Revised Industrial Policy Action Plan hearings: Day 4

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Trade and Industry

09 March 2010
Chairperson: Ms J Fubbs
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Meeting Summary

The Committee continued with the public hearings on the Revised Policy Action Plan (IPAP 2). Two organisations made submissions. The Southern Africa Stainless Steel Association viewed the Industrial Action Policy Plan as a positive step. It stated that the focus should be on key areas like public procurement, development of small and medium enterprises, and developing a successful proudly South African campaign. It also highlighted five initiatives it had undertaken as an industry, namely: a craft project, hollowware project, agri-processing, solar water heating project, and infrastructure project. Members asked what the association thought government should do to ensure that South Africa could compete globally, asked about comparative costs, whether the Department of Trade and Industry (dti) supported the projects, whether there was economy of scale in the industry, and what new legislation might be needed. They also asked about availability of raw material, in relation to production, what was regarded as “sustainable employment” and who were the Association’s members. The shift from manufacturing to importing since 2004 was questioned. The Committee stressed that written responses should be furnished and that perhaps other role players could be invited to comment.  

Aspen Pharmcare maintained that the Industrial Action Policy would only succeed if all relevant departments were aligned and prepared to implement the programme provisions, with annual monitoring to review progress on implementation. If this was carried out and aligned to certain time pressures, it was believed, that the Industrial Action Policy Plan could make a significant contribution to the South African economy. Aspen was aligned to Business Unity South Africa and its focus was on leveraging public procurement, policy coordination across departments, and developmental trade policies. Aspen made several recommendations on tender structures, and recommended that local manufacturers should receive the benefit of local producer points in order to compete properly. Mr Marais wanted to know if there were any proposals given to the dti regarding the Capex Incentive Scheme. Members asked for the proposals submitted to the Department, commented that the question of government coordination should be addressed by the Committee, and asked for the Department’s comments on the point-principle suggested by Aspen. Members asked about the company, its competitors and exports, and suggested that other role players in the industry should perhaps collaborate with Aspen in submitting a general document to the Committee on the issues that the pharma-sector faced.

The Parliamentary Research Unit took the Committee through a summary trade fundamentals and trends in trade, in order to explain the basic definitions and assumptions around trade, trade theory and practice, types of tariffs, and the impact of regulation on economy.

The International Trade and Economic Development Division of the Department of Trade and Industry presented a Trade Strategy discussion document. The document did not attempt to answer every question related to trade. It only outlined approaches to tariff reforms, explained what the trade strategy was about, and emphasised trade related issues that the Department would focus upon in future. Members asked questions about issues of corruption in procurement, why South Africa was importing, when it had raw material, whether the Department of Trade and Industry was supporting the initiatives undertaken by companies, what opportunities were available for locally produced goods to become world players, and if trade liberalisation was a necessity for South Africa.


Meeting report

Revised Policy Action Plan (IPAP2): Public hearings
Southern Africa Stainless Steel Development Association (Sassda) submission
Mr Tim Raaff, Chairman, Southern Africa Stainless Steel Development Association, (Sassda), told the Committee that the mandate given to this Association (Sassda) by its benefactors was to grow the consumption of stainless steel products converted in South Africa. Sassda was focusing on three key areas, namely: enterprise development, communication, and lobbying. Sassda was producing 700 000 tons of steel per year. In 2009 it exported 400 000 tons of steel. It was importing finished products, of which kitchen sinks made up a fair portion. In 2008 Sassda imported 71% of Hollowware products.

Problems facing the industry included, quality and tariff manipulation were problems cited. To remedy the situation, Sassda had decided to work with the South African Revenue Services (SARS), had undertaken consumer education and protection, had established standards, and issued accreditation to local manufacturers.
In respect of safety and health, Sassda had experienced contaminated imports. As a result, it had to ensure standards were in place and assisted in policing imported products. In the fields of skills development and retention, it had forged relationship with organised labour and business, was working with educational institutions to ensure that industry needs were met, and channeled resources to enterprise development. In regard to manufacturing challenges on matters of capital and technology, opportunities hade been identified, and Sassda had facilitated “meeting of the minds” amongst players in the industry.

