Minister of Economic Development on turnaround strategies and bail-out for training and companies in distress

Meeting report

The Hon. Mr Ebrahim Patel, Minister of Economic Development, said that South Africa’s economic situation needed to be placed into context within the global economy, which experienced the sharpest downturn in September 2008 since the Great Depression.  This had been accompanied by a financial crisis and a loss of productive output, with the shedding of millions of jobs.  Because of South Africa’s close association with the world economy, it was also adversely affected.  The social effects were harsh and immediately noticeable.

In South Africa, 1.1 million jobs had been lost between the fourth quarter of 2008 and the second quarter of 2010.  At the same time, a further 739 000 people - a large number of whom were young people looking for their first jobs – joined the ranks of discouraged work seekers, who were not officially recorded as unemployed.

The response of the Government, under the previous administration of President Motlanthe, was to initiate talks between organized business, the labour movement and community organizations, which led to the development of the “Framework for SA’s Response to the International Economic Crisis” in February 2009.  It was important that this document was crafted jointly by four stakeholders, who would normally have held differing views on the required solutions, but faced with this enormous crisis, had worked together to develop common solutions.  This was the beginning of a new, shared vision which the Government wanted to create in the country.

President Jacob Zuma, in his State of the Nation address in June 2009, had referred to the Framework Agreement as a starting point for working in partnership to respond to the crisis.  The following month, the newly-formed Economic Development Department was tasked with co-ordinating the implementation of the framework. 

One of the instruments in the Framework was a leadership task team, whose role was to bring together the leaders of the partner groups, and up until now, 11 team meetings had been convened.  Key principles had been developed, such as the burden of the economic downturn should not be placed on the poor and the vulnerable, and that what was planned for the short term should translate into decent work opportunities in the long term.  High levels of public investment were needed as the principal driver of the economic recovery.

Key areas for immediate action were identified.  One of these, to avoid job losses, was a new layoff arrangement and special measures for companies in distress.  Customs fraud, which had led to a large number of job losses, needed to be addressed.  With households coming under increasing financial pressures, the Competition Commission was tasked to investigate collusive practices which might push up prices where consumers were particularly vulnerable.  Local procurement was supported, while Government agreed on a counter-cyclical policy of increased public spending to slow the downturn, or to ensure some degree of recovery.  Another area was the maintenance of public infrastructure.

The first phase of implementation involved setting up a R6.1 billion fund, administered by the Industrial Development Corporation (IDC), to support companies in distress.  These were companies who had lost access to credit, because of higher risk aversion, or who had lost orders as a result of the crisis.

The second step was to approach business and labour in a few distressed sectors – clothing and textile, auto, capital equipment and metal fabrication – and ask them to come forward with proposals to transform and support their sectors.

It was also decided to set up a R2.9 billion Training Layoff Scheme, aimed at providing temporary relief for workers threatened with retrenchment.  The scheme provided for companies to retain workers on their books, place them on a training layoff, work with a Sector Education and Training Authority (SETA) to provide the training, and the Government would pay half the workers’ wages.  It was hoped that at the end of the training period, the companies would have recovered and the workers could be re-absorbed.

With the establishment of the implementing agencies taking up most of 2009, the next step was to get the programme working.  The IDC provided the funds, set up the rules, and invited applications from companies in distress.  So far, it had approved funding for about 50 companies, saving or creating about 15 000 jobs.  These companies covered a range of sectors, including metals, chemicals, mining, clothing and textiles, tourism, catering, agriculture, forestry, sawmilling, automotive and auto parts and accessories.  The total approved to date was just under R1.8 billion, with an average cost per job saved of about R120 000.  Applications from a further 14 companies seeking funding of R1.314 billion had been received and were being considered.

Referring to the funding by province, The Minister highlighted the jobs saved in areas such as Mpumalanga, North West, KwaZulu-Natal, Western Cape, Eastern Cape and Gauteng.  However, the low involvement of the Free State and Limpopo needed to be taken up with the IDC and local business communities.

Apart from the IDC interventions, packages were being developed to meet the needs of specific sectors.  One for the auto industry had been announced by Minister Dr Rob Davies (Department of Trade and Industry), while others were being developed for the capital equipment, transport equipment and metal fabrication sectors.  Auto, metals, capital equipment and transport equipment, and clothing and textiles, were included in the Industrial Policy Action Plan (IPAP2) in February, 2010.

