Minister of Economic Development on the New Growth Path

Economic Development

22 November 2010
Chairperson: Ms E Coleman (ANC)
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Meeting Summary

The Minister of Economic Development released the framework of the New Economic Growth Path to the Portfolio Committee on Economic Development. This policy is aimed at enhancing growth, employment creation and equity. The policy is targeted at creating five million jobs over the next ten years. Infrastructure development was identified as a critical driver of jobs across the economy. The document recognised the challenges of an uncompetitive currency and set out clear steps for government to address the impact of the rand on the economy. The New Growth Path set out an ambitious programme to create jobs through a series of partnerships between the state and the private sector. The document called for a broad pact between business, labour and government aimed at fostering employment creation whilst enhancing competitiveness and social equity and developmental goals. It also called for a major rethink of the BEE framework and policy, and pointed to a number of weaknesses in the current operation of BEE.

Business Unity South Africa stated that finance was not the only thing needed to be given to small businesses, but it acted as a lubricant. Access to markets and management know-how played an equal role. Support given to small businesses needed an integrated approach. For the Growth Path Plan to succeed, a strong SME base was required. Small businesses were facing the high costs of initiating micro loans and the costs of recovery from the economic meltdown were high. BUSA recommended flexibility in the allocation of seed capital, and that funds should be allocated on a graduated basis.

Members wanted clarity on how the Growth Path programmes would be financed, if provincial strategies would be aligned to the new Growth Path, what policies were in place to address the inefficiencies of BEE. They asked how small businesses could partner with big business in order to minimise the challenges of competing for the same market.

Meeting report

Minister's briefing on New Growth Path

Minister of Economic Development, Mr Ebrahim Patel, stated the document reflected the commitment of the government to prioritising employment creation in all economic policies. It outlined strategies to enable South Africa to grow in a more equitable and inclusive manner. The centrepiece of the new growth path was a massive investment in infrastructure and people through skills development. The shift to a new growth path challenged every South African to contribute to building the nation over the coming twenty years. It would require strong leadership and governance. The key challenge would be that of implementation. There were too many agencies and too little coordination between them.

Infrastructure Development
A critical driver of jobs across the economy was infrastructure development. The document identified investments in five key physical and social infrastructure areas: energy, transport, communication, water, and housing. This infrastructure programme was seen as the trigger to build a local supplier industry for the manufacturing of the components for the build-up programme.

In the green economy, expansion in construction and the production of technologies for solar, wind and biofuels was supported
by the draft plan for electricity (IRP 2), which proposed that green energy sources contribute 30% of new energy generation in the next twenty years. Jobs in agriculture would be created through interventions to improve efficiency by addressing the high costs of fertiliser and other inputs and by up-scaling processing and export marketing. The New Growth Path committed the government to unblocking stalled land transfers which constrained new investment. This new policy called for the re-industrialisation in the South African economy based on improving manufacturing performance through innovation, strong skills development and reduced input costs in the economy.

Coordinated set of actions
The document recognised the need for a coordinated set of actions across a broad front and identified a “development package” consisting of macroeconomic strategies, microeconomic measures and stakeholder commitments to drive employment and economic growth. The document suggested a somewhat looser monetary policy with lower interest rates, greater building of foreign reserves and a sovereign wealth fund to manage foreign reserves more actively.

To ensure that the looser monetary policy did not cause high inflation and to support a sustainable macroeconomic framework, the document identified the need for slower growth in public expenditure, with real growth at around 2% per annum over the next few years.

The new policy document called for a major rethink of the BEE framework and policy, and pointed to a number of weaknesses in the current operation of BEE. The New Growth Path sought to place BBBEE in a growth and employment framework, and called for the substantial revision of BBBEE Codes to increase employment, skills development, and new investment.

On labour market policy, the document pursued three objectives: to promote partnerships for productivity improvements, to address concerns about the vulnerability of workers in the labour market, and to ensure more efficient decision-making.
 
The New Growth Path (NGP) set targets for scarce and key skills and identified the role of government departments and agencies in working to meet these goals. The policy called for stepping up the focus on workplace training, targeting on-the-job training and refresher programmes for 10% of the workforce every year. The implementation process for the New Growth Path should manage key risks as well as ensuring clear prioritisation.

