Revised Industrial Policy Action Plan (IPAP): public hearings Day 6

Meeting report

Gambling Commission Public hearings
Mr A van der Westhuizen (DA), criticized the Gambling Commission (GC) on its poor organisation of the recent public hearings around gambling. The notice had not been sent to the Committee, and he had seen a notification of the hearings in the press, but no time had been stated. He suggested that the Commission was wasting time and money with such poor systems, and could not succeed in its operations if it were to continue in this way.

Mr S Marais (DA) added that the particular public hearing to which Mr van der Westhuizen referred was only attended by six people, therefore showcasing the poor commitment of the GC. He suggested that in view of the problems on the Commission’s side, perhaps another hearing should be organised in Worcester as it was Parliament’s duty to give transparency to all issues.

The Chairperson agreed that the GC’s public hearings made a mockery of the process of public hearings and she said that the mistakes had to be rectified.

Mr X Mabaso (ANC) protested on a point of order, and suggested that the question of the Gambling Commission should be discussed in closed session, although he agreed that there was a great deal of work needing to be done. There were more pressing issues to deal with at this meeting.

Revised Industrial Policy Action Plan (IPAP2): Public hearings
Department of Economics and Econometrics, University of Johannesburg submission
Prof Fiona Tregenna, Professor at the Department of Economics, University of Johannesburg, gave the submission on behalf of the University’s department. She gave reasons why it was important to have a comprehensive industrial plan. She pointed to the fact that no country had successful growth without industrial plans, as the propensity for market failures had existed throughout history. She said that there were spill-over effects, both positive and negative, especially in cases where there was an absence or inadequacy of automatic adjustment mechanisms. Because there was a danger of the economy being stuck in a low-level equilibrium trap, there was a need for a structural change. She stressed that the manner with which trade was conducted had not had much positive and sustainable gains.

Prof Tregenna stated that the costs and barriers that hampered structural change needed much State intervention. She mentioned that the different agents made economic decisions with different timeframes that suited them for their short-term plans but were in many ways detrimental in the long run. Because there was a lack of homogeny amongst sectors, differentiated policies were needed, with an overarching promotion of manufacturing.

She noted that in the 1970s, South Africa’s manufacturing of value-added commodities was at 600 points, compared to the emerging Asia, which was then well below 300 points. However, in 1990, Malaysia had surpassed South Africa in terms of output. Currently Malaysia’s value-added output was at an impressive 1400 points, whereas South Africa’s output was still at the same point it had been in the 1970s.

Prof Tregenna pointed out that South Africa’s share of manufacturing had dwindled compared to other developing countries such as those in Latin America. It was this that led her to look at why manufacturing mattered. Manufacturing was important for long-term growth.  The importance of manufacturing was also due to the fact that deindustrialisation tended to be detrimental as it was difficult to reverse. She alluded to the fact that a high level of sophistication in manufacturing exports was pivotal, especially because the country was competing with advanced export based economies.

She mentioned that the historical lessons that could be learned, in order to implement a successful industrial policy, included the importance of a dynamic rather than a static comparative advantage, the creation of temporary monopolies, combined with regulation, in order to achieve advances in key areas. The provision of finance, at below-market rates, for key activities, and the provision of fiscal incentives for prioritised activities, and an acceptance that there would be failures and resource wastage (within reasonable limits) were also pivotal. Further historical lessons included the need for strategic protection, management of rents and the promotion of technological transfer and advancement, while promoting domestic innovation capacity. The importance of supportive macroeconomic policies, especially exchange rates and interest rates were crucial. Lastly, a gradual shift to activities with higher knowledge content in terms of skills was another key point.

Prof Tregenna pointed out that the State’s potential role in industrial policy could lie in the fields of regulating, producing, acting as a financial agent and also acting as a consumer.

She said that the appropriate objectives for industrial policy in South Africa in general could be an increased absorption of labour, and the avoidance of further deindustrialization.  She prescribed that South Africa should put manufacturing on a long-term growth path. Supremely, the country should regain its lost world share of value added manufacturing output. There should be a move towards more demand-dynamic products. She recommended Broad Based Black Economic Empowerment (BBBEE), especially in actual production. A promotion of diversification was to be embarked upon. South Africa should also support its objectives in the region, and on the Continent.

She further recommended the strengthening of domestic linkages between sectors, especially those with desirable characteristics such as being labour intensive, demand-dynamic products, sectors that were positive for balance of payments, sectors with strong domestic backward linkages, sectors that were technologically progressive and those that had a scope for cumulative productivity increase. She stressed that exports of a relatively unprocessed from should be discouraged, and that the State should encourage exports that were in a more processed form.

Prof Tregenna looked at macro constraints to a successful industrial policy for South Africa. These were the strength of the exchange rate, the volatility of the exchange rate, high interest rates and the low domestic demand. Amongst those constraints, high unemployment and associated ‘trade-offs’, limited infrastructure and a concentrated economic ownership and control needed much attention.
Other associated constraints were the high cost of capital, coupled with problems with the availability of this capital, lack of sufficient skills, the limited capacity of the State, the limitations of the country’s private sector, low productivity and competitiveness, and path dependence.

Prof Tregenna saw that the strengths of the Industrial Policy Action Plan (IPAP) lay in policies that were detailed and concrete, with measurable outcomes. The recognition of importance of policy integration was also a strong point. The leveraging of procurement for industrial policy (IP) objectives, an emphasis on developmental trade policies, sectoral differentiation and targeting were important. She listed other strengths of IPAP as including the fact that it targeted sectors with different characteristics and implications for growth and employment, its emphasis on importance of competition policy and its three-tier clustering of sectors, which she deemed useful. She saw the welcoming of the economic debate on ‘normalisation’ in South Africa as a tremendous strength.

She commented that there was a need for a significant up-scaling of IP. She also stated that there was a need for medium-term IPAPs with annual actions and reviews. She warned that it would be difficult to regain lost production capacity, as deindustrialization was immensely difficult to reverse.