There was also agreement in principle by a number of State-owned enterprises to support the concept of “fleet procurement”, in terms of which their tenders would specify short, medium and long-term requirements, rather than one-off tenders to meet immediate needs.  The new approach would help suppliers to eliminate uncertainty over their capital investment requirements to meet future demand.

A number of studies had been conducted on the nature and extent of financial constraints on companies, and these had been presented to the IDC, Government and industry, with a view to discussing what more could be done.

A package had been developed for the clothing and textile sector, but one of the challenges was how to deal with its short-term problems while at the same time begin to change the fundamentals of its competitiveness.  The Government had introduced a Clothing and Textiles Competitiveness Programme (CTCP), managed by the IDC, which had two components – the Clothing and Textile Competitiveness Improvement Programme (CTCIP) and the Production Incentive Programme (PI).  So far, proposals to the value of R61 million had been received to assist 47 companies under the CTCIP, while 71 applications to the value of R287 million had been received for the PI.

The Minister said that in the Framework, the Government was committed to adopting a focused approach to customs fraud, beginning with the vulnerable clothing sector.  This had led to raids on a number of companies suspected of importing goods illegally, and the confiscation of 750 tons of clothing items in the second half of 2009.

Trade remedies through the imposition of tariffs could work two ways – higher tariffs on imported finished goods could protect local jobs, while lower tariffs on imported components could assist local manufacturers.  The International Trade Administration Commission (ITAC) had received an application from the clothing sub-sector to increase tariffs to the bound level on 35 articles of clothing.  ITAC had dealt with the application expeditiously and approved the increase to the bound rate of 45%.

The Minister described as “an innovative departure from the old way of doing things,” ITAC’s requirement that companies applying for rebate permits must now provide details of the number of jobs they expected to create as a result of the permit, and report on their job creation on a quarterly basis.

An issue raised repeatedly by companies in the past had been the delays by ITAC in handling investigations for trade remedies and tariff investigations.  Mr Patel pointed out that ITAC was bound by regulations, and had to ensure its decisions could meet legal scrutiny.  However, ITAC had managed to reduce time delays significantly.

The Government had made a commitment to ensure expeditious payment of small businesses by its departments – within 30 days of invoice.  Since the launch of the Public Sector SMME (Small, Medium and Micro Enterprise) Payment Assistance Hotline in September last year, it had facilitated almost R183 million worth of payments up to the end of July, 2010.  He acknowledged that much more needed to be done in this area, and in general assistance to small businesses.

Returning to the training layoff process, Mr Patel noted that the arrangement capped the salary that people may draw while receiving training, at R6 239.  A total of R2.9 billion had been ring-fenced to cover the costs of the programme.

Instead of creating a new institution to handle the layoff programme, the Commission for Conciliation, Mediation and Arbitration (CCMA) had been drawn in, and its Commissioners briefed on how to deal with Section 189 applications (where companies wish to retrench workers), so that they could assist the companies and unions to enter into a training layoff agreement.  Workshops had been held with different industry sectors in the main centres in May and June, and a total of 6 083 workers were placed on training layoffs instead of being retrenched or being without work.  New applicants for the scheme were now being processed.

The Minister presented a graph showing the relationship between investment by the private and public sectors, indicating a decline in the private sector since the onset of the recession, while Government and state owned enterprises (SOEs) had increased its investment.  Without this investment, job losses would have been significantly higher.

The Competition Commission was pursuing investigations into collusive practices that undermined the capacity of sectors to create jobs.  One of the big pressures on households was food prices, which impacted so severely on the consumer price index last year that the Commission had been mandated to investigate the food industry.  It was now looking at the entire food chain, from the farm to the consumer.  Associated products, such as tin plates used for canning, were also being investigated.  He said the investigations had produced a number of positive results, and announcements would be made over the next few months.  A fertilizer company had already agreed to pay a fine of R250 million, while a company in the bread cartel had been fined R195 million.