Discussion
The Chairperson thanked the Minister for presenting an overview of the document. She noted that this was the beginning of the interaction and hoped that in future there would be more robust engagement and detailed discussion around the document. Finally, she asked if the strategic documents of the provinces would be aligned to the NGP and if there were any time frames in place.

Ms P Bhengu (ANC) commented that the concept of decent work as the central objective of an inclusive growth path presupposed a change in the country’s current labour market policy. In the context of the NGP, where was the aim, in the short and medium term, to expand employment rapidly especially through public investment? What policies were envisaged that would militate against possible contradiction in the labour market?

Mr S Marais (DA) said it was a pity that Members had only received the document at the start of the meeting. They were therefore at a disadvantage and could not engage properly with the
contents of the document. From the overview presented, it was clear that the document contained a lot of information that needed to be studied further. Its contents must be based on reality and practicality. The Minister spoke about massive extra investments but the Medium Term Budget Statement (MTBS) and the Medium Term Expenditure Framework (MTEF) did not show this so somewhere along the line this needed to be made practical. Members must be shown exactly how this would be achieved in reality. In terms of job creation, the document stated that the country needed a GDP level of between 4% and 7%. However, the Minister of Finance had previously mentioned that in order to create 5 million jobs by 2020 the country would need to sustain an annual GDP rate of 7% for the next 10 years. By Government’s own calculation, the country was expected to only achieve a GDP rate of 4, 4% by 2013 so it seemed the country would be well behind the set objectives. Since 1994 the country had gained only 4 million jobs, 2 million have been lost since 2008 and already 80 000 had been lost in the last quarter. Against this background, the Minister needed to share with the Committee how the aim of 5 million jobs would be achieved. There were no incentives to business to create jobs and no ideas on how to stimulate production.

Mr X Mabaso (ANC) noted the history of the country, in particular, the economic disparities and commented that Broad-Based Black Economic Empowerment (BBBEE) was aimed at ensuring economic inclusivity for black people. In the context of the NGP, what policy and legislative measures would be required to make BEE more efficient and effective to achieve its intentions of being broad based?

Dr Rabie agreed it was unfortunate that Members had not been given time to study the document and
emphasised that there should be a follow up meeting on this matter. He noted that the Minister had mentioned more emphasis would be placed on Research and Development. Could Members get more detail on this and was this based on a particular model in other emerging markets or was it unique to the South African situation? Lastly, the country had a high rate of youth unemployment (people between ages of 18-35). It was therefore imperative that this age group was accommodated as well when jobs were created.

A Member referred to the Minister’s introductory paragraph which stated NGP implementation would be a collective effort and trade-offs would have to be entered into between government, labour, business and civil society. Given the challenges that the country had in attracting Foreign Direct Investments (FDI), what policies would be established to mobilise domestic resources for investments in sectors of the economy that would support job creation? Finally, he noted reference made to skills development (page 20) and asked in the context of the NGP, what specific changes would be required in the education and training sector to develop the skills which were necessary for the kind of economy that was envisaged?

Mr L Greyling (ID) noted a great emphasis on public investment particularly when it came to infrastructure and the job creation. This was something he would welcome given the country had accrued a backlog of R1, 5 trillion of investments that should have been put into infrastructure over the last 10 years but was not. There was a lot needed to made up for going forward. However, there was concern about how the country was going to budget for all of this as there was increasing demands on the fiscus.

A Member said there were many laudable objectives contained in the document and there was a need to engage further on each one. He recalled that two weeks ago, the Committee had been briefed by the Minister in the Presidency on the framework that the Planning Commission had set for itself and there was much of a sameness in terms of the way forward. He asked what linkages were there between the Planning Commission and the Department of Economic Development in planning the way forward.  The Minister of Finance had indicated that by 2014, government would like to see a 7% GDP rate. Was this document targeted towards that growth rate? Lastly, he queried if some of the statements in the document particularly on BEE provisions were founded on evidence and fact. Did you find this through your research?

