The meeting was an opportunity for the department to present its reasons for under-expenditure and to explain the way forward for the remainder of the 2010/11 financial year. The department had several under-expenditure challenges for the first six months which included: the Automotive Investment Scheme; the Film Incentive Scheme; the economic recession which impacted on certain projects such as the Richard’s Bay and Coega Industrial Development Zones; the Small and Medium Economic Development Programme; the Enterprise Investment Programme; the National Pavillions; the Foreign Mission Accounts and compensation to employees.
Total expenditure (based on actual funds requested from National Treasury) increased from R1.6 billion in July 2010 to R2.8 billion in October 2010. This was mainly driven by transfer payments to incentives, agencies and Industrial Development Zones (IDZs). The percentage variance at the end of July 2010 was 7.08% as opposed to 5.14% at the end of October 2010 with 55.02% available at the end of October 2010.
There was also detailed discussion on Coega and what the plans were for its future. An adjusted appropriation of R414 million was set aside for Coega for the adoption of special projects located there. One had to put in the required infrastructure there to attract investors, otherwise, the less investors showed interest, and the less National Treasury was interested in funding Coega. This was the funding logjam the Department was facing. If DTI could demonstrate interest from investors who were contracted, this money could be used to leverage investment. The outcomes to date were far below projections but things would improve once the general economic conditions improved.
Members raised questions on the status of Coega; when new vacancies would be filled, what cost cutting measures were in place; the status of the Centurion Aerospace Village; how Trade and Industry would recover from the ending of the 2010 Soccer World Cup; the late processing of vouchers and invoices; increasing SA representation at international organizations such as the World Trade Organisation; the exchange rate and the value of the currency.
The Chairperson said the purpose of the meeting was to look at two critical issues: (a) briefing by the Minister on critical aspects of the Auditor General’s report and (b) forward planning for the industrial policy action plan, trade, regulatory issues and small and medium enterprises particularly cooperatives.
Minister on DTI’s Adjustment Appropriation and spending trends for 2010/11
Minister of Trade and Industry, Mr Rob Davies, said that his Department was going to present on whether it was going to underspend on a significant scale or not. The Department had a record of good spending that was important to them and there was currently not any huge differences and underspending. There were specific explanations for expenditure to date and projections for last three quarters.
Mr Tshediso Matona, Director General, Department of Trade and Industry (DTI), gave the presentation. He began by looking at a five-year comparison of the budget as opposed to expenditure. The Department tried to keep under-expenditure to a minimum. There was currently a 5% variance in under-expenditure up to the end of October 2010. The major sectors accounting for the under-expenditure were:
▪ The Automotive Investment Scheme (AIS) which was part of the automotive support programme. The time lines for launching this programme had been extended because of prolonged negotiations with the industry. The programme was supposed to be launched some time last year but was only launched in May this year. The start date for qualifying investment was 1 July 2010. Applications for 39 entities and 53 projects were received during September 2010. All 39 applications would be presented to the AIS Adjudication Committee in December 2010. R 550 million would be disbursed between December 2010 and March 2011.
▪ The Film Incentive Scheme (FIS). The reasons for under-expenditure were two-fold. The general economic climate was subdued and those productions that were approved experienced delayed shooting because of the 2010 Soccer World Cup.
▪ The economic recession also impacted on the following programmes: (a) the Support Programmes for Industrial Innovation (SPII) – the impact was on firms doing research and development (R&D); (b) Richard’s Bay and Coega – the impact had slowed down planned investment; (c) Business Process Outsourcing (BPO) – the economic downturn in the United Kingdom resulted in such projects not performing according to projections. A reviewed programme strategy would be implemented in the latter part of the year.
▪ The Small and Medium Economic Development Programme (SMEDP) was phased out and had been replaced by the Enterprise Investment Programme (EIP) scheme. The claims payment process in the EIP was reviewed as it originally allowed for an entity to claim within its relevant claim period, with many entities only being in a position to claim in the following financial year. The process had been revised to assist entities to claim as close to the point of investment as possible.
▪ With regards to the National Pavilions, funds would be disbursed to the 16 selected pavilions during the last quarter of the financial year.