There was a need for the State to be stronger on the financial sector, while keeping a close watch on the current account balance. The deficit was unsavoury and had possible negative implications on the IPAP. There had to be State-initiated or ‘housed’ manufacturing enterprises. She prescribed a joint government/business research initiative that would identify feasible manufacturing opportunities. She called for co-ordination on policy areas that, although not falling under the Department of Trade and Industry (dti) were nonetheless essential for the success of industrial policy.

Discussion
Ms C Kotsi (COPE) stated that there were some negatives amongst the positives outlined on the IPAP. She asked what some of these could be.

Prof Tregenna answered that the government was spending a great deal on IPAPs. This money could be spent on other programmes, such as education and housing. That was what prompted proper strategising, otherwise the funds would be spent unwisely.

Mr G Radebe (ANC) stated that the State had handed over some of its parastatals to the private sectors and that some of those parastatals were performing poorly, and having to be bolstered by government funds. He asked whether the State should reclaim some of these parastatals as a means to strategic planning.

Mr N Gcwabaza (ANC) asked what the universities were doing to assist the IP, in terms of their intake and output of engineers, since the submission had made various points on the focus on skills.

Prof Tregenna said that she could not comment on the skills question as she was not an expert in that field.

Mr Mabaso asked whether universities and technikons collaborated with similar aspired outcomes.  He stated that the dti’s strategy was not including those who were at the periphery of the economy.

Mr van der Westhuizen asked who should lead the government/business research initiative.

Prof Tregenna answered that this should be a joint initiative from both sides. She gave an example of the joint venture that the Chinese government and business were embarking on, in their growing wine industry. She predicted success for the Chinese in twenty years time, due to the dual commitment of both sectors.

Due to time constraints, the Chairperson invited Prof Tregenna to contribute further with written recommendations and responses.

ArcelorMittal submission on the IPAP2
Ms Nonkululeko Nyembezi-Heita, Chief Executive Officer, ArcelorMittal addressed some of the key discussion points set out in her submission. She summarised these as the view that employment creation in South Africa pivoted around a grand-based incentive scheme, that more assistance was needed for the preservation and creation of employment, the leveraging of the public sector infrastructure investment programme, the dependence on the strength of the exchange rate and the volatility of that exchange rate.

In relation to the assertion that South Africa’s employment pivoted around grant-based schemes, Ms Nyembezi-Heita stated that the selection of the automotive components sector was broadly positive for the primary steel industry. She predicted that the move away from a tax-based scheme was likely to increase the administrative burden on the dti.

She informed the Portfolio Committee that the steel industry had, for more than two decades, created and maintained its own incentive schemes to entice downstream industry to utilise their dormant manufacturing capacity, and to export their additional produce that was not required by the domestic market. She said that the rebate payable represented the price differential between domestic and export prices, effectively pricing steel at export levels for that campaign, and added that ArcelorMittal had supported the principle of value added exports.

Ms Nyembezi-Heita said that there were advantages of the value added export scheme. It would create a higher domestic demand for primary steel, there would be foreign exchange earned by the downstream industries, and that in turn would drive the notion of value addition. There would be domestic job creation, as the production unit utilisation would increase. New and optimised downstream capacities would be created, and the downstream sector would became exposed to international markets, via value added products

She then noted that the following rebates had been paid out to exporters:
- In respect of value added assistance a sum of R376 million was paid out, which had dwindled to R194 million in 2009. 
- In respect of import subsidies, R133 million was paid out in 2005, and had decreased to R22 million in 2009.
- In respect of the Committee for Secondary Manufacture (COSM), a sum of R46 million was paid out in 2005, which then decreased to R38 million.

In total; R555 million was paid out in 2005, but that sum had dropped by 2009 to R252 million, about half of the 2005 amounts.

She listed the industries that were supported with the value-added export schemes, as including pipe and tube, conveyers, wire and wire products, construction, tin cans, mine support systems, automotive products, cell towers, power lines and drums.

Ms Nyembezi-Heita said that the government needed to continue focusing on improving the infrastructure of the country, in areas such as energy, roads, ports and rail transport. She stated that although this was happening in places, the task of leveraging the public sector infrastructure investment programme to the maximum remained a work in progress. She warned that real control regarding the localisation programme in the public sector had not been achieved. Many contracts still sourced material internationally while sufficient supply was available in the domestic market.

She pointed out that South African downstream industries had to sort out some of their own deficiencies. There were challenges such as non-competitive cost structures. The government could assist with best practice and benchmarking programmes, to ensure best-in-class businesses in South Africa. Uneconomical production units that were caused by the absence of economies of scale could change when local content of infrastructure programmes contributed to better utilisation, and trade policy counterdumped finished goods in the South African market. Old facilities which did not compare to current new technologies had to be upgraded with an accelerated tax friendly incentive scheme to lighten the burden of debt in the industry. Uneven playing fields in the international market, due to subsidies and incentives given by the governments in the exporting markets, should be countered by similar instruments in South Africa’s domestic market. Regulation against imported sub-standard products should be done, to ensure that quality products were entering South Africa’s markets, and that locally manufactured products could compete on an equal footing.
She recommended that other non-trade barriers such as rail and port deficiencies should be solved and should receive the highest priority from the government.

On the issue of exchange rate volatility and strength, Ms Nyembezi-Heita warned that the strong rand had reduced the profitability of exports, as the variability of the exchange rate had increased the risk of investing in export industries. Predicting the exchange rate was very difficult, and it had been equally difficult for anyone contemplating an investment in the manufacture of goods for export, to budget the future income. The result had been a dramatic decline in South Africa’s manufactured exports, from approximately 1% of total world exports in 1980, to less than 0,4% currently. High interest rates and foreign currency speculation had further reduced the profitability and increased the risk of investments in the manufacture of tradable goods. The benefits of rand appreciation were that it would temper inflationary pressures, and enhance the chances of further interest rate reductions. The negatives of rand appreciation were that the country’s export sectors’ single main comparative advantage of a cheap currency would be significantly eroded by a strong rand. The manufacturing, mining and tourism sectors in particular could be negatively affected and economic growth could also be placed in jeopardy.

