Departmental budget 2011: Research Unit analysis, Committee's Annual Report 2010 & Study Tour Report: adoption

NCOP Economic and Business Development

21 March 2011
Chairperson: Mr F Adams (ANC, Western Cape)
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Meeting Summary

The Parliamentary Researcher presented a detailed analysis of the 2011 budget of the Department of Economic Development (EDD). The context to the budget included the recent global economic crisis, and South Africa’s growth rate, factors contributing to the Gross Domestic Product (GDP), and comparative consumption by consumers and government spending. He emphasised the importance of South Africa’s exports, and demand for raw materials, and noted that most responses to the financial crisis, as well as the New Growth Path (NGP), centred on structural changes of the GDP components. NGP tried to correct the previous “jobless growth”. South Africa ranked very low in absorbing labour, with contributory factors including large amounts of unskilled labour in a sophisticated economy, militancy of trade unions, impact of labour laws, lack of support for small business development and infrastructure. The government policy priorities were set out. The Economic Development Plan included committing funds to save jobs, the training layoff scheme, seizure of smuggled goods and increase of tariffs in the clothing and textile sector.

The Researcher described the allocations of the total budget of R594.5 million across the four programmes of the Department, and noted that, after adjusting for inflation, this represented a 26.1% increase on the previous year. The various sub-programmes and their allocations were also set out. The presenter emphasised that the allocation to Programme 3: Economic Planning and Coordination amounted to about 85% of the budget, at R500 million, but about 93% of this was accounted for by transfers and subsidies to development finance institutions (who would be merged in time) and regulatory bodies, whose allocations were also set out. Nothing was yet allocated to the Green Economy sub-programme since the Department would be giving a supportive role only to other departments. He set out issues that Parliament could consider in oversight. These included overseeing the NGP indicators, the number of decent jobs created, urging the private sector to contribute, and addressing the growth challenges identified. It should also improve the labour absorption rate, through sufficient skills development, on-the-job training and improvements in quality of education, and recognise that education was only one factor in measuring skills.

Members were generally appreciative of the presentation. They asked how the Committee could ensure that finance institutions did their work, whether earlier research on development funding models had been factored in, how the green economy sub-programme would work, and why so much was allocated to the Administration Programme. Members asked  that the analysis should consider the specific role of the NCOP, and outline the provincial implementation and allocations. Some questions required further research into municipal and provincial budgets, and another on mining beneficiation would be answered by later presentations. Members also asked about plans to measure broad based black economic empowerment.

Members adopted the Committee’s Report on its Study Tour to China, the Second Term Programme, and its 2010 Annual Report, subject to information on committee attendance being checked.

Meeting report

Chairperson’s opening remarks
The Chairperson apologised for a problem with the time of the meeting. He noted that the Industrial Development Corporation (IDC), who was to have attended, was unable to do so and another date would be arranged.

Department of Economic Development budget 2011/12: Research Unit analysis
Mr L Mahlangu, Committee Researcher, Parliamentary Research Unit, noted that the overview that he would give of the budget included an examination of the contextual background, the policy priorities for 2011/12, the performance and service delivery information, budget analysis and expenditure trends, programme analysis, transfers and subsidies, and key issues for consideration by Parliament.

The context was dominated by the economic recession of 2008, and South Africa had a moderate economic growth rate of 2.9% in the last quarter of 2010, compared to the – 1.8% shown in 2009. South Africa’s recovery from the crisis had been aided by factors contributing to the Gross Domestic Product (GDP), such as commodity prices resulting from increasing demand for South African raw materials, low interest rates since 2006, and faster global growth global growth shown by emerging markets, due to fiscal stimulation in those countries. That growth was mainly led by the rise of China, as experienced and discussed in the G20 meetings. He outlined that economic theory cited key components of growth as consumption both by government and consumers. There was an increase in consumption by consumers, driven by an increase in their disposable income, and that would have an impact on future growth. Government spending on goods and services would also have an impact on future growth, and this had shown an increase, when compared to revenue from net exports. An injection into the economy would also be experienced, which would be reflected in the current account of the balance of payments. A comparison of the second quarter of 2010 to the average over 2009 showed that consumption had increased by 4.4% of the GDP. The GDP of 2009 was about R1.6 trillion, from both individual consumption and government, of which Government spending formed about 6.6%. In the first half of 2010, the merchandise component that contributed to exports increased by 6.3%, which exceeded the percentage achieved throughout the whole of 2009. These were thus the major contributors to economic growth if one considered South Africa as an export led economy. The increase in exports meant that the current account decreased from minus-4% in 2009 to minus-3.6% in 2010. A decrease of 1.85% was apparent in economic growth because of less national income, meaning less disposable income for people to purchase or import goods. However, the increased demand for South African raw materials had overtaken imports. Most responses to the financial crisis and responses from the New Growth Path that built on the previous economic policies centred around the structural changes of the components of GDP.