▪ Foreign Mission Accounts. This referred to expenditure incurred abroad whereby the Department of International Relations and Cooperation (DIRCO) provided administrative support to take care of the expenses incurred abroad. There was a two month delay between the invoices and the vouchers in receipt of mission accounts from DIRCO. A Memorandum of Understanding (MOU) was signed with DIRCO to allow the Department to pay and advance and reconcile that to the vouchers upon receipt.
▪ With regards to compensation of employees, the baseline vacancy rate was 17.9% which reflected new posts that were created. Not all the posts were budgeted for but there was some under-expenditure. There was also a delay in the payment of the annual inflation-linked salary increase as a result of the settlement in the public sector.
Total expenditure (based on actual funds requested from National Treasury) increased from R1.6 billion in July 2010 (1st quarter) to R2.8 billion in October 2010 (2nd quarter). This was mainly driven by transfer payments to incentives, agencies and Industrial Development Zones (IDZs). The graph on Slide 8 of the presentation depicted the comparison between expenditure and actual projected drawings. DTI would only draw down money if it was confident the money would be expended. It had introduced financial management discipline which prevented large funds from not being spent. The overall message from the graph was that the Department was underspending relative to the projections. The percentage variance at the end of July 2010 was 7.08% as opposed to 5.14% at the end of October 2010 with 55.02% available at the end of October 2010. Based on a number of factors, actual results could vary materially from those anticipated by the forward-looking statements. These factors included, but were not limited to, the following: actual claims paid and the timing of such payments may vary from the estimated claims and estimated timing of payments, taking into account the preliminary nature of such estimates; claims and loss activity may be greater or more severe than anticipated, as a result of natural and man-made catastrophic events; and economic contraction or other changes in general economic conditions would adversely affect factors relevant to DTI’s performance. Slide 12 of the accompanying document showed the way forward for the remainder of the financial year. Some expenditure was projected to be paid later in the financial year. Expenditure on the Automotive Production and Development Programme, infrastructure, SMEDP, Export marketing and Investment Assistance, the Centurion Aerospace Village, Trade and Investment South Africa (TISA) and the South African Bureau of Standards (SABS) were projected.
Mr T Harris (DA) asked whether it was appropriate if he could refer to the actual budget and not the presentation. He referred to page 332 of the budget. There were zero new investments, yet the jobs targeted were half the number than what it used to be. He asked how this would create more jobs. He then referred to the note on page 338 of the budget and said that the overall change to the budget was R44 million. Two-thirds of that money was for the National Tooling Intsimbi Initiative Programme. The training of staff was to be scaled-up. He asked the Department to explain the contradiction because previously it was unable to spend R29.4 million.
Mr Matona replied that the tooling initiative was initially funded by donor funding from the European Union (EU). The fund and the adjustments were now supported by National Treasury. The Department was also hoping to reach its target of training those students.
The Minister said that the national tooling initiative was not progressing as fast as it should be and it was a critical programme because it depended on cooperation and partnerships with the private sector. This process was very slow because of the economic situation. In terms of the overall performance of the metals related industry, the tooling initiative was quite fundamental.
Mr B Radebe (ANC) asked how the Department was going to recover as a result of the 2010 Soccer World Cup now being over. He referred to compensation for employees and asked when the new posts would be filled. He asked if the Department would ensure that these posts were filled before the end of the year. He then referred to the fact that it was policy that all departments were supposed to save. He asked how that policy affected the Department in the filling of new posts.
Mr Matona replied that how the Department would recover would depend on how the confidence levels in the manufacturing sector improved. Whether it was achievable during the remainder of the financial year up to March 2011 was a moot point, but it was clear that the economy needed to be talked-up. The greatest challenge at the moment was the value of the currency. This was a topical issue and the Minister met last week with manufacturers who account for 80% to 90% of the manufacturing in the country. These manufacturers were facing short term crises and government needed to respond to this. Government needed to make the appropriate signals otherwise the economy in general and the manufacturing sector in particular would not recover from the depressed conditions. Government needed to deploy credible incentives like the tax incentive launched on the 8 November 2010 and other incentives in DTI’s portfolio.