She concluded by announcing that the primary steel industry was ready to help government to build South Africa’s economy, to achieve a better life for all. The Revised Industrial Programme Action Plan (IPAP2) would boost confidence in the industry and should support further investment in industry productive capacity, particularly in the component manufacturing sector. IPAP2 identified a number of priority sectors, including the vehicle and component manufacturing industries, all of which were steel-related, for employment creation.

IPAP2 also proposed the provision of support and assistance to encourage the production in South Africa of electric vehicles and related components, which would boost steel related fixed investment. IPAP2 would boost business confidence in the manufacturing sector and could support further investment in the sector. Macro- and micro-economic policies would be more in line, and thus the promotion of investment in certain sectors would have a positive impact on steel sales to the construction sector. IPAP2 would enhance inward industrial development which would have a positive effect on the balance of payments. The new plan would focus on opportunities in capital goods, transport equipment and metal fabrication, which would invariably boost steel demand.

Discussion
Mr Marais asked what percentage of ArcelorMittal was used in car manufacturing.

Ms Nyembezi-Heita answered that it was a meager 10%.

Mr Mabaso asked how much involvement ArcelorMittal had on the African continent. He also asked about the relationship between the company and South Africa’s tertiary education institutions.

Ms Nyembezi-Heita stated that ArcelorMittal was working on being a reliable provider of steel in Africa. That was to avoid dumping left-over produce on the continent.  She said that ArcelorMittal was paying for a number of youngsters in universities and technikons and that the company had not deprioritised that commitment, even in the midst of the financial crises.

Mr S Marais asked what ArcelorMittal had to say about the accusations in the industry that this company was price-pushing.

Ms Nyembezi-Heita answered that the ArcelorMittal philosophy was to create an attractive price to customers and to maximise profitability.

Because of the time constraints, the Chairperson asked Ms Nyembezi-Heita to respond to the Committee in writing. She also welcomed further recommendations from ArcelorMittal.

South African Institute of Steel Construction (SAISC) submission
Dr Hennie de Clercq, Executive Director, South African Institute of Steel Construction (SAISC), provided a context of the steel industry and SAISC’s function. It was stressed that SAISC produced steel structures within its factories, which were then constructed on sites. Examples of such work included the Burj Al Arab hotel in Dubai, Soccer City Stadium in Johannesburg, a sports complex in Abu Dabi, the Nelson Mandela Bridge and Eskom transmission line pylons. Many projects for the mining industry were also shown, highlighting that without the steel industry, the mining industry could certainly not function. The facilities of SAISC were shown to be cutting edge and of the best world standards.  

What distinguished the SAISC from other industries was that no projects were mass-produced, but were rather specialist one-of-a-kind jobs fabricated in world-class workshops. The SAISC was also set apart by the fact that it participated in construction, and erected structures on site. Due to the fact that nothing was mass-produced, a relatively small capital investment was needed to create one job, although the industry was fairly labour and knowledge intensive. 80 000 people were employed in “safer, healthier and better paid jobs” through steel and construction projects.

The steel industry was seen as very important, because 40% of all steel produced was used in construction – equivalent to 2 million tons of steel a year – during the previous years, although this could have dropped owing to the global economic crisis. The industry was also a very sustainable, ‘green’ one as steel could be recycled many times without losing integrity.

The South African steel industry was undoubtedly world class. This was due to the skills available in the country and the quality assurance measures that were undertaken. It was a globally competitive industry as the SAISC was able to export a large number of products while still meeting the demand for steel locally. The industry was also forward looking, and much expansion had been undertaken with “huge investment” in new equipment, software and training.

SAIC devoted resources to education and training, with research programmes and courses run by the SAISC at Universities. It also published technical handbooks and advised the South African Bureau of Standards (SABS) on industry standards. Importantly the SAISC undertook to proactively act with decision makers in both the public and private sector in order to pre-empt the needs of the market. It also actively “defended the home market”. An example of how the Australian steel industry had failed to protect its own interests, and was pushed out by Chinese steel manufacturers, was provided to substantiate this point. The SAISC was constantly pursuing projects in other countries and was mobilising South African companies in South America and the Middle East. It was demonstrated that South African steel exports had been on a constant increase from 2004 to 2008. 

Mr Kobus de Beer, Industry Development Executive for the SAISC, noted that an important role of IPAP was to identify major projects, set a timeline for industries and ensure that this timeline was being adhered to. SAISC was concerned by the indefinite deferral of establishing Nuclear Plants. The steel industry had stood to benefit immensely from such projects. Eskom was now 100% supplied by the South African steel industry, moving away from the 40% once imported from China. An indication was needed of when the nuclear projects could be expected to be under way again.

The steel industry had benefited immensely from Department of Trade and Industry (dti) incentives. It was reiterated that such incentives should not only be financial or result in “crutch industries”, should help to build capacity and create a “knowledge economy”. The SAISC felt that exactly this had been achieved through its collaboration with the dti and programmes such as the Industrial Policy Action Plan (IPAP).

New opportunities for the industry included projects for Sasol and Petro SA, as well as an increased number of cellphone masts throughout Africa. SAISC requested IPAP’s help in preventing China from taking over the cellphone masts market with its cheaper versions. Support of the industry and impositions of import duties were needed. When SAISC exported goods to India, a 10% import duty was levied against them, but goods entering South Africa were free of duties. This situation needed to be rectified by IPAP.

Contrary to media reports the price of steel had never been found to be a detriment to the steel construction industry or SAISC, and was good when compared to international prices and standards. SAISC had never encountered a skills deficit, and this was attributed to the longer lead times of the industry. For example during a project carried out in Mozambique, the local government had insisted that only local labour be used. The SAISC managed this by establishing a training school within the area. The key to success in this regard was a predictable workload.

In the last three years South Africa’s steel industry had grown into one of the most modern, cutting edge industries in the world. While it was not a very large industry – China’s was between 10 and 15 times bigger – its standards were certainly world class. This was attributed due to IPAP and needed to be preserved through continued application of the programme.

The only criticism levelled at IPAP was that the SAISC occasionally felt left out of the loop on the progress of certain projects. For this reason six-monthly feedback sessions were requested. The SAISC’s own need to be more proactive in attending all dti events was also recognised.