The Minister said it should be noted that much of the investigative work was focused on the starting point of the food supply chain, as high input costs at that level had a multiplier effect further up the chain, and was a major factor in food price inflation.

The Government’s continued commitment to infrastructure was reflected in the medium-term expenditure framework for 2010 of R268 billion, including SOEs, which represented almost 10% of gross domestic product.

There was a big investigation in the construction industry, conducted by the Competition Commission, into collusive behaviour and tender-rigging, which imposed huge costs on the fiscus and contributed to high prices in some areas and a reduced economic impact.

Other areas where progress had been made were the Expanded Public Works Programme, the Social Plan, where an extra R3 million in funding had been made available, and the extension of the child support grant had been implemented.

The Minister gave the experience of Bell Equipment, a large South African manufacturer, as an example of the support which the Framework could provide.  Hit by the downturn, Bell needed to cut employment and reduce costs.  Commercial banks could not offer a lifeline, but the IDC did, with the result that the company was able to re-employ 250 staff at its Richards Bay plant, and this number would increase as demand increased further.  He said this example showed how companies in difficulties could be extended a temporary lifeline to enable them to return to profitability.

A “green economy” summit had been held recently where a number of job creation opportunities had been identified.  The Government had targeted 300 000 new jobs which it felt was achievable within the next five years.  The IDC had made available R11.7 billion as a contribution to “green” industrialization.

The Minister concluded by saying the Framework had shown the importance of the partnership of Government, business and labour to continue co-operating to address the country’s economic challenges, and to see what kind of economy could be created that could provide much greater labour absorption, so that the millions of unemployed and discouraged work seekers could find jobs.  He added that the country should follow China’s example in grabbing “green economy” opportunities, while institutions of learning should also draw a much stronger link between knowledge, innovation and science on the one hand, and the challenges of jobs and growth, on the other. 

Discussion
Mr B Mnguni (ANC, Free State) said the Government’s bail-out package had been widely welcomed, but it appeared as if only large companies had benefited.  SMMEs were finding the IDC uncompetitive, offering rates at prime, plus one or two per cent, while commercial banks were more competitive.

The Minister said that when the support packages were developed, one of the challenges the Department faced was that the country’s public institutions were not always aligned to Government policy.  The challenge was constantly to reinforce the mandate of the Government. The Department’s approach with the IDC was to introduce a package and keep on refining it, questioning their activities and, in the process, changing the mindset of what it was expected to deliver.  The cost of the IDC package was one of the “sharper” discussions the Department was having with the IDC.

The Minister said that the IDC had had no new capital infusion since the 1950s, and therefore used its limited funds to invest in new projects which offered relatively safe and high returns.  By contrast, its counterpart in Brazil received an annual infusion from the state, which was deducted from the payroll tax.  This enabled them to invest fairly aggressively in the manufacturing sector, with the cost of capital significantly below the normal market rate.  The result was relatively pedestrian growth in South Africa, compared to robust growth in Brazil.

Change was therefore needed, and there was short-term pressure on the IDC to bring its rates down.  The longer term challenge was to see how more resources could be released to the IDC.  The IDC was not very highly leveraged, so it had been encouraged to increase the money that it took up from international capital markets, to make available increased funds to local business.

The Minister said that there had been discussion at IDC board level as to whether the Government ultimately valued the IDC for its financial return, or for its industrialization return.  This was a complex issue, as profit was an essential factor, yet the measures applied by IDC shareholders would not be the same as the shareholders of a commercial bank.  The latter would be interested in the maximum profit return, while the former would look at the employment return, the small business development return and the “green economy” return.  So the IDC was now engaged in a serious review of its policies, taking into account that a much stronger industrialization and employment outcome was required.

The IDC had an asset base of R70 billion, but it needed to deploy this prudently and with a clear focus.  It was an excellent organization, but if its package was ultimately less competitive than a commercial bank, then there was something wrong with the way in which it calculated risk.  The IDC’s cost structure was also being scrutinized in an attempt to reduce its internal costs, with a view to reducing the costs it charged for its services.

Mr Mnguni asked whether the Department had investigated why the Limpopo and Free State provinces had been so slow to take advantage of the support packages. 