The Minister replied that besides the 2010 Soccer World Cup affecting the number of film productions, the number of productions decreased worldwide and the number of productions coming to South Africa also decreased because of the economic downturn. Now we faced the challenge of the value of the currency.
Mr Matona replied that the Department had affected savings of their own: moderation in travelling; reducing the number of delegations; travelling economy class where possible; and reducing the number of advertisements and promotional activities. The non-essential expenses were targeted and the Department scored some savings which allowed the Department to do the adjustments.
The Minister said that in terms of compensation to employees, only part of the additional salary increases was passed on to departments.
Ms Jodi Scholtz, DTI Chief Operating Officer, said there was a governing body monitoring cost cutting initiatives and that in terms of DTI agencies there were contractual arrangements and Memorandums of Understanding in place that would determine and dictate the payments of the transfers.
Mr Matona replied that a few years ago the Department started to encourage due diligence and as a result of this there was a reduction in the vacancy rate and a reduction in the turnaround times for filling posts. The Department was pretty confident that as a result of the level of diligence, the filling of posts would continue. However, he could not be certain that the reduction in the vacancy rate would cause under-expenditure to be reduced. He assured the Committee that improving DTI’s capacity and recruiting strategically would maintain the highest levels of diligence.
A DA Committee Member referred to the transfer of funds to agencies on Slide 7 of the accompanying document and asked what the effect of the late processing of the transfer of the funds would be. He asked if the Department was on target in terms of the processing. He then referred to the issue of the invoices and vouchers on Slide 6 and asked whether the Department would be able to file those vouchers within the current financial year and what the financial audit implications would be. He asked if it would be seen as fruitless and wasteful expenditure.
The Minister referred to the table on Slide 7, a huge part of the DTI’s budget was involved with transfer payments to incentives, agencies and IDZs. The table was clearly showing that between July 2010 and October 2010 the pace picked up. This was the broader picture of what happened during this time period.
Ms M Ramatla, DTI Chief Financial Officer, said that there were serious challenges in terms of receiving vouchers timeously but things had improved. They used to wait four months for these vouchers. A MOU was signed with DIRCO to allow the Department to pay in advance and reconcile that to the vouchers once received. The MOU was helping because the Department was engaging with DIRCO on a monthly basis.
Ms F Hajaig (ANC) referred to Slide 12 and asked what the status of the proposed oil refinery at Coega was.
Mr Matona replied that the reason for the adjusted appropriation for Coega was because of the adoption of special projects that were located at Coega. There was a “chicken and egg” situation because if one puts off the infrastructure required to attract investors, the less investors show interest, and the less National Treasury was interested in funding Coega. This was the funding logjam that the Department was facing. What we see here was if the Department could demonstrate interest from investors who were contracted, the money could be used to leverage the investment. He said the outcomes to date were far below projections but things would improve once general economic conditions improve. He mentioned that Project Mthombo oil refinery was still in the decision making process and there was no finality to go ahead. The Minister of Energy was very supportive of the project and this could lead to an industrial development spin-off to leverage from the investment.
The Minister replied that the Industrial Development Zones (IDZs) faced big challenges. The assumptions made in the past were shown not to be real. There was big infrastructure at Coega but he was not sure whether the oil refinery would be built or not. It was the department’s job to make the infrastructure work.
The Chairperson referred to the Centurion Aerospace Village on Slide 12 and asked the Department for clarity because of the fact that the construction process could not be launched. She also referred to the incentive item in Slide 7 and asked the Department to expand on that. She then referred to the economic contraction bullet in Slide 11 and asked what DTI was actually looking at with regards to this.
Mr Matona said the Centurion Aerospace Village project had been in the making for a while and was initially funded with donor funds. However, now it was funded by the fiscus and he was confident that the money would be expended.
The Minister said that SWEEP stood for the Sector Wide Enterprise and Employment Programme which was a fund from the EU. SWEEP was stopped when the fund ended and was replaced by a broader programme around enterprise and employment. SWEEP supported the Centurion Aerospace Village project initially and the Department needed to start funding the programme itself.