Discussion
Mr X Mabaso (ANC) stated that one of Government’s greatest concerns was that the economic benefits of an industry were only being experienced by a few and did not empower the broad spectrum. He asked how the steel industry was contributing to alleviating this problem.

Dr de Clercq replied that the steel industry was “one of the least concentrated areas” of economic benefits. This was due to the fact that barriers to entry in the industry were very low. The SAISC especially had spent a lot of time involved in the Construction Sector’s Black Economic Empowerment (BEE) Charter, and had been very frustrated that government involvement in this Charter had taken so long. Moreover, training schemes and bursaries were mostly directed at black individuals and the number of females in the industry was growing.

Mr M Komo, Chairman of the Board of SAISC, commented that the biggest constraint in involving previously disadvantaged individuals and Small and Medium Enterprises (SME) in the industry, was the denial of access to loans and credit by financial institutions. No matter how “benevolent” the BEE initiatives, constraints were almost always imposed by financial instruments. If government could help in rectifying this then the empowerment of black individuals would go much further.

Mr A van der Westhuizen (DA) commented that that SAISC must know that the Export Insurance Corporation fell under the dti. He asked SAISC to share its experience of this and say whether government was doing enough in this regard.

The Chairperson noted that the presentation had been enthusiastic, but asked what SAISC saw as the challenges, and how they should be addressed. She also asked for a profile of representivity within the steel industry. She questioned if the percentage of steel which was still being imported into South Africa could be viably produced by South Africa.

The Chairperson asked for all questions to be dealt with in writing.

Mr G Radebe (ANC) took over as Acting Chairperson.

Bioclones (Biopharmaceutical Company) presentation
Dr Shaun Cochrane opened his presentation to the Committee by contextualising the role of Bioclones within the Biopharmaceutical Industry. Bioclones manufactured the Active Pharmaceutical Ingredient (API) for Biopharmaceutical medicines. Biopharmaceuticals were essentially medicines created out of biological (and not chemical) components, such as proteins, hormones, DNA, antibodies, and would, as science progressed, eventually include human cells such as stem cells.

Globally, the Biopharmaceuticals market was worth $90 billion. This industry was growing twice as fast as the “straight” or ordinary pharmaceuticals industry. A third of all pharmaceutical products in the pipeline were biologics. It was predicted that the industry would grow to the point that in thirty years’ time the majority of treatments would in fact be biologic in nature.

The South African Biotech Industry, however, imported all Biological Therapeutics as final, packaged products. Since the industry was still so new no total market size within South Africa had yet been defined. The imports caused lagging behind all other countries. Due to their newness, the biological therapeutics were still high cost and not used as first line treatments “despite proven therapeutic benefits”. They were used to target or “developed market diseases” such as diabetes and cancer, but these were also increasing dramatically in developing countries, and therefore South Africa needed access to them at affordable prices.

Bioclones was the only sub-Saharan manufacturer of Biopharmaceuticals who manufactured API from scratch. It had significant Intellectual Property (IP) in the development of new biologics. Bioclones was also at the forefront of therapeutic technology and possessed novel technology for vaccines – this held many benefits for Southern Africa in terms of improved supply and adherence attributes.

Bioclones currently employed four PhD Graduates, but if the industry were supported, the number of doctorate and tertiary educated individuals employed would increase significantly – not just in the company but throughout the country. Due to the fact that biologics were complex to manufacture, automated processes could not be relied on and the industry was fairly labour and knowledge intensive, employing mostly scientists. The current challenges faced by the industry related to scientists emigrating through lack of the biologics industry, and the lack of ways to commercialise the excellent research from the universities. If the industry received the support it required, commercial opportunities could be granted to graduates and scientists. There were significant growth prospects in the biopharmaceutical industry, and by generating the local biologics manufacturing industry, revenue earned would be reinvested in the Bio-industry of South Africa. Bioclones’ current growth strategy was to buy technology with its profits, thereby generating skills and employment opportunities. The industry could contribute considerably to skills development, and, if manufacturing locally, could contribute heavily to Gross Domestic Product (GDP). It was estimated that the ordinary pharmaceuticals market generated 30c of GDP for every Rand sold. Because Bioclones self-manufactured API, its contribution to GDP would therefore be much higher.

IPAP and access to incentives by the dti had given the Biopharmaceuticals Industry hope. However, no support had been received from the Department of Health (DoH) and the National Treasury (NT), and this was needed to generate revenue from exports.  In the past the DoH and NT had almost exclusively supported multi-nationals, for instance awarding 99% of a tender to multinationals, and only 1% to Bioclones, despite the latter equalling or bettering the prices, and the reason given was that this had followed the doctors’ requirements, as they were not aware of the Bioclones products.

Another challenge to South Africa’s bio-industry was coming from Indian markets, since these were subsidised and therefore price-competitive, and it was feared that this could lead to further skills losses as South African scientists would be disincentivised to work in the field.

Bioclones summarised that although Africa could never compete in Biotech it had a very good chance of making inroads in the Biopharmaceuticals Industry  if it received the necessary support. Biopharmaceuticals were seen as the medium term future of medicine and the country would undoubtedly need biologics as a front line treatment. However, the industry was unwilling to invest in training and infrastructure if it did not receive support from DoH. This lack of support was hindering the development opportunities of the industry. With the necessary help from all government departments the Biopharmaceuticals Industry could be developed in the next five to ten years and would be able to commercialise the prolific research and development (R&D) South Africa had produced.

Discussion
Dr M Oriani-Ambrosini (IFP) pointed to the example of development of industry in Taiwan, which had focused on studying where technology was going to be in future, and had deliberately built its industries around those goals, thus becoming a leader in Information Technology (IT) and electronics. South Africa could, by focusing on the bio-industry short term, become a long-term leader in these products. Government needed to invest in a “Bio-park”, where infrastructure, knowledge, commercialisation and R&D were centralised. He suggested that in this way a buy-in of foreign knowledge could be arranged for all participants and a “springboard” developed to create a global industry. Instead of spending the little money available on protectionist measures, government rather had to focus on creating a globally competitive Bio-industry of its own. He asked if this was viable.