Mr Mahlangu said that there was growth in the period 2005 to 2007, but it had not created any employment, so it was “jobless growth”. The New Growth Path (NGP) tried to address those challenges, and correct the situation so that growth was matched with job creation. Some of the reasons for the jobless growth centred around the low ratio of employment of adults between 15 and 64 years old. He cited some comparisons of the labour absorption rate in African countries, noting that South Africa stood at 41.4%, Uganda at 83%, Rwanda at 80%, Tanzania at 78%, and Malawi at 78%. Generally, anything above 75% absorption rate was considered high, and anything below 50% employment rate was considered low. South Africa was far below that 50% mark. Some of the reasons cited for the low employment rates in South Africa were the fact that the country was much more sophisticated than other African economies yet there were a lot of unskilled labour. Other reasons hindering economic growth and job creation included the militancy of trade unions and the impact of labour laws, lack of support and development of small businesses, and the infrastructure.

Mr Mahlangu then considered the policy priorities for 2011/12. The New Growth Path, with its 10 year plan, would address unemployment, inequality, and poverty, using a strategy that was principally reliant on creating a significant increase in the number of new jobs in the economy, mainly in the private sector. A target of creating five million jobs had been set in the next ten years, which was projected at decreasing unemployment from 25% to 15%. A critical part to that target was the importance of social dialogue, where civil society, business sector and government worked together to address the structural challenges in the economy. The New Growth Path would focus on unlocking employment in six key sectors and activities in line with the 2011 State of the Nation Address. Those six sectors included infrastructure development, by the massive expansion of transport, energy, water, communication capacity and housing, by increasing and expanding the agricultural value chain and the agro-processing sector, by increasing the mining value chain, with emphasis on mineral beneficiation as well as increasing the rate of minerals extraction, and by focusing on the green economy, green energy, component manufacture and services. Finally there would be promotion of tourism and certain high level services, such as banking and insurance sectors.

Mr Mahlangu then considered the performance and service delivery information of the economic development plan in relation to the response to the financial crisis. He noted that from December 2010, R3.6 billion of the R6.1 billion fund for distressed companies, controlled by the Industrial Development Corporation (IDC), had been committed and 23 322 jobs had been saved or created. R219 million had been committed from the Unemployment Insurance Fund (UID) R2 billion jobs fund. The R2.9 billion training layoff scheme was a collaboration between the Department of Economic Development (EDD), Department of Labour (DOL), IDC and Commission for Conciliation, Mediation and Arbitration (CCMA). By January 2011 the scheme had benefited 6 351 workers. By the end of 2009, 750 tons of smuggled clothing and textiles, valued at R90 million, were seized by South African Revenue Services (SARS). The International Trade Administration Commission (ITAC) had responded by increasing the tariffs on 35 items of the clothing and textile sectors.

He noted that the challenges raised above must be borne in mind when looking at the budget analysis. In order to check whether the budget was sufficient, the allocations for the Department of Economic Development (EDD or the Department) had been broken down according to its four programmes of Administration, Economic Policy Development, Economic Planning and Coordination, and Economic Development and Dialogue. He noted that, for the 2011/12 financial year, Administration received R55 million, Economic Policy Development received R23.3 million, Economic Planning and Coordination received R499.9 million, and Economic Development and Dialogue had R16.3 million. The total budget was R594.5 million. If inflation, currently at 4.8% was taken into account, then this was a real increase of 26.1% when compared to the previous year. Economic planning and coordination received the biggest slice of the allocation, at almost 85%, whilst the other three programmes shared the remaining 15% of the budget. He noted that the largest part of the Economic planning and coordination Programme went to transfers and subsidies.

Mr Mahlangu noted that each of the four programmes had various sub-programmes to deal with certain issues. He outlined those for the Administration programme, noting that this included the Ministry, which had been allocated R19.6 million, the Office of the Director-General, receiving R5.8 million, and the General Management Services that received R29.6 million.

Programme 2: Economic Policy Development included sub-programmes for Growth Path and Creation of Decent Work, which received R6.1 million, Economic Policy, which received R8.4 million, the Broad Based Black Economic Empowerment (BBBEE) that also received R6.1 million, while the Second Economy received R2.7 million. He reiterated that the total allocation to this programme was R23.3 million, and it aimed to develop economic capacity development of government to ensure broader participation in the economy. This also spoke to the informal sector, which was not recognised in the real economy, and hoped to measure the contribution of the informal sector to the GDP. This programme was also monitoring the implementation of the New Growth Path.