The Minister said that the “road shows” had had a positive effect in the major centres, and should be taken to Limpopo, the Free State and Northern Cape, to see if this made a difference.  The real challenge was to get business and labour in these areas to actually apply for support, as this initiative was left to the private sector.

Mr Mnguni asked whether the training layoff scheme provided workers with the relevant skills needed to take the economy forward in the future. 

The Minister said that the Government had decided not to prescribe the skills to be provided, but rather to leave it to the enterprise involved, together with the SETA.  This would ensure that the workers would have the necessary skills to be used immediately the company was ready to re-absorb them.  Most of the companies using the scheme were in the productive manufacturing economy, rather than consumption-led sectors, such as shopping malls.

Mr Mnguni said that he had been approached by two SMMEs who had performed work for local authorities and had had to stop because the municipalities could not pay.  He asked whether the Department could play a role in ensuring the 30-day payment rule was enforced, as SMMEs – as major job creators – derived most of their work from local authorities. 

The Minister said that although this was not the responsibility of the department, he would look into these specific issues.  He added it was essential that all three spheres – national, provincial and local – work in co-ordination, and to facilitate this process, MECs (Members of the Executive Council), SALGA (South African Local Government Association) and the mayors of the metros, had been invited to be partners in the MinMec discussion on the growth path.  This would be the first time local Government had been included.

Mr K Sinclair (COPE, Northern Cape) asked the Minister to give more attention to the Northern Cape, where the two main sectors – farming and mining – were struggling. 

The Minister said that solar energy provided a big opportunity for the Northern Cape, and the IDC had been asked to work on solar energy in a significant way.  There was also a range of other work being done within Government to explore the potential for solar energy in the Northern Cape.  He conceded that the proportional loss of jobs in the Northern Cape was the highest, owing to its dependence on mining and agriculture.  This was why economic diversification was important for the province.

Mr Sinclair asked the Minister how he viewed the world economic situation, and what its impact would be on South Africa’s future economic policy. 

The Minister said that the economic situation now was unlike any previous recession.  On the one hand there was the United States and the European Union, with no growth.  On the other hand, there were the fast-growing, rapidly industrializing parts of the world, such as China and India.  China’s recovery to pre-recession levels was off the back of significant investment in their domestic economy and domestic consumption.  India was pumping enormous sums into modernizing its infrastructure, which would enable the country to take off rapidly when the world economy recovered.

Mr Sinclair asked what basic criteria firms had to meet in order to qualify for the IDC’s R6.1 billion support programme. 

The Minister said that the following criteria were applied:
•The company must be demonstrably in distress;
•Its situation must not be the result of poor management;
•Its problems must have been the result of the global recession;
•Banks had tightened their lending criteria because of risk aversion;
•The company must have a viable business plan; and
•The company must show an employment gain.

Mr Sinclair commented that the Extended Public Works Programme (EPWP2) was not creating “decent jobs.”  People wearing orange overalls and cutting grass at the side of the road would be better employed carrying out maintenance work at places such as schools and hospitals.  He urged the Minister to use his influence to create a more innovative approach to creating jobs. 

The Minister said that the EPWP2 was intended to create very short-term jobs, with modest pay.  The Government was looking at how to make changes to the EPWP “family” of programmes, with more focus on the medium to long term, so that improvements could be introduced.  He stressed, however, that it was ultimately up to the private sector to create more jobs.  The EPWP should be seen as a short-term bridge to enable the individual to become more employable.

Mr A Lees (DA, KwaZulu-Natal) enquired if the support package for the auto industry was above the existing help it received, and asked how long the Government was going to keep the industry afloat. 

The Minister said that the industry was faced with a wide range of challenges, and if it were left to market forces, and the Government moved out, South Africa would lose a large chunk of its manufacturing capacity.  There were examples from around the world of Governments supporting industry.  The United States Government, for example, invested heavily in its aerospace programme, which had a major rub-off in the private sector.  France invested in a range of high-tech sectors.  It should also be recognized that our exchange rate was not competitive, and that South Africa traded with countries which managed their exchange rates.  This meant that the price of vehicles for export, and for the local market, were subject to influences beyond the control of the industry.  The Motor Industry Development Programme (MIDP) had been restructured to encourage the increased production of a smaller range of vehicles for both export and local markets, resulting in economies of scale.  The Minister acknowledged the need for a pragmatic balance between too much support, which reduced the incentive to be more competitive, and no support, which would cause an industry to disappear.