Dr Cochrane responded that the idea of a Bio-park was certainly a viable one and that Bioclones was interacting with the Department of Science and Technology (DST) who shared a similar vision. Similar Bio-parks elsewhere in the world were successful. Investment from DST and dti seemed available, and biopharmaceuticals could be developed and ultimately manufactured and sold as a result. The question however was whether such a park would only focus on export or also on servicing the local economy and people.

Mr van der Westhuizen asked why Dr Cochrane believed South Africa had a competitive cost benefit in this industry, seen against other countries.

Dr Cochrane said that there were definitely competitive benefits and the South African industry could in fact be equated with the Indian one.  Firstly, the manufacturing costs of biopharmaceuticals here were equal to those of India, even with India benefiting from government regulations and subsidies. Secondly, South Africa was able to compete on an academic level with India and even with Europe and America. The only real difference between South Africa and India was to be found in the profits each would make from the industry. While South African profits might not be as high as India’s they would be enough to reinvest in technology and the growth of the industry.

Mr Mabaso asked whether it was possible that the DoH and Treasury were simply not “speaking the same language” and fully understanding Bioclones’ position. He asked if the Bio-industry represented South African demographics in terms of race, gender and people with disabilities, pointing out that this was often a critical assessment tool. He also asked whether the industry concentrated more on developing products or developing skills, and to what degree did the industry interact with tertiary institutions.

The Acting Chairperson asked for an indication of the size of the industry and how many players were participating in its development. He also asked what the critical parts were that government could play in allowing the industry to succeed.

Dr Cochrane agreed that there was a lack of understanding between the industry and the DoH, who did not have biotech expertise to understand the industry. The Bio-industry was heavily involved in new therapeutics which were not yet understood in this country. The Medicines Control Council was only now looking to establish guidelines on Biotech control.

Dr Cochrane noted the comment around demographics. Bioclones recruited many previously disadvantaged individuals and female scientists. It was not possible to speak for the industry as a whole, but transformation was certainly under way as many previously disadvantaged people and females were attracted to studying sciences. However, this was possibly not yet achieved in the vast numbers required.

Bioclones interacted fully with tertiary institutions as this was critical to business.  It had formed partnerships with many universities, including the University of Cape Town and the University of Pretoria. These relationships formed critical two-way interactions in which Bioclones could commercialise R&D and give back business acumen, knowledge and manufacturing know-how. Many universities also carried out contract clinical trials, which Bioclones could use in order to test new Biopharmaceutical products.

Dr Cochrane could not specify exactly how many participated in the industry as no established market size had yet been developed for South Africa. However, all those that he knew of interacted with one another and shared knowledge and experience. As a trade group in Biotechnology all companies were very committed to establishing a fully fledged industry in South Africa.

Biovac Institute presentation
Dr M Mokgena, representative for the Biovac Institute, opened the presentation by informing members that Biovac was also part of the Pharmaceutical Industry and also played a part in the bio-technology arena. The Biovac Institute was responsible for developing human vaccines. It opened in 2004, after government-run vaccine producing entities had closed, due to lack of skills, funding and good business practices. Biovac was formed as a public-private enterprise, in which the government held 40% shareholding. It interacted closely with the Department of Health.

Biovac’s objective was to establish the domestic production of vaccines in an economically viable manner, whilst simultaneously retaining vaccine production skills and the R&D around vaccinations. It had been upgrading its facilities over the last three years, and would have spent R242 million, by 2013, to become a fully fledged vaccine producer.

In 2004, there were 24 staff taken over into Biovac, but it now employed 150 staff, of whom 45% were black individuals and the majority were female. Biovac attracted a skills base from tertiary institutions and its speciality areas constituted all sciences. However, the Institute compromised of a number of super-speciality areas and therefore focussed on developing and training people in order to facilitate such skills. In 2010, an additional 30 scientists were to be employed.

A number of manufacturing challenges were experienced by the Institute, including cost and supply chain issues. The demand for vaccines was unpredictable – as seen in the 2009 swine flu pandemic.

Biovac Institute currently imported all vaccines, roughly 35 million doses a year, because the Institute was still upgrading and not yet at manufacturing level. However, by 2013/14 it was hoped that Biovac would be able to produce 47% of the country’s vaccines.

There was a great potential for export within the vaccines market. The United Nations Children’s Fund (UNICEF) currently procured vaccines for any countries that could not do so themselves, and a list of countries in the Southern African region for whom UNICEF procured vaccines was tabled. The Institute was preparing to meet World Health Organisation (WHO) qualification criteria, so that by 2014 it could supply UNICEF with 20 million doses of vaccines. Logically, it made far more sense to supply Southern Africa with vaccines manufactured in Africa, rather than imported from elsewhere. In this manner Biovac would become the only sub-Saharan manufacturer of vaccines.

With regards to IPAP the vaccines industry would ask for greater cohesion between departments of government – including the DST, DoH and dti. It would also ask that government embark on a process of interacting with WHO. Biovac also asked for a “speedy amendment to the preferential procurement legislation”   

Discussion
Mr van der Westhuizen asked Biovac to expand on the closing down of government vaccine production facilities and the impact this had on South African sciences and the ability to fight diseases.

Dr Mokgena stated that the previous facilities had been enough to produce vaccines for the Government of South Africa at that time. However, post 1994, when South Africa emerged as a “global player”, it was necessary to ensure that these facilities were upgraded and WHO qualified. For this reason a public-private enterprise had been established.  Moreover, the vaccines produced in the older facilities were for the treatment of diseases such as smallpox and polio that were no longer needed and so the vaccine industry therefore needed to adapt to treating illnesses, especially those in Africa. Unfortunately, when the facilities were done away with, there had been an exodus of skills, and the Institute was no battling to find scientists with the requisite skills.

Mr S Njikelana (ANC) enquired as to which areas of the preferential procurement legislation Biovac wished to see amended.

Dr Mokegena stated that the supply of vaccines from Government seemed to focus on price, regardless of the value added by local manufacturing.  Point matching tenders would be of much assistance in helping to fulfil the objectives of the Biovac Institute.

Business Unity South Africa (BUSA) submission
Ms Catherine Grant, Director: Transformation, Business Unity South Africa, noted that this organisation (BUSA) appreciated having been consulted on the development of the trade policy from the outset.  While BUSA’s preference had been for a more forward-moving and critical strategy, it acknowledged that this was a living document and was developed as part of a process.