The Minister said that with the economic contraction and performance one was pushing up against a hill. The currency issue was a real problem and the currency war was serious business. It was a huge millstone around every investor’s neck and the uptake was not where it should be. On the contrary, the Automotive Programme was slow off the track but had improved. There were a number of meetings with industry and a lot of work took place around it. The uptake was quite good and there were a number of projects in the pipeline.
Mr B Radebe (ANC) asked what the strategy was to increase the capacity of South Africans in the World Trade Organisation (WTO) and international organisations. Africa as a whole was dependent on South Africa.
Mr Matona replied that the Department was in the process of reviewing its representation abroad in line with the strategy to prioritise a high growth dynamic. We needed to refocus our presence and footprint in Africa and new offices had been opened in Africa to expand its presence there.
The Minister said that the Department had a sense as to where the opportunities were for trade. There was a much closer relationship with DIRCO so that we could enhance the general capacity of diplomacy. Also, one of DTI’s people would soon be appointed as an ambassador under DIRCO. The Department was trying to add to the staff of that mission.
Ms C September (ANC) said that it was one thing cutting down costs, but if you cut down, was the money shifted elsewhere because there was a budget of X-amount. She asked if the Department was putting the money in more productive areas. Generally speaking she asked if there was a detailed analysis of expenditure levels to say that it should be at X-amount in certain areas and that it was not wasteful expenditure. She said that these exercises were not about negotiating for more money, but she asked if one looks at all the line items and the budget overall, was the Department going to achieve its objectives in the five-year period, and if objectives had various challenges, for example, human resources and financial challenges, then it was a worthwhile conversation. She asked what effect President Obama printing mre money had or going to have.
Mr Matona said that the Department put in an additional request of R5 billion for the MTEF. We needed to consolidate our work that gave us the greatest returns. He said that saving was not an event, but a culture.
Instead of every unit having its own printer, there would be a centralised printer that could be used. Also, meetings would take place in the current facilities and not necessarily outside in hotels, for example.
The Minister said that the Department broadly spent its budget. In many cases the Department had a fairly productive relationship with National Treasury on some of the incentives and programmes. He said that the Department needed properly resourced programmes. The currency in the United States of America was overvalued and this was causing huge problems.
Mr T Harris (DA) asked what the source of the R29.4 million rolled over for the tooling initiative was. Also, within Programme 6, R400 million was shifted away from the Automotive programme into IDZs. This was a serious proportion of the programme’s budget. He asked whether the Department had the capacity to spend that R400 million and asked where did the money go.
Mr Weber, DTI, said that at the end of the previous financial year we had a surplus of more than R150 million and could have used it for incentives, but we could not expedite more than eight percent of that money. Funds could only be rolled over for the same objective, but National Treasury gave permission in this instance to roll over the funds.
The Chairperson said that on a recent study tour and oversight visit to the Eastern Cape the Committee visited Coega. She asked what the status of Coega was with respect to funding arrangements. She asked where the Department was going forward because there were a number of challenges in that regard. She said that the Committee had taken a position on the currency and while we agreed that the currency played a big role, we would still be facing a high transport and communication costs which was directly related to the currency. The other area was the role of markets: South Africa was totally committed to regional integration and it had become quite clear that we need to look at African continental trade and how South Africa could benefit from that. On the skills side, this was clearly not your specialized area, but how can one ensure that one does not allow the manufacturing to decline.
Mr Matona was convinced that the allocation to Coega would be put to good use. Some projects were already rolling. The current funding model was unsustainable and National Treasury was very supportive that DTI leverage more development finance through the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) which could lend to Coega and possibly bring in private sector funding in the long term. The state should also assist because the private sector would not be able to do this on its own.
The Minister said that transport and communications in Africa underpinned development integration on the African continent. There had to be cooperation around infrastructural development.
The Chairperson thanked the Department for working with the Committee on the matters at stake and that the Committee and the Department had common goals to transform the lives of people living in South Africa.
She thanked the delegation for its engagement and input. The meeting was adjourned.
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