The Economic Planning and Coordination Programme worked hand in hand with the National Planning Commission (NPC), in that the Programme evaluated the plans of each department for and sent them to NPC for further research. He reminded Members that it would receive almost R500 million, 85% of the Department’s budget. Transfers and subsidies accounted for about 93%, and the entities receiving this included the development finance institutions (DFIs) and regulatory bodies. He outlined the various allocations to sub-programmes as follows: Spatial, Sector and Planning - R16.8 million, Economic Development, Financing and Procurement - R5.2 million, Investment for Economic Development - R262.2 million, Competitiveness and Trade for Decent Work - R200.4 million, but nothing to the Green Economy, since this programme aimed to develop and support initiatives of other departments, entities and stakeholders in development of green economy projects, rather than initiate them itself. This programme overall showed the critical value the entities would have in the economy – for example, DFIs would provide financial muscle to small and medium business initiatives so they could become drivers of the economy.

The Economic Development and Dialogue Programme aimed to bring stakeholders on board so as to achieve the broader economic goals of the country. Social dialogue would enable stakeholders to take part in driving economic growth and job creation. The total allocation of R16.3 million was divided into four sub-programmes, which included National Social Dialogue and Strategic Frameworks, receiving the majority portion of R11 million.

Mr Mahlangu outlined the transfers and subsidies allocated to the DFIs. Khula received R128.9 million, SAMAF received R90.5 million, and IDC received R34.0 million. He also outlined the allocations to regulatory bodies The Competition Commission received R126.6 million, the Competition Tribunal received R15.2 million, and
International Trade and Administration Commission (ITAC) received R69.6 million. He reiterated that transfers and subsidies, at R464.8 million, constituted 78% of the Department’s budget.

Mr Mahlangu noted that the various DFIs funded different categories of businesses. SAMAF funded micro-enterprises for between R0 – R10 000. Khula funded small and medium institutions, of between  R10 000 and R1 million. National Empowerment Fund (NEF) offered exclusively BEE finance between R250 000 and R3 million while IDC offered industrial finance to medium size to large companies, between R1 million and R3 million. The 2011 SONA had announced that all the DFIs would be merged to become one unit serving the same objective.

Mr Mahlangu set out the key issues that Parliament needed to consider. 2011 had been declared as a year of job creation, so it was important for Parliament to consider and oversee the New Growth Path indicators. Those indicators would be published monthly by the Department to evaluate its progress. Parliament should also consider the number of jobs created or the reduction of unemployment. Parliament should also ensure that the NGP guided the work of relevant departments to achieve the goals and they should be working on the premise that creation of decent work was central to the country’s economic policy. Parliament could also play a role in urging sectors and private business to focus on job creation.

The GDP growth was also important to Parliament’s oversight work, because Parliament must ensure that any growth actually resulted in the creation of jobs. South Africa’s growth rate had been annualised at 1%, which was far lower than other emerging markets. Challenges in South Africa included the structural imbalances, lack of education, infrastructure, competition, and human capital, as well as stakeholders who were not willing to help drive national issues. Therefore, Parliament could play a role in supporting policies that encouraged private sector competition, infrastructure, human capital development, and simple and transparent tax policies, in order to boost growth.

A further indicator was the employment ratio or absorption rate, and here Parliament could ensure skills development, on-the-job training, and quality of education, especially taking into account prior learning. Education may be used as an indicator for measuring skills but it was not a sufficient indicator in itself, so Parliament had to take other factors of skills development into consideration in addressing higher levels of unemployment.

The distribution of earned income was another indicator, and Parliament could play a critical role by looking at a number of cross cutting issues including the labour market, globalisation, education, wealth condensation, race, gender, culture, and innate ability.

The last indicator he mentioned was household poverty. There were still many people in South Africa who lacked basic needs such as water, nutrition, and health care, so Parliament needed to ensure that more and better jobs were created in identified sectors, and should improve the alignment of economic policies in all government spheres, placing emphasis on rural development policy. All of the indicators spoke to the policy priorities of the NGP, which included unemployment, inequality and poverty, and the creation of jobs.

The Chairperson asked Members if they wished to pose questions of clarity, but reminded them that this was an analysis, and Mr Mahlangu could not give substantive answers on the budget.

Mr A Lees (DA, Gauteng) wanted to congratulate Mr Mahlangu for a good analysis.

Ms M Dikgale (ANC, Limpopo) echoed his congratulations. She asked what the Committee could do to ensure that agencies such as SAMAF did their work properly.

Mr B Mnguni (ANC, Free State)asked whether the research commissioned by National Treasury about four years ago, on changes in the DFI funding model, had been factored into the NGP, and how the funding models of Small and Medium Enterprises would change.