Useful points of synergy between the Trade Policy and IPAP2 – such as the non-tariff barriers and standards – were acknowledged. It was stressed that tariffs could be used indirectly to support industrial development and food security, but that they were only “one part of the tool box” for creating a business environment conducive to growth. BUSA placed a priority on addressing the ‘mechanics of trade’ such as trade facilitation and market intelligence. Overall, the policy needed to be implemented in such a way so as to support those actually doing the trading.

BUSA asked for much stronger political commitment from African governments in implementing trade agreements, especially in removing tariffs between Southern African Development Community (SADC) members and thereby fully liberating trade. BUSA suggested that one way in which to better hold governments accountable was the greater involvement of stakeholders (including those in the private sector) in initiatives.

Strategic thinking was needed on the impact of Free Trade Agreements (FTA) – especially those with Asian countries – on South African exports. Creative thinking around South Africa’s own model of preferential and free trade agreements was suggested. The current model was not as effective as it should be, and did not hold enough scope for expanding trade. Although BUSA did not have all the answers in this regard, the FTA model needed to be considered carefully.

A cost-benefit analysis of South Africa’s participation in the Southern African Customs Union (SACU) was needed. While the SACU agreement had been revised in 2002 it had not at all been properly implemented

BUSA suggested that South Africa make better use of its alliances within the World Trade Organisation (WTO). In particular capacity needed to be built to participate in the dispute settlement system, both with the WTO and within the Southern African area. BUSA acknowledged that the dti had been very inclusive in its engagement with the WTO and thanked the Department for this.

A very positive area of the Trade Policy was the emphasis it placed on services. However, there were still problems around issues of investment and competition policy. Investment needed to be promoted and more coherent policy in this regard was needed. Furthermore, the linkages between investment and competition needed to be made clear within the Trade Policy.

The policies accompanying the Trade Policy needed to provide broad support to ensure a consistent and inclusive approach. It should certainly not only be targeted at, and benefit, certain groups.

It was heartening to see better coordination and cooperation between government departments and this went a long way in lessening its institutional challenges. BUSA however conceded that it needed to build its own capacity and broaden its access to information on matters in order to better participate in trade policy debates. An initiative to provide training to private sector individuals was under way.

Lastly, BUSA priorities for a future trade policy programme were outlined. Most importantly these included: a review of SACU, a study of the impact of FTAs on South African strategy, a rethinking of South Africa’s strategy regarding the WTO, and the implementation of company level analysis by the dti in order to better formulate Trade Policy.

Discussion
Mr Marais referred to the fact that, because of budgetary constraints, only twelve sectors had been identified as focus areas of the Trade Policy. He asked if BUSA thought that with the money available, and these twelve sectors, the economy could be grown properly, or whether the money should instead be concentrated on a smaller area and focussed results created.

Ms Grant  stressed that, overall, BUSA was very positive about IPAP and felt that the Trade Policy should be used as a means to strengthen industry overall. With this in mind BUSA agreed that a more concentrated approach may be needed rather than a widely dispersed one. This was not to say that the twelve sectors identified were not important, but it was suggesting that a sequencing of resources should take place within those sectors, in terms of human capital and monetary resources, so that there was concentrated focus on each sector as a time. However, BUSA believed that there were more important overarching issues that should have been more at the heart of the policy, and there should not be selection of specific sector initiatives. Furthermore direct synergy between trade and IPAP was needed.

Mr van der Westhuizen referred to BUSA’s criticism of SACU, and asked if it was a bad thing for South Africa’s neighbours to benefit more from SACU, if they were poorer than South Africa.

Mr Njikelana asked how strategic it would be to disintegrate SACU and simply incorporate it into SADC.

Ms C Kotsi (COPE) asked exactly which areas of the SACU agreement needed to be reviewed, and which areas were hampering the relationship between South Africa and its neighbours.

Ms Grant said she was not suggesting that SACU be done away with. However, a number of years had passed since its implementation, and there had been many other developments that infringed on the SACU agreements. For instance, the SACU agreements made provision for trade tribunals for those that infringed policies, and yet this had never been implemented. This had raised questions as to the long term viability of SACU. A review of how SACU was operating and implementing policies was needed, in order to find perhaps even better ways of benefiting South Africa’s neighbours, who were, indeed, supposed to be the primary beneficiaries under SACU.

The Acting Chairperson referred to the fact that BUSA needed to build its own capacity, and asked if it had a shortage of skills, and whether it was contacting tertiary institutions in this regard.

Ms Grant said that BUSA was indeed aware of the gap in its own capacity and shortage of skills, and it would be in BUSA’s own interests to rectify this. It was cooperating with tertiary institutions. Programmes had been run with universities in the past, but this was not sufficient and more should be done.

Mr Marais stated that he understood that there was a perceived lack of synergy between the Treasury and dti, and asked how BUSA thought this could be rectified.

Ms Grant responded that in the past it had certainly been felt that there was no consensus from different departments on issues. While this had been rectified to an extent, it was necessary to ensure that congruence and integration on policy frameworks existed between departments – especially with regards to IPAP. It was agreed that if NT was not “on the same page” as the dti, then the programmes would never succeed.

Trade Strategy Group Presentation
Ms D Keet introduced the Trade Strategy Group (TSG) as an active and influential body which was compromised of Non-Governmental Organisations (NGOs), research Institutes, labour organisations and church-based organisations. The TSG operated on a national, regional and global level throughout various trade organisations. It was not only concerned with trade but also with development and, importantly, the effect of trade upon development.

The TSG welcomed the policy shifts taking place in government and the dti trade strategy. However, it was felt that the dti trade dimension was more advanced than its industrial strategy dimension. This was understandable, as trade had been the dominant influence of globalisation in the recent decade.

South Africa, especially in the media, still suffered from “knee-jerk reactions”, claiming that the dti trade strategy consisted of the creation of protectionist and interventionist government and a closed economy. Because this strongly influenced the public’s views, an active response from government was therefore necessary. The device of referring back to apartheid era protectionist policies had also been employed. This did not negate the necessity for appropriate policies and the Trade Policy stressed that tariffs be applied selectively and with strategic pragmatism. There was no “across the board protection”, but instead the Trade Policy was judicious and nuanced and TSG recognised its subtlety.