A Member asked about the country’s relations with China, India and Brazil. What economic policy agreements would the country pursue that would not contradict the goals of creating decent work and protect the vulnerable sectors of the economy from foreign protectionism?

Mr
Z Ntuli (ANC) asked the Minister for his view on nationalisation given that there was an emphasis on addressing inequality and promoting employment through state intervention.

The Chairperson asked if there would be any policy changes, specifically on trade, to accommodate the NGP.

The Minister
said that the Department had wanted to give the Committee a general briefing prior to a thorough debate of the document. He recognised that Members needed time to study the document and welcomed future engagements on the detail. The aim of the briefing was simply to highlight some of the key issues.

The Minister indicated that the process had been initiated at MINMEC level. Provinces were therefore aware that their strategies must be aligned to the NGP. It was an ongoing process and further discussions would continue moving forward.

The Minister clarified that the vision set out in the NGP was one that sought to improve efficiencies in the labour market. This would be achieved not by cutting the rights of workers or reducing the protections enshrined in the Constitution but instead by building partnerships, harnessing skills, focusing on productivity and ensuring that the productivity gains were fairly and equitably shared between workers and employers. The target had been set to create 5 million jobs in 10 years. To be able to achieve that job target required economic growth. The rate of growth required to achieve that target depended on the employment intensity of growth – that is, the relationship between the growth in employment and the growth in the GDP.

The Minister explained that t
here were a number of operational issues involved. These would not be addressed in the framework but in the budget itself. The Minister of Finance would be making an announcement next year in February on matters that had a fiscal impact including issues such as subsidies and the level of public support for the investment programme. The document called for a major rethink of BEE. It pointed to a number of problems that beset BEE. As good as the intention may be and committed as government was to ensuring empowerment in society, there was recognition that the design must be right. The correct regulatory framework was needed to support the outcome that was desired. There was a need to revise the BBBEE code, incentivise employment creation and invest in new enterprises and skills development. This marked a critical intervention that government would undertake to ensure that BBBEEE served its purpose. Over the years, there have been many examples and cases to support the view that there were often unintended consequences and that BBEE was not achieving the goals set out in the statute books.

The Minister
highlighted that the government planned to lift the level of R&D spending in the economy. It hoped to double spending to about 2 % of GDP by 2018. There were fast growing economies in both developing and developed counties that had invested heavily in R&D. China, United States and France were all increasing their level of investment in R&D. It was not just lifting the level of spending, it was important to ensure that more employment returns were yielded for R&D spending.

The Minister
noted that FDI remained important given the country’s needs. The country needed to attract more FDI and encourage foreign companies to set up offices in the country particularly in the green economy, manufacturing, mining sectors and elsewhere. One immediate area that government would engage with business and labour was in the area of retirement funds. It was important that a portion of wages be set aside for this purpose. For example, Singapore built an enormous savings nest that was then directed in an efficient way to the industrialisation of their economy. This helped to build a modern, forward looking and export-oriented economy that today provided a high standard of living to the residents and citizens of that country. South Africa can and must learn from international best experience.

The Minister agreed there were backlogs regarding public investment. To solve this, it would require a strong physical infrastructure. Different funding models would be developed and the Ind
ustrial Development Corporation (IDC) would make an announcement soon on sources of funding. The document stipulated that there should be a reprioritisation of spending, to cut waste and corruption and to ensure that those resources flowed to these new priorities. The bulk of the funding would come from the national budget.

On nationalisation, t
he Minister replied that the state envisaged a mixed economy with the involvement of the private sector. The state had a role to intervene and this was achieved through the state-owned enterprises.

The Chairperson thanked the Minister for the presentation and noted that further discussions would take place next year.

BUSA and SACCI submission on SME financing
In a joint presentation by SACCI and BUSA, Professor Thami Mazwai stated that support to small businesses needed an integrated approach. Finance was not the only thing needed to be given to small businesses, although it acted as a lubricant. Access to markets and management know-how were critical. In the start-up phase of SMEs, entrepreneurs were usually unable to adequately demonstrate the potential of their businesses to deliver the required rates of return to financiers. The provision of finance was one of several variables necessary for small business support, albeit it a very important one. Local government business retention and expansion programmes could be harnessed to assist in the improvement of SME sustainability. A strong SME base was required for the New Growth Path Plan to succeed.