Mr Mahlangu acknowledged that there were challenges at SAMAF, and because there were so many developmental agencies at provincial and also at local government level, a large portion of amounts allocated to them tended to go to compensation of employees, meaning that less was available to ensure service delivery. The Department was trying to cut down on the number of service providers. There was also a lack of education, and here the EDD had to tackle how to deal with existing institutions, and how to deal with aspiring ones. Small Enterprise Development Agency (SEDA) could play a role, but this differed across provincial or local governments. Khula had also identified that many of the small and medium enterprises (SMEs) did not have any collateral security, so banks would not give them financial assistance. Khula Direct would allow for SMEs to get funding, but the interest rates were still under discussion, as Khula did not wish to compete with commercial banks. The IDC had also made the point that there were problems not only in accessing funding, but in accessing information in order to get the funding. Many institutions required long certification processes, and the kind of pressures that this created meant that many SMEs fell out of the process.

Mr A Nyambi (ANC, Mpumalanga) also praised the analysis, and questioned the implications of the different percentage allocations, noting that the Administration programme received the highest overall. He wondered how the Economic Planning and Coordination programme would deal with the green economy, seeing that there was no budget allocated for it.

Mr Mahlangu responded that Administration received a higher allocation, firstly because of the need to establish the Department, and this included issues of capacity, human resources and IT. One of the main issues faced by the Department was accommodation, as it was still accommodated in the Department of Trade and Industry’s premises, although space had been promised by Companies and Intellectual Property Registration Office, who should have moved out. Some of the allocations were to be put to the new premises.

He then explained the zero allocation to the green economy, which was based on the fact that the EDD’s role in the green economy was to support the initiatives of other departments and stakeholders in the green industry. The Department was in a process of establishing a Green Fund, which would in future receive allocations. For the moment, however, it would only be offering support to others.

Mr Nyambi wondered if the Research Unit had any specific comment for the NCOP, rather than mentioning “Parliament” in the presentation.

Mr D Gamede (ANC, KwaZulu-Natal) also emphasised that the budget analysis should look to the role of the NCOP, and he would have liked to have heard how much each province was going to get to implement the programmes.

Mr Mahlangu said that the Department, in its Annual Report, would give figures on achievements, and that MinMEC aimed for coherence between provinces, including strengthening agencies and strengthening South African Local Government Association (SALGA) to address some of the challenges in the provinces. The Department was also investigating holding conferences on local economic development in provinces.

Mr Mnguni asked if agro-processing was going to be complementary across other provinces and to other products, or whether there would be competition for economic growth between provinces.

Mr Mahlangu stated that these questions would require further research, as he would need to look at municipal budgets and the local economic development (LED) plans which were integrated into the Integrated Development Plans (IDPs). There were allocations to public corporations and entities in different provinces.

Mr B Mnguni asked which mineral resources were targeted for mineral beneficiation, and in which provinces such beneficiation would be carried out, also which provinces would benefit from such beneficiation, and whether this would be a competitive or complementary process between provinces.

Mr Mahlangu said that he could not answer this question, but the answer to it would probably be given during the presentation on mineral resources.

Mr Mnguni wondered what the EDD was planning over the three years of the BBBEE programme, and if there was any measuring tool that would be used by the Department in the first two years of the programme.

Mr Mahlangu answered that the Department was currently working on “index empowerment” as a way of measuring BBBEE. It was looking at a score card and code of conduct for BBBEE, and reviewing the current policy of BBBEE to align it to the NGP.

Committee Report on the Study Tour to China
Mr Gamede moved for, seconded, and adopted the Committee’s Report on the Study Tour to China.

Programme for the Second Term
The Chairperson informed the Committee that the House Chair had not approved the Second Term Programme, but it could be adopted now, subject to that approval.

He noted a request from the Portfolio Committee on Energy for a joint visit to Atlantis, as also the Koeberg Power Station, and wind turbines, and all that could be achieved in one day. This should be slotted into the programme.

Members adopted the programme, subject to the House Chair’s approval.

Draft Committee Annual Report 2010
Mr Lees noted that the Committee’s Annual Report reflected many Committee Members as having been absent from meetings and asked for clarity.

Mr Gamede agreed that this should be checked; he did not recall why so many were absent, but perhaps this was during study tours.

The Chairperson asked the Committee Secretary to check on this. He suggested that the draft Report could be adopted, subject to clarification on this point.

Members agreed, and adopted the draft Report, subject to the necessary amendment.

Minutes and Announcements
The Chairperson informed Members that they would deal with the Minutes and Announcements in the next meeting. He expressed thanks to Mr Mahlangu for his work into the budget analysis.

The meeting was adjourned.


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