Sassda had initiated five projects in the industry. The first, a Craft Project, involved the manufacturing of Stainless Steel Craft items on a regional basis. It was employing four to six people per kilogramme of Stainless Steel. It was based in Gauteng and Western Cape. Its second project, the Solar Water Heating Project, was concerned with the use of stainless steel for long life and hygiene in tanks. It manufactured components that would then be distributed to regions for local assembly and installation. This project had seen the development of Small, Medium and Micro Enterprises (SMMEs) and skills amongst its employees, reduction in energy consumption, and improved living conditions. So far, stainless steel has been added to the South African National Standards specifications, and a detailed business analysis was in process.
The third project revolved around the hollowware industry, through improved manufacturing methods. Sassda had instilled a “Proudly South Africa” consumer mindset. As a result, between 100 and 200 new jobs had been created. Together with the Department of Trade and Industry, a study was to be undertaken to expose the potential. The fourth project involved infrastructure and Agri-processing projects, which were aimed at promoting the use of local products in projects such as railway stations, airports, hospitals, correctional centres, and military installations. This had created employment already and enhanced technology. Plans were on the cards to form interest groups.

Sassda saw IPAP as a positive step in the right direction as it would leverage public procurement, lock out unsafe and poor quality products, develop SMMEs and provide cohesion at all three spheres of government. Possible hurdles that it had identified included the difficulties of changing mindsets, spreading the word especially to the owners of small business, and avoiding corruption.

Discussion
Dr M Oriani-Ambrosini (IFP) asked Sassda what it thought the government should do to make sure the country could compete globally, taking advantage of the fact that steel was produced locally.

Mr Raaff explained there was potential to expand and enter the global market. As to exactly how this could be done, he said that Sassda needed to discuss the matter and would respond in writing to that question.

Prof B Turok (ANC) asked Mr Raaff for evidence on comparative costs. Secondly, he wanted to know if the dti was supportive of the projects Sassda was undertaking and what it had done to overcome problems related to the projects. Thirdly, he asked Mr Raaff to tell the Committee of the economies of scale in the industry. Prof Turok would like to see many entrepreneurs. Fourthly, regarding tenders and procurement, Prof Turok said it was not enough for Sassda to complain, but it should rather tell the Committee if the latter should push for new legislation to curb “tenderpreneurs”.

Mr Raaff responded, on the issue on comparative costing, that it was best to put up a schedule so as to get an idea of what it was. Further, he noted that the dti was supportive of the Sassda projects. Sassda had forwarded development plans and dti had responded positively. A joint committee that was meeting monthly was established to look at some of the business issues. In regard to the economies of scale, he said that volumes were too small to make this effective. Lastly, he said that Sassda would forward a proposal on what could be done about corruption in procurement.

Mr S Marais (DA) wanted to know the availability of raw material in relation to what South Africa had, and what could be produced, and why there was so much discrepancy. He wanted to know if the reason was that South Africa could not compete in terms of price. He asked Sassda to explain what it meant by “sustainable employment”. Thirdly, he asked Sassda to give a breakdown of its membership. Lastly, on the issue of tariff manipulation by neighbouring countries, he enquired if this should be discussed with the Southern African Customs Union (SACU) and Southern African Development Community (SADC) members.

Mr Raaff explained that in relation to availability of raw materials, market volumes in South Africa did not come close to the production capacity of the manufacturer. That was why the majority of the material was being exported. Sassda had five hundred members, of whom thirty-five were big businesses from the engineering sector. Sassda also had a small number of small businesses that participated in their activities. Medium sized businesses made up the bulk of their membership.

Ms F Hajaig (ANC) asked Sassda to explain why there was a major shift from manufacturing to importing since 2004. Furthermore, in relation to import manipulation, she said that even if kitchenware was imported from Zambia or Malawi, there were rules of origin within SADC countries that could be used for local manufacturers, so that they could know about them. What the Committee needed to know were the areas of engagement and how it could intervene.

Mr Raaff said Sassda would like to assist government to put in place necessary mechanisms to fight manipulated imports. It would like to work with customs officials in terms of providing training and advice.

The Chairperson asked Sassda to reply in writing to answers on which it had indicated that it could expand further. She commented that Sassda could not provide details at this meeting, and it should perhaps prepare more thoroughly, see how best to represent the interest of its members, and could bring other role players as well, when it appeared before the Committee next time.

Aspen Pharmcare Submission
Mr Stavros Nicolaou, Senior Executive, Aspen Pharmcare, briefly introduced and described Aspen and its business. Aspen had sixteen facilities across five continents, of which eleven were in South Africa. It supplied Anti Retroviral medication (ARVs) to close to one million patients every month, and over 70% of ARV volumes were supplied to the State. It was the top pharmaceutical company in the South African private and public market. It currently employed over 5 000 people globally and 3 800 in SA. Generic Bulletin ranked Aspen 17th in the top global Generic Manufacturers. In the Pharma sector, it was the fifth largest contributor.