Challenges
In pointing out challenges faced by SMEs in accessing finance, the regulatory burden, which made it difficult to set up a business, was costly and administratively complex. This made it challenging to move from an informal to formal status. SMEs were seen to prefer self-finance for start-up funding, and business insurance would have been helpful. The requirements of financial institutions for collateral were seen as problematic for new SMEs. The relatively high interest rates and risk profiles of the SME sector was not conducive to loan financing for small enterprises on a sustainable basis. Approaching direct foreign investments (DFIs) was perceived as daunting and the processes of eliciting assistance was considered too challenging.

As a general rule, financial institutions did not provide finance in the region of R500 000 to R2,5 million. Small business owners were forced to take personal loans, and that exposed them to personal risk, which in turn affected risk taking. Venture capital should be made easily available, a culture of entrepreneurship should be stimulated. Benchmark practices that have been tried and tested should be retained. Collusive and anti-competitive behaviour in markets should be stemmed. Regulatory Impact assessments and reviews should be undertaken. State and business procurement links with SMEs should be maximised through sub-contracting, outsourcing and joint venture arrangements in the value chain.

The submission highlighted that government should create conditions conducive to venture capital development. Primary igniters for this might be tax incentives and tax breaks to encourage risk taking. The creation of a state venture capital fund aimed at funding SMEs could focus on a wide range of financing needs from start-up capital, to working capital and cash flow funding. Small business development was a partnership between the private sector, government, organized business and the education sector. The regulatory impact assessment mechanism needed to conduct an impact assessment of the role of all existing and new legislation. This would prevent situations such as the demise of small pharmacies as a result of a law passed by Parliament.

He concluded that the capacity of businesses to employ was currently limited by their capacity to sustain themselves. It was generally recognized that small and emerging businesses have the greatest potential for job creation. Nonetheless, business did not favour policy interventions and support programmes to the extent that a “dependency culture” was fostered.

Discussion

Dr Rabie, commenting on the pharmacies that closed down because of the regulatory framework, asked for an explanation about the vulnerability of other retail sectors and how the legislation could be improved to curb this.

Prof Raymond Parsons, Executive Board Member of BUSA, stated that a lot of concentration was being expended on the field of retailing. The pharmaceutical sector was not the only one affected. BUSA would investigate the matter through the Competition Commission to look into complaints affecting particular sectors.

Mr S Marais stated that the SMMEs and BEE were very narrow based at the moment and fronting was a problem. He asked how small BEE companies could become partners with big ones.

Prof Thami Mazwai said small businesses had problems all over the world. And there were varying levels of survival. Governments continued to introduce policies for an enabling environment, but the situation in SA was different. It was not a question of race but that of survival. The country needed a better thought-out approach. The relationship between the SMEs and big businesses remained a challenge that needed to be solved. BBBEE was a necessity in order to transform the economy but the unfortunate thing was that growing the economy was ignored.

Mr E Gcwabaza asked how the challenge of SMMEs competing with big businesses for the same market could be addressed, and how broad venture capital could assist the SMMEs.

Mr Naren Rau, SACCI CEO, explained the partnership approach was the only way to address some of these challenges and grow the economy. The government should consolidate the existing database instead of creating a new one. Regarding this partnership, he said the Chamber could assist in terms of regulatory framework. The purpose of the one-stop shop that BUSA advocated was not to get things done under one umbrella, but to get things done quickly and efficiently.

Mr Ntuli asked Prof Mazwai to air his view on the idea that an entrepreneur was born, not made.

Prof Mazwai stated the challenge was how the entrepreneurs were allowed to graduate from informal to formal. That was an area that SETAs should focus on by becoming more active in the type of business arena where they were badly needed rather than in big business. Those who were running SMMEs should be provided with skills so that their businesses could stand a chance of expanding.

The meeting was adjourned.


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