It was however necessary that government and the dti made it clear to businesses that any tariff supports would be conditional (with certain criteria needing first to be met) and transitional (to avoid becoming a built-in protectionist measure and creating dependency).  A clear distinction between the protectionism of the powerful and the protective policies of the weak was needed. It was also however recognised that the protectionist devices used in industrialised countries were not limited to tariff barriers and were very difficult to deal with.

The dti called for a purposeful State within the Trade Policy, and correctly pointed to historical evidence that no country had developed, diversified and industrialised without active State intervention. States were required as protective, monitoring agencies in order to regulate free markets, which had shown their destabilising role and irresponsible behaviour. Moreover, if the economic crisis continued, the intervention of the State in industrialised countries would continue to be seen. South Africa needed to ensure, in principle and practice, the right and capacity of the State to intervene in order to protect and develop the economy.

The dti made indirect reference to the necessity of import replacements. There was frequent reference in the business media and academic publications to refer to failed import substitution industries. It was incumbent on the dti and South African industry to revisit the import substitution strategies applied in different countries and to learn from them. It was important to respond to the continued outflow of South African capital resources to pay for imports that could be sources internally. How and why South Africa’s industrial capacity had deteriorated and how much this was due to internal policy decisions or external pressures, needed to be examined.  

The most important part of the Trade Policy was that it was explicitly employment driven and not trade or liberalisation driven. The Policy explicitly rejected simplistic trade formulae or “text book approaches” which advocated the impractical implementation of free markets, and dti’s position on this was welcomed. Dti’s  position that tariff reduction did not automatically result in the restructuring of the economy was commended, as selective and strategic tariff policies were needed. TSG also agreed with the dti’s position that the export basket needed to be changed from a strong commodity based one.

The broadening and diversification of trade applied not only to the context of the trade but also its orientation. The challenge was not to “buy into” the idea that South –South agreements were devoid of any of the ‘dangerous’ implications of free trade which would weaken the economy. Instead of free trade agreements in Southern Africa, preferential trade relations needed to be entered into. The TSG welcomed South Africa’s leading role in opposing the European Union’s (EU) economic partnership agreements and for resisting demands from the EU which would directly contradict the direction government policy was taking.

TSG felt that SACU seemed no longer to be a viable entity. Either the governments involved in the EU agreement would need to withdraw their offers or SACU would have to be renegotiated in the context of SADC.

The creation of a vast Cape to Cairo free trade area raised concerns for the TSG. The terms under which such a trade area was created could have a seriously destructive and destabilising effect – especially if South Africa was not the prime beneficiary of such an agreement. TSG saw it as problematic that United Kingdom investors had been assured that this would be a vast open area in which they could invest freely.

Trade was not the only, tool in industrial development. In speaking of industrial development and strategy, it was necessary to consider economic development and diversification. Industrial strategy was only one dimension of a holistic economic development strategy and might not be the most important job creator.

The inadequate synergies between the dti and National Treasury needed to be addressed, with much better consultation, coordination and convergence towards the dti’s strategies. It was also accepted that while the dti and other government departments must deal diplomatically and cautiously with the private sector, the NGO sector had a right and much greater freedom to say something. It was necessary for the South African government to demand quid pro quo support from businesses, but any support should be applied on the basis of certain criteria, which might include a genuine commitment to job creation without tokenism or fronting, a commitment to South African development needs and requirements, or a better sensitivity and understanding to regional development and cooperation.

The TSG disagreed with BUSA and the dti’s position on service exports. In TSG’s view, South African service providers were not up to standard, and government should not be underwriting and negotiating deals for them to leave the country. They should be encouraged to operate optimally within South Africa and not to leave.

Because the dti had developed the Trade Policy at the early stages of the economic crisis, no criticism could be levelled at it for not taking into account the full extent of the recession. However, it seemed that the repercussions of this downturn would be felt for many years, which made it even more important for  strategic policy interventions to be flexible and innovative. An ecological or environmental crisis was also looming, in terms of availability of energy and water resources. A similar approach would be necessary from all government departments to prepare for what would undoubtedly be a very difficult period.

Members did not wish to ask any questions.

AGRI-SA Presentation
Mr Hans van der Merwe, Chief Executive Officer, AGRI-SA, opened the presentation by voicing his appreciation of the consultation that had taken place between the dti and the Department of Agriculture, Forestry and Fisheries on the Trade Policy. He felt that it was necessary for dti to implement an industry specific approach towards agriculture, which was not covered by the Trade Policy.

It was acknowledged that significant changes were undertaken in the structure of tariffs within the policy, but that no actual structural changes of industry as a whole were included, despite the National Industrial Policy Framework (NIPF) requirement that the approach to tariffs should be “decided primarily on a sector by sector basis”. Until the mid-1990s agriculture had not been included in multi-lateral trade policies, and for this reason a distorted trade dispensation towards agriculture now existed. Agricultural strategies and the Agricultural Sector Plan therefore needed to be considered. 

Of great importance were the many cuts in subsidies and protection the Agricultural Sector had experienced. Due to this, South Africa had come to rely on importing value added agricultural goods, while only exporting a small fraction. There had been a 32% increase in exports between 2003 and 2008, but a 132% increase in agricultural imports. This had a broad impact on jobs and needed to be investigated.

South Africa was limited to allowing only 3% of its producers to receive support from the government, while developed countries relied on far more. Certain products simply needed more support in order to be able to compete with producers in the developed world. Global players within agriculture were all heavily subsidised and protected.

Overall, agriculture was contributing far less to the South African economy than it once was, because it received less protection than agriculture in developed countries. Realistically, South Africa now only remained competitive in fruit, sugar and wine. Agriculture, as the cornerstone of development in developing African countries, therefore needed support.

AGRI SA had identified a number of objectives which agriculture needed to achieve. These included a reduction in bound rates, an increase in market access quotas for South Africa’s exportables, new and agreed disciplines on tariff quota administration, and the renegotiation of special safeguards as their application was currently cumbersome and impractical.