The position of Aspen was aligned to that of Business Unity South Africa (BUSA) and its focus was on leveraging public procurement, policy coordination across government departments, developmental trade policies, and lack of clarity on accessing capital expenditure (Capex) incentive schemes.

It was felt the current tender system was set in a way that had “boom-bust” characteristics. It had the potential to cause de-industrialisation, job and skills reduction, and loss of productive capacity. The State was procuring more medicines from abroad than locally. Imported content accounted for 53% of the value of all public sector medicine tenders. On average, only 47% of total tender value was local content, even in commodity markets.

Aspen described the economic consequences of a tender bid. The local producer had no right to match or shield against subsidised importers. The importer had little or no local value-add activity, and the local producer who had not won a tender would then have to re-organise and downsize his business. Skills and jobs would be lost in the process. Aspen submitted that it was necessary to create certainty, predictability and local supply security in tendering process, and that point matching by domestic producers would go a long way to achieving this.

In regard to point matching, he said that short and medium term interventions were needed, which also required policy cohesion across the Department of Trade and Industry (dti) and Department of Health (DOH). The domestic producer needed to be defined in the pharma context. It was noted that there were details that needed to be included in the policy. For example, once the preferential points were applied, and those of the local tenderer happened to be higher, the local company then should have the right to match the importer. If the bid price of the importer matched, the local should get the tender.

Aspen was of the view that tenders should set a precedent of including terms and conditions. The National Treasury had queried whether point matching was consistent with Section 217(1) of the Constitution, which set out principles on which public procurement processes must be based, and Section 33, relating to administrative law. Aspen had procured an extensive legal opinion on point matching, which stated that in fact this did comply with all five principles contained in Section 217 (1), namely, in regard to transparency,
competitiveness, cost-effectiveness, fairness & equitability, and procedural fairness.

Point matching would cost the State nothing extra and was not prejudicial to importers because they could invest in South Africa in order to obtain the same matching right. However, the challenge was to get agreement across the Department of Trade and Industry and the Department of Health. He suggested that studies, which defined the number of preferential points by sector that would place the fiscus in a cost neutral position, should be carried out, and that the preferential procurement laws should be amended in order to accommodate these preferential points and Broad Based Black Economic Empowerment (BBBEE) imperatives.

In regard to policy coordination, it was felt that all departments should be on the same side and speak with one voice. On matters of trade development policies, Aspen suggested that aggressive and defensive tariff lists had to be used extensively and needed to bear reciprocity in the sector. There was also lack of clarity on accessing Capex Incentive Schemes because of transitional provisions between IPAP 1 to IPAP 2, and investment vacuum periods.

Aspen made some further recommendations. These included the need for policy coherence and cohesion across dti and DOH, and ensuring that policy was not undermined by the turf battles of the departments. There was a need to develop transparent and multi-departmental annual progress reviews, especially around interdepartmental cohesion and coordination. There should be urgent implementation of point matching in tender conditions, and in this regard there should be conclusion of a preferential study as soon as possible, and amendment of  preferential procurement law. It recommended a clarification and gazetting of sectoral incentive schemes, and commencement of bilateral trade and tariff negotiations.

Discussion
Mr Marais wanted to know if there were any proposals given to the dti regarding the Capex Incentive Scheme.

Mr Nicolaou said he would send the Committee the proposals or submissions made to the dti.

Prof Turok commented that it seemed to him that an important statement had been made about the government coordination, and that the Committee’s findings on the issue would be inadequate if that was not addressed. He suggested that National Treasury and other government departments be invited to find answers to the problem of lack of coherence and coordination between departments. He further suggested that the dti should tell the Committee if the point-matching principle was correct and fair, particularly on the suggestion that if there was equal weighting, preference be given to the local.

Mr Nicolaou elaborated that very often when tenders went out, it would be discovered that the tenderers had “missed out” before starting dealing with any policy coherence. The pharma industry, through National Economic Development and Labour Council (Nedlac) had convened a Ministerial round table last December to iron out the cohesion issue. He noted when policy documents came out, they caused investment uncertainty, and that investors would concur that a tender was awarded but no policy was adhered to.

Ms C Kotsi (COPE) commented that Aspen did not divulge the breakdown of its employees in terms of race, gender, and sex. The Committee was interested in the issue of transformation in the industry, so that Aspen could be helped in terms of incentives. She also wanted to know if Aspen had competitors locally and where it was exporting its products.

