Industrial Policy Action Plan (IPAP) 2 implementation: briefing by DTI

Meeting report

Briefing by Department of Trade and Industry (DTI)
Mr Nimrod Zalk, Deputy Director General, Industrial Development Division of the Department of Trade and Industry (DTI) briefed the Committee on the Industrial Policy Action Plan (IPAP). He outlined the key pillars to new growth and stressed that IPAP2 required a comprehensive and integrated action. He presented the industrial sectors in three groups: new areas of focus, scale up of existing IPAP sectors, and sectors that would develop long-term advanced capabilities.

Mr Zalk spoke about key progress in areas that cut across sectors. He noted that IPAP was about leveraging private sector investment. In regards to public sector procurement and State Owned Enterprise (SOE) supplier development, high level negotiations to amend Preferential Procurement Policy Framework Act (PPPFA) regulations were currently awaiting promulgation by the National Treasury. These amendments would designate sectors for local production. He noted that DTI developed the sector designation methodology. The Industrial Development Corporation identified between R70-R100 billion over the next five years for investment in IPAP sectors. The Competition Commission made referrals against a range of anti-competitive practices in various sectors (see presentation). The International Trade Administration Commission (ITAC) had processed numerous applications for changes in duties in line with IPAP priorities. Also, the South African Bureau of Standards (SABS) identified technical barriers to trade for exporters and they distributed the information monthly.

Mr Zalk turned to sectoral progress highlights. In the automotive sector, the Automotive Investment Scheme was finalised and it led to investment commitments of R13 billion from assemblers and component suppliers that supported 24 000 jobs in the sector. In clothing and textiles, the Clothing Textile Competitiveness Programme (CTCP) and associated Production Incentive (PI) rollout benefited 106 and 94 companies respectively. Between April and December 2010, R40 million in investments were made in the Business Processes Sector which created 950 jobs. Furthermore, 3400 people were trained under the Monyetla II Programme, with at least 70 percent of these people guaranteed employment by the Business Process Outsourcing (BPO) consortium. In the area of green industries, progress included a revision of building standards that required higher levels of energy efficiency and mandatory installation of solar water heaters in new buildings. SABS had also finalised enabling standards in a variety of green technologies. The South African Renewables Initiative (SARI) was created as an intra-departmental initiative to leverage international climate finance that would supplement domestic funding. In the forestry sector, 161 licences for 10 000 hectares was issued by the Department of Water and Environmental Affairs (DWEA). In the iron and steel sector, Cabinet mandated the Departments of Mineral Resources, Trade and Industry and Economic Development to secure developmental steel prices in exchange for cost plus iron ore.

Mr Zalk noted key challenges to the implementation of IPAP2. Among these challenges were slow recovery of the global economy in key export markets such as the US and EU and sustained rapid growth of developing economies such as China, India and Brazil. These two facts implied a challenging process of trade adjustments as value-added exports went to advanced trading partners and commodity exports went to developing trading partners. Another key challenge was the continuous appreciation of real effective exchange rate (REER) to the highest level on record in Q3 2010. The South African economy was still recovering domestically from the global economic crisis and there was a slowdown in public and private fixed investment expenditure. Lastly, there was a large drop in manufacturing employment between Q1 2008 and Q2 2010 with only slight improvement in Q3 2010.

Mr Zalk presented slides that depicted the key challenges in the currency exchange rate and investments in graphical form (see attached presentation).

Mr Zalk highlighted the key action plans that required fast-tracking to give maximum effect to the IPAP programme. The technical process to amend the Preferential Procurement Policy Framework Act (PPPFA) regulations awaited promulgation by the National Treasury. The Customs Fraud Campaign was underway but required scaling-up. The Biofuels Mandatory Uplift Regulations required promulgation and the Biofuels Fuel Levy Rebate required implementation. These regulations would unlock very significant economic activity and thousands of jobs in the biofuels sector. Work to establish and define minimum levels of beneficiation for 10 commodities to lay the foundation for building beneficiation value chains needed to be finalised and fast tracked. The export tax on scrap metals required implementation. Greater clarity was required on the inclusion and timing of adding nuclear energy into the national energy mix. Other key action plans were in the areas of food safety, issuing water licences for forestry, and set top boxes for the digitalisation of television.

Mr Zalk summarised that very substantial progress had been recorded and most key action plans of the IPAP2 were on track. He called upon the Committee to engage with their counterparts with oversight over the relevant government departments to facilitate fast tracking of these key action plans. DTI was also engaging at various levels to facilitate the completion of these key action plans by the end of March 2011. The first IPAP Annual Report would be tabled to Cabinet by the end of Q1 2011/12. Furthermore, the revised three-year IPAP2 would be finalised and tabled to Cabinet, Nedlac, Portfolio Committee, and Select Committee in April 2011. The next iteration would be a consolidation of IPAP2 and not another major quantitative leap. 