AGRI SA stated that the IPAP strategic approach linked well with the Trade Policy and was sensitive to “cross-cutting” rather than “picking winners”. However, it stressed that in order to fully succeed, a dedicated Agricultural policy was needed.

Discussion
Mr Mabaso stated that one of the challenges faced by the country was the disproportionate availability of land across racial lines. He asked how AGRI-SA members would play a role in addressing these inequalities.

Mr van der Merwe conceded that transformation challenges were very real and should undeniably be addressed. AGRI SA did have serious commitments to this. Ideally, the best approach was to recruit the best entrepreneurs from across the entire population in order to make a true economic difference through entrepreneurial enterprises. However, because of the way agriculture was inherently structured, small and medium enterprises found it very difficult to survive. Since 2007, 30% of job opportunities in the sector had been lost, and less than 1 000 farms were now producing 80% of South Africa’s agriculture. This made it very difficult for newcomers without experience to succeed in the industry. Equity schemes within the sector, as opposed to land redistribution, would create better results.

Mr Mabaso asked whether Southern African countries were acting cohesively and sharing experiences with one another. He asked in particular what lessons South Africa could learn from the agricultural practices of Botswana.

Mr van der Merwe said that South African agriculture was acting as a unit with SADC working groups, and the Southern African Confederation of Agricultural Unions (SACAU). Ministers of African countries often met and South Africa’s Minister of Agriculture was to visit Nigeria. Members of SACAU held discussions and then took up issues with their respective governments. However, corruption and ever-changing policies often frustrated the progress that members attempted to make.

Mr Njikelana asked for clarification of the role of the agricultural sector as an importer of food, with its keen interest to export and asked where the balance between the two was to be found. He said that self-sufficiency should surely be the priority, before exporting took place. He asked if AGRI SA had any proposals on the agricultural self-sufficiency of SADC.

Mr van der Merwe responded that South Africa was agriculturally self-sufficient and had food security on a national level. However, at a household level, there was food insecurity. In order to rectify household insecurity, government intervention was necessary. At a national level food security was experienced in terms of trade and this was necessary in order to exploit competitive advantage. For example, South Africa experienced a major maize surplus which meant that exports were distorted in this way.


Mr Marais stated that the exchange rate obviously related closely to the favourability of exports. However, possible import replacements must exist, and he asked what these might be in South Africa. He also asked if AGRI SA could give a value of the government support ideally needed by the agricultural sector.

Mr van der Merwe said that the careful management of the exchange rate was necessary in order to find the optimum balance between exports and imports. Fertiliser, fuel and equipment were all objects that were completely import dependent. The South African agricultural sector did not have the resources to be a world player and to be competitive on an international scale. This was due to a number of factors. Firstly, infrastructural deficiencies in rural areas led to inordinately high transaction costs. Secondly, investor confidence in South African agriculture was extremely low due to failed restitution schemes. Lastly, the rising electricity prices would cause irrigation-dependent crops such as wheat and maize to become completely unprofitable. Costs were constantly escalating and it seemed as if competitors were set to take the market. A broad based approach to make agriculture a viable enterprise in South Africa was necessary.

“The Trade Lawyers’ View” on the Trade Policy and Strategy Framework
Mr Hilton Zunckel, Managing Director, Trade Law Chambers, said that this entity did not represent a large constituency, it worked for large constituencies. He said that he would focus on practical matters.

The question was asked where “trade” should ideally or naturally be located. In Canada, it fell under the Foreign Affairs Ministry, and the question was whether South African trade should not call under the Department of Economic Development, or even the National Planning Commission. That was not an issue addressed at all in the Trade Policy.

South Africa had a strong leadership role to play within Southern Africa and the world. United States Trade Representative Ron Kirk had stated that “if countries like Brazil, China and South Africa would come to the negotiating table with ‘open minds’, and were ready to make tough decisions, a conclusion to the Doha round could be reached”. South Africa was obviously seen as a global leader in trade and needed to take up this role on a multilateral and regional level.

South Africa seemed to be tentative in the area – for instance if had not spoken up when Swaziland closed its borders to the trade of flour.  SACU agreements and Articles of Unfair Trade Practice existed in order to provide a means of legal recourse, through trade tribunals. From 2002, none of the policies outlined by these agreements were implemented, and the question was whether Southern Africa was serious about them.

This had a number of practical implications for South Africa. Firstly, policies of protecting South African industry could not be implemented because no tribunals in which to formulate them were held. Secondly, unfair international trade policies were not being dealt with through the necessary measure of tribunals.

On the positive side, however, South Africa had recently acted as a silent party (with Brazil and Canada) in a WTO dispute against the United States for its protectionist measures in the maize trade. The American maize industry essentially ran at a loss, but was kept as the world’s largest exporter through heavy government subsidies. South Africa’s own maize industry had lost R4.4 billion due to this. Although no results were ultimately achieved that would benefit South Africa (because a private settlement had been reached between the US, Brazilian and Canadian governments) the value of third party participation was recognised.

The lesson to be learned was that South Africa should become involved in disputes sooner. Initiatives from the industry were recognised as the process driver. In the absence of an institutionalised arrangement, it was necessary to have excellent linkages between industry and government.
The Trade Law Chambers noted that the dti website, despite claims that information would be made accessible, displayed no tariff policies, trade agreements or national statistics. If companies wished to have access to these, they were forced to subscribe to external sites, at great cost. Moreover, there was no search engine present on the dti website to facilitate easy access to information. This would have to be addressed.

Discussion
The Acting Chairperson said that the dti had acknowledged these deficiencies and undertook to rectify them to better their service to citizens.

Mr Njikelana stated that pertinent and salient issues had been raised, but asked that while identifying such challenges possible solutions could be put forward too.

Mr Zunckel replied that possible solutions were already outlined in agreements such as those with SACU and the WTO. The true solution was to make the tribunals and dispute settlements outlined by such agreements fully functional. While diplomatic engagement was necessary, legal action should also be undertaken when it was called for.

The Acting Chairperson asked that all further discussion be addressed in writing.

The meeting was adjourned.