Mr Nicolaou explained that Aspen employed 3 800 people in South Africa. A. It was a level 3 Black Economic Empowerment company. Plans were in place to develop skilled industrial pharmacists. He acknowledged that Aspen had competitors locally. Some companies were large, others medium-sized, and there were also fledgling companies. All these companies were facing the same challenges that Aspen was facing around public procurement. Aspen was exporting to Sub-Saharan Africa. Aspen had entered into a deal with an overseas company where Aspen would manufacture products and the overseas company would do the distribution to emerging markets. There was an eye-drop product, for instance, which was currently made in Port Elizabeth, and which Aspen had been exporting to the United States of America for a while.

The Chairperson commented that Aspen should have invited other role players in the industry also to contribute. She suggested that Aspen should, with the help of other role players, submit to the Committee a document about the general challenges the industry faced, and other issues that they would like the Committee to take into consideration.

Trade Fundamentals and Trade Policy: Parliamentary Research Unit Presentation
Mr Lwazi Mahlangu, Parliamentary Researcher, made a presentation on Trade Fundamentals and Trade Policy, which focused on the basics and definition of concepts in the discipline of trade. Trade was explained as the exchange of capital, goods and services across international and local borders or territories. Nations traded because they had surplus production, which could be turned into profit, and because this would earning a foreign currency through export of their commodities. They would import because some products were not available or could not be produced in their own country, and sometimes they would consider efficient production and price differentials, such as the importing of clothes from China by South Africa. This meant South Africa was not efficient enough at producing the goods that her citizens demanded.

Trade depended on the comparative advantage of the country. A comparative advantage was a simple model in international trade economics, and was based on the premise that countries would export goods that they could produce relatively efficiently, and import goods that they could only produce relatively inefficiently. By specialising in production, and by trading with other countries, it was possible for countries to increase their incomes and consumption, and this was the Gross Domestic Product.

Mr Mahlangu outlined trade theory and practice. It was noted that countries did not specialise exclusively in the production and export of just a single product or service, and they would rather produce at least some goods and services that other countries could produce more efficiently. A lower income country might, in theory, be able to produce a particular product more efficiently than developed countries could, but that country might not be able to identify potential buyers or transport the item cheaply enough to warrant it being developed for export. Generally, countries with a relative abundance of low-skilled labour tended to specialise in the production and export of items for which low-skilled labour was the predominant cost component. On the other hand, countries with a relative abundance of capital tended to specialise in the production and export of items for which capital was the predominant component of cost.

Governments often manipulated or regulated trade in a number of ways, by restricting imports. They did this by imposing quotas and tariffs, and encouraging exports through subsidies. Six types of tariffs were identified. Firstly, the ad valorem tariff was a set percentage of the value of the goods that were being imported. A specific tariff represented a specific amount of money that would not vary with the price of the goods. A revenue tariff was a set of rates designed primarily to raise money for the government. A prohibitive tariff was one that was so high that most importers would be discouraged from importing any of that item. A
protective tariff was intended to artificially inflate prices of imports and protect domestic industries from foreign competition. An environmental tariff, also known as a ‘green tariff’ or ‘eco-tariff’, would be placed on  products being imported from or being sent to countries with sub-standard environmental pollution controls.

Because tariffs caused an increase in prices, the buying power of consumers was reduced and producers in other industries sell less. Consequently, the economy could decline and jobs could be lost.

Discussion
Mr Marais commented that this document was belated, and it was something that should have been presented at the beginning of the year, so that the Committee could understand why jobs were created and lost. However, it did serve the purpose of giving Members a basic understanding of trade issues in order to better understand the Committee’s work.

Trade strategy: International Trade and Economic Development (ITED) Unit: Department of Trade and Industry (dti) presentation
Mr Xavier Carim, Deputy Director-General: International Trade and Economic Development (ITED), dti, stated that the Trade Strategy document that he had tabled was not an attempt to answer every question related to trade. The document reviewed the ingredients for growth and success in a changed global economy, and showed that South Africa had undergone extensive tariff liberalisation since 1994. It also noted that South African exports continued to be dominated by commodities, except in African markets.

ITED had adopted a strategic approach to tariff reforms that supported industrial and employment objectives. An evidence-based, case-by-case assessment would inform changes to tariffs. Tariffs on mature upstream input industries could be reduced or removed, to lower the costs for downstream, labour creating manufacturing. By way of contrast, tariffs on downstream industries with employment potential would be retained to ensure sustainability and job creation.