Mr Zalk concluded his presentation by noting that there were additional data slides in the appendix.

Discussion
Mr K Sinclair (COPE, Northern Cape) requested that the Minister should meet with the Committee in the near future. He noted that the theory of IPAP was good, but there were always problems with implementation. For example, the turnaround time for IDC applications was too long. A lack of investment was largely a result of the government's lack of clarity on certain policy positions. He asked for clarity on the REFIT model as investors were not participating because government was not prepared. He asked for Mr Zalk's feel on the high South African interest rate and expressed his concern that it may be moving up.

The Chairperson commented that the Minister would continue to be absent on Wednesdays due to Cabinet meetings. The Chairperson intended to move this meeting to a Tuesday for one meeting in order that the Minister might attend.

Mr A Lees (DA, Kwazulu-Natal) asked if, that during the process of identifying sectors for IPAP implementation or growth, was there an attempt to find where the competition lay. He queried whether there was an attempt to find niche areas or was it a shotgun approach. He asked if the emphasis on agro-processing was simply an attempt to relocate business from one area to another, or was the approach looking at import replacement.

Mr Lees noted that the auto industry had been receiving subsidies for over 20 years. He asked if there was a sunset on this industry and when would we stop pouring taxpayers’ money into this industry. He also asked how much it would cost the taxpayer to achieve the R13 billion in investments in the auto industry.

Mr Lees asked for clarity on the first paragraph of page 6 of the DTI presentation dealing with Cross-cutting highlights. Also on the same page of the presentation, he asked what control would there be on local products as opposed to the quality of the product. He noted that there were problems with the textile industry and problems with the application of the minimum wage. Would there be any assistance with this industry to prevent them from moving?

Mr Lees asked if standards imposed by SABS were used to block the entry of cheaper imports. He queried if the long delays in the approval process would simply not drive up costs.

In regards to the renewable energy REFIT program, he asked if there were rules that would allow one to store energy on the system and draw it out at a later time. The 10,000 hectares of land approved for forestry licences was previously not laying idle and he asked what the land was used for and what jobs were being lost. He asked what the impact would be on the water table. Mr Lees noted that there was a report on the iron and steel sector, but that there was no comment on the implementation or success of the report. Mr Lees asked what was meant by the "Mandatory uptake regulations" with regards to biofuels.

Ms E Van Lingen (DA, Eastern Cape) expressed concern about the minimum levels of beneficiation and asked if this referred to minimum beneficiation for the workers and not just BEE. Given the price reduction in the ARV tender, she asked if there was price collusion in the previous tender and how could it drop by almost 50 percent in such a short time. She noted that we needed to address the delays on items that were imported for the purpose of re-export and how did this relate to the information presented on page 7 regarding SABS identification of technical barriers to trade. She asked if Mr Zalk could define the BPO consortium. Ms Van Lingen noted that water was critical to growth in many areas. She asked if all the departments were coordinating the water capacity of South Africa and what was the strategy to ensure that we have water for the next many years.

Mr B Muguni (ANC, Free State) asked if one could get steel cheaper in South Africa, why one could not get fuel and petroleum cheaper. What would be a more suitable exchange rate?

The Chairperson asked if one could look at manufacturing steel products in South Africa rather than exporting the raw materials and importing products. He asked if it was better to apply an export tax to scrap metal or was it better to reduce the amount of scrap metal that South Africa exported. He also asked what would happen to the sugar industry with an increase in biofuel use.

Ms M Dikgale (ANC, Limpopo) expressed her support to move forward with the IPAP process.

Ms Van Lingen noted that certain industries could not operate at full capacity because of a lack of funding to improve the railway capacity. She asked if this plan was addressing this issue.

Mr Zalk noted that the comments from the Committee were heard clearly and that the Department was moving as rapidly as possible. He noted that a number of strategies were cross-cutting and multi-departmental in nature. He suggested that it could be beneficial to call representatives from several departments to the Committee in order to address specific sectors that were multi-departmental by nature.

Mr Zalk stated that REFIT stood for Renewable Energy Feed In Tariff. Many investors needed the tariff to get started, but this was the first for the country and rules would be in place within the next few months. It was anticipated that this program would unlock a lot of investment. People could probably sell energy back to the grid at a later stage in the project. It would not be immediately available.

Mr Zalk noted that South African interest rates tended to be at the higher end of international rates.  He would not speculate on when rates may change. Having higher rates tended to have a negative effect on the ability to attract investment. Thus, the focus was to look at ways to reduce the cost of capital.

Mr Zalk noted that the IDC was acutely aware of, and addressing the issue of turnaround times for applications.

Mr Zalk stated that the DTI did not adopt a shotgun approach to sectors for the IPAP, rather it looked into sectors and identified areas where they could either be competitive or where there could be new growth. Agro-processing was not about relocating from one place in the country to another; it was about both import replacement and exports.

