufacturers in South Africa who functioned on two trade agreements – the first being AGOA, which allowed them to import vehicles into the United States of America duty-free when competing with Europe, and the second being a Free Trade Agreement with Europe, in terms of which any vehicle exported into Europe with more than 60% local content carried no duty into Europe.
 
Employment in this sector had decreased, as less than 30% to 35% of vehicles produced locally were produced from local content. He suggested that legislation should be introduced which would compel manufacturers to stipulate their local content ratio. There needed to be a set percentage of local content for manufacturers, as this could help the industry regain the 30 000 jobs shed.  

Discussion
Mr Marais asked whether only 30 000 people had been employed in direct manufacturing.

Mr Loocke answered that the component suppliers employed three to four times more people than assemblers.

Mr Njikelana asked whether there was any product diversification strategy. He also asked to what extent IPAP2 had introduced a paradigm shift in the industry.

Mr Loocke answered that it was possible to diversify. For instance, aluminium could be used in solar heating panels. 

Ms Kotsi asked what the meaning of APDP was.

Mr Loocke answered that it stood for the Automotive Production and Development Plan. This was the replacement for the MIDP.

Dr M Oriani-Ambrosini (IFP) asked whether the industry made money for the country, or cost it money.

Mr Loocke responded that the industry was of financial benefit to the country, especially considering that it had limited the trade deficit to R30 billion. 

South African Fruit and Vegetables Canners Association (SAFVCA) submission
Ms Jill Atwood-Palm, General Manager, SAFVCA, said that this was a R5 billion industry which was strongly export-driven. Approximately 85% of South Africa’s fruit was exported, and South Africa was accounting for approximately 7% of global fruit exports. In terms of its competitive advantage, it had a reliable supply and quality of fruit and vegetables, strong manufacturing capabilities, experienced exporters with proven track records, and offered premium quality products that were highly nutritional in value.

The Public-Private Partnership (PPP) fruit canning initiative had been established in order to create a sustainable platform for the long-term growth and competitiveness of the industry. This initiative came about as a result of recommendations made by a Department of Trade and Industry analysis that had looked at ways to address hardships in the industry. The main pillars of this initiative were transformation, marketing, competitiveness and market access.

Research conducted into the industry had found that it had growth potential, was export-driven and competitive. This made it worthy of industrial policy intervention. It was, however, affected negatively by temporary macro-economic challenges such as unfavourable market conditions resulting from the global crisis, an export-unfriendly exchange rate, uneven playing fields and adverse input cost pressures. This had resulted in a short-term trap of under-investment, which could lead to negative long-term effects. There was therefore a need for industrial policy intervention in order to send out a signal to its stakeholders and potential investors. The industry had partnered with: Government, business, labour and community representatives. In terms of its socio-economic profile, this industry employed more than 120 000 dependants.

The absence of an enabling environment could result in job losses and impact negatively on the already struggling agricultural sector and rural communities. Industrial policy intervention was therefore needed in order to stimulate job creation and uplift rural communities.

Mr Nassos Martalas, representative of Langeberg & Ashton Foods, added that IPAP2 could assist the industry by looking into issues such as market access, where it should address the uneven playing fields, unfair practices, and protection of the domestic market. In the absence of short-term relief, the industry found itself in a very difficult situation. Another issue was the exchange rate, which affected the industry in significant ways seeing that the industry was 85% export-driven.
 
Mr Gerhard Kotze, representative for SAFVCA, said that possible IPAP interventions included the establishment of a National Food Control Agency, a zero-rating on canned fruit and vegetable products, as well as a revision of the Sugar Act. He further suggested that services such as electricity and water needed to be supplied reliably and at a competitive price, that infrastructure and logistics needed to be improved and that an appropriate industrial upgrading assistance scheme should be developed. Other support measures could include support for agri-research, capital investment support programmes and national feeding schemes.

Mr Rudi Richards, representative for SAFVC, said that without effective IPAP intervention there would be factory closures, de-industrialisation, job losses and an adverse impact on rural communities. Effective IPAP intervention would, however, lead to job creation, industrial upgrading, rural development, community upliftment and accelerated transformation.

Discussion
Mr Mabaso asked what Government could do to influence other countries to reduce subsidies. He asked to what degree this industry employed foreign nationals, thereby contributing to socio-political unrest.

Mr Kotze answered that the sector had sent a memorandum to the dti with its suggestions in this regard.

Mr Martalas added he was not aware of any policy by any of the factories that prioritised the employment of foreign nationals.

The Chairperson asked for a more detailed report on the industry’s cost structure. She also enquired what would be the role of cooperatives.

Mr Jacobs answered that the PPP initiative covered many issues, including labour, skills, transformation, and cooperatives.

The meeting was adjourned.


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