Mr Lees asked if the clampdown on illegal imports was based on contravening brand or tariff regulations, and whether this had an effect on the price of clothing in South Africa. 

The Minister said that both brand and tariff transgressions were involved.  The clothing industry was important because it was the biggest provider of jobs in poor communities, and the closing of firms would affect numerous other firms in the supply chain.  The Government had to weigh these types of factors against the communities’ need for low prices.

Mr Lees said that in the light of the salary cap, he was curious to see that 55 jobs saved or created in the Free State had cost R2 million.  Mr Patel said this was a key issue for discussion with the IDC to ensure that when they made their decisions they were aware of the employment consequences.

Mr Lees asked how the IDC funding for the “green summit” would be spent. 

The Minister said that the IDC was putting together a business plan.  However, much more than the allocated R11.7 billion would be required, so they would have to work strongly with the private sector and other public entities.

Mr D Gamede (ANC, KwaZulu-Natal) asked what type of economy the Department wanted to pursue. 

The Minister said that the growth path policy was still being worked on, but the intention was to place jobs, decent work and development at the centre of the economy.

Mr Gamede urged the Department to undertake campaigns to educate communities around the issue of “decent work.”   

The Minister said that using the United Nations and International Labour Organisation’s definitions, the issue was much broader, and referred to the quantity of jobs that could be produced, the conditions of that work (social protection), and freedom of association between employers and workers (social dialogue).  There were also a number of international conventions which South Africa had adopted.  He agreed that the Department could do more advocacy work on the matter.

Mr Gamede asked whether the support packages were restricted to the sectors identified in the presentation.  Mr Patel said the criteria for support applied to any other sector.

Referring to the “decent jobs” issue, Ms E van Lingen (DA, Eastern Cape), said that a “culture” of maintenance needed to be created, and municipalities were a place where this could be introduced. 

The Minister supported this idea, and said maintenance made economic sense by providing ongoing jobs and delaying the need for repairs or replacement.

Ms Van Lingen asked whether confiscated clothing could be made available to NGOs for distribution to people in distress. 

The Minister said that this was a complex matter, as the South African Revenue Service (SARS) had in some instances sold the clothing at auction, and in others handed it over to non-governmental organisations (NGOs), or used it in disaster relief operations on the African continent.  But there had been abuses, which meant that the authorities were continually having to look at ways to ensure the clothing was distributed in accordance with its policy goals.

Ms Van Lingen referred to collusion among cartels, and said that in the agricultural sector there was a big gap between producer and consumer prices.  Farmers were often being paid below their cost of production, and needed help. 

The Minister said this disparity often reflected the relative power between the grower and the seller, like a supermarket.  The power was often at the end of the process, and competition policy was to open this up to allow more entrants and reduce monopolistic situations or collusion.

Ms Van Lingen asked where the fines imposed for collusive practices went.

The Minister said that they were paid to the National Treasury and became part of Government’s general income.

Ms S Chen (DA, Gauteng) said there appeared to be a contradiction between the need to encourage spending in order to stimulate the economy, and the need to encourage a culture of saving.  She asked how a balance could be achieved. 

The Minister said that it was traditional Keynesian policy for governments to spend money during a recession, as companies stopped investing and consumer demand dried up.  It was even considered better to pay people to dig holes, and then pay others to fill them, than to do nothing at all.  Economic theory had advanced since then, and many governments were looking at investing now in the green economy, so that they could be part of the new wave of green industrialization.  As a general rule, countries with high domestic savings performed better than countries with low domestic savings.  In the case of South Africa, there was not enough saving and too much conspicuous consumption – the latest cell phones, gadgets or cars.  In fast-growing economies, one saw far less “bling.”

The Minister concluded by saying that South Africa’s growth path depended on the number of jobs its growth created.

The Chairperson thanked the Minister, who left the meeting.

Consideration of Minutes and Third Term Programme  
The minutes of the meetings of 25 May 2010, and 01 June 2010 were adopted.

The Third Term Programme was adopted.

The meeting was adjourned.