Mr Zalk said that the auto industry did get support from the government. The auto industry had seen a reduction in support from over 100 percent in the 1990s to about 30 percent today. This has led to an increase in productivity in the industry. The net economic benefits outweighed the costs to the taxpayer and consumer. The IPAP logic was pushing for an increase in production and localisation in the industry. The rules of the program stated that between 20 and 30% of the R13 billion investment would come from the fiscus.

The changes to the Preferential Procurement regulation contained two elements. For the awarding of large tenders, 90% of the points would be awarded based on price and 10% would be aligned to BE codes. Local procurement would be introduced in sectors that could be proven to be competitive and therefore local procurement in these sectors would have to take place from domestic manufacturers. Mr Zalk stated that any government tender had minimum technical standards of quality. There was no question of allowing low quality domestic products to crowd out high quality imports. The quality standards of ARVs were set by the Medicine Control Council. The standards were incredibly high and amongst the highest in the world. Both domestic and import suppliers were held to the same standards.

The application of minimum wages in the clothing and textile industry rested primarily with the Department of Labour. DTI was involved from the perspective of encouraging manufacturers to take advantage of the Clothing and Textile Competitive Program and the Production Incentive.

Mr Zalk noted that discussion on the forestry licensing would benefit from the participation of the Department of Agriculture, Forestry and Fisheries and the Department of Water Affairs. He noted that water was available in parts of the country to increase forestry. There were very stringent environmental impact assessments that were required before water licences could be issued.

Mr Zalk stated that the lead department in the area of iron and steel was the Department of Mineral Resources. They were the custodians for mineral rights, legislation and the ability to award mineral rights. This issue could be addressed by a single department.

Mandatory uplift of biofuels meant that petroleum refiners were obliged to buy up and blend a particular percentage of biofuels into the general stock.

Mr Zalk explained that by minimum beneficiation he was referring to the processing of commodities. In accordance with the Mineral and Petroleum Resource Development Act, mining companies were obliged to meet minimum levels of black economic empowerment. However, in the Act they were allowed to offset BE requirements by doing beneficiation.

The ARV price reductions were a result of a decrease in international prices. The national tender enforced South African prices to be reduced in line with international prices.

Mr Zalk asked the Chairperson for the specific details regarding the export blockages so that he could address it more thoroughly. He suggested that it was an issue of import rebate processing. Mr Zalk defined the BPO consortium as Business Process Outsourcing consortium. He noted it was a public-private partnership of major call centre companies operating in South Africa in association with the DTI and the Department of Labour. The private companies made a commitment to take up at least 70% of the 3 400 trained persons.

Mr Zalk addressed the issue of the cost of doing business. He noted that this was a cross-cutting issue, but that the IPAP perspective was to focus on particular issues. They focused on issues like steep pricing and the pricing of chemicals. These items, although domestically made, were priced at the level that they would have cost if they were imported. This was the concept of import parity pricing.

Mr Zalk noted that the exchange rate was a major challenge for the country. Local production had a much higher spill-over effect into the South African economy that imports would. Local production drew in primary inputs as well as goods and services from South Africa. The exchange rate was not based on the underlying fundamentals of the South African economy; rather it was based on speculative short term capital inflows. He stressed that we needed an exchange rate that was both significantly lower and stable.

In addressing scrap metal, there could be a ban placed on the export of scrap metal, but Mr Zalk said that there may be legal impediments to this. DTI proposed the taxing of scrap metal exports. This tax would have the effect of dis-incentivising exports and incentivising the re-use of scrap metal.

Mr Zalk stated that there were provisions for a broad range of agricultural inputs into biofuels and he noted that maize was excluded as an input for food security reasons.

Ms Van Lingen re-iterated her concerns about Richard's Bay.

Mr Zalk commented that he did not have the information to provide an accurate reply except that there was an infrastructure backlog in the country and Richard's Bay would be no exception. Mr Zalk discussed the concept of 'import fronting' and explained its undesirable impact on local economies.

Mr Sinclair stressed that the Expanded Public Works Programme (EPWP) should be a part of the IPAP initiative. Many of the issues would have a direct impact on the region. He also asked how IPAP implementation would impact on any of our international agreements.

Mr Mnguni asked if small construction businesses were disadvantaged by big businesses only giving them a small percentage of work.

Mr Zalk replied that they were working with regional partners to improve standardisation, reduce trade barriers, and provide technical support. When South Africa entered into international agreements, it could limit the type of incentive programs that they could construct. They also constructed programs to minimise the potential for World Trade Organisation (WTO) complaints. In construction projects, the procurement process did allow for splitting of tenders that would give smaller companies opportunities.

The Chairperson thanked Mr Zalk for his presentation and the members for their engagement. The meeting was adjourned.