The trade strategy was based on the premise of a global economy that was supportive of development that was in the interests of South Africa. Trade and investment relations with key countries in Africa would be forged, and the focus would be on building production capacities and cross-border infrastructure. Links with key economies in the North would be consolidated, and industrial complementary relationships would be formed with dynamic growing economies of the South to support industrial development and shift the structure of trade. The developmental outcome of the World Trade Organisation (WTO) Doha negotiations, which addressed imbalances, was more important than reaching an early conclusion.

Future trade policy work was focused on clarifying trade related issues such as services, investment, intellectual property, procurement, labour, and environment. Links would be elaborated between trade reform and measures to cushion costs. Institutional arrangements for trade policy making would be strengthened. The Cabinet input of 2009 and NEDLAC comments of February 2010 were being accommodated in the formulation of the strategy document, and ITED was hoping to meet the Cabinet deadline of April 2020.

Discussion
Mr Marais wanted to know what the Committee could do regarding the many transgressions on WTO rules and regulations.

Mr Carim explained that some of the approaches adopted in the strategy document were not applicable to every detail and question. He noted that there was a need to be clear on transgressions. Subsidies were defined. Looking at the history of the agreements, it could be seen that they were negotiated in such a way that they covered subsidies that developing countries were now using. That was when ITED began to find inequity across such agreements. He cautioned that there was a need to be careful about saying that there were “transgressions”. South Africa had not yet developed sufficient capacity to protect her rights under WTO. Other countries were active in protecting theirs.

Mr X Mabasa (ANC) enquired why commodities dominated South African exports, except in African markets. He further wanted to know if the country was marketed thoroughly inside, so that people could buy local produce adequately.

Mr Carim replied that these issues were based on generalisations on how Africa had evolved over the years. Comparatively speaking, African countries were import-dependent in some of these sectors. South Africa had a competitive advantage over other African countries, in regard to how to get the products to other European countries. There was a great deal involved in promoting South African exports. There seemed to be a more concerted effort from government departments to do this in a coordinated way.

Ms Hajaig asked for dti’s views on tariff liberalisation, taking into account trade policies of South Africa. She also asked how successful South Africa was in promoting NEPAD commitment in the region and the rest of the continent.

Mr Carim elaborated that South Africa liberalised rapidly. As a result, it did not charge duty on tariff lines. Although there was scope for tariffs to be raised, that had to go through investigations and WTO rules. In regard to the commitment of SADC in the region, he explained that the lack of industrial and agricultural capacity in the region was being prioritised and plans were in place on how to build it. There was a mid-term review of SADC agreements. This would facilitate customs across the border and strengthen the rules of origin. 85% of goods in SADC were traded free. He noted that the imbalance had not changed much because South Africa was exporting seven times more than the region in the last fifteen years. Another area that ITED was focusing on was the development of standards in the region. South Africa was not alone in this programme, but was trying hard to work with other governments. However, unfortunately, these other governments had their own priorities.

The Chairperson questioned how the WTO regarded support in terms of developmental finance.

Mr Carim responded that this needed a proper legal assessment, but there were trade agreements in WTO about preferential loans. It all depended on how these were structured, as that was still a grey area in WTO. ITED had managed to stave off those challenges.

Ms Kotsi wanted to know what South Africans had learned from the agreement between China and South Africa.

Mr Carim replied that a Memorandum of Understanding was signed with China. An option was available, up until 2008, to apply quotas on China. This was covered in the WTO. In general, it would be considered to be WTO-incompatible. Some countries were concerned about the competitiveness of China. It was agreed that China would be treated as a special case for a certain period. The idea of safeguards was a good move, to give an industry in distress a breathing space.

Mr B Radebe (ANC) enquired about the view of the Department on the issue of exchange rates that seemed to hurt South Africa’s export market.

Mr Carim explained that the exchange rate issue was something IPAP 2 highlighted, and that it encouraged imports. The approach that was adopted necessitated that South Africa must develop a competitive exchange rate. That needed thorough debate, and it was not the responsibility of the dti alone.

Mr N Gcwabaza (ANC) wanted to know the rationale behind liberalisation, and what was achieved by it.

Mr Carim replied that the South African manufacturing industry was high cost, competitive and highly protected, and that was caused by years of sanctions. In order to integrate it into the global economy, it had to liberalised. Liberalisation in South Africa was felt to be too rapid when compared to other developing countries. As a consequence, it lacked support structures. Hence there was a view that South Africa needed to be careful about tariff reforms.

The meeting was adjourned.

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