Industrial Policy: public hearings

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Trade and Industry

23 April 2002
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TRADE AND INDUSTRY PORTFOLIO COMMITTEE; ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE: JOINT MEETING

TRADE AND INDUSTRY PORTFOLIO COMMITTEE; ECONOMIC AND FOREIGN AFFAIRS SELECT COMMITTEE: JOINT MEETING
24 April 2002
INDUSTRIAL STRATEGY: PUBLIC HEARINGS

Chairpersons:
Dr. Davies (Portfolio Committee) and Mr. Moosa (Select Committee)

Documents handed out
Submission by Textile Federation (see Appendix 1)
Submission by Foundation for Education Science and Technology (FEST)
Submission by Small Business Project (SBP)
Industrial Development Corporation written submission (see Appendix 2)
Accelerating Growth and Development: the Contribution of an Integrated Manufacturing Strategy: see
DTI website for document (at bottom of homepage)

SUMMARY
Submissions were heard from the Textile Federation, the Foundation for Education Science and Technology, the Small Business Project and the Chemicals Energy Paper Pulp and Allied Workers Union. All submissions were made in response to the Industrial Strategy policy document released by DTI. There was general satisfaction with the document although a number of issues were raised throughout the submissions. There was no general agreement on how South Africa could become more globally competitive. Some of the submissions favoured more state intervention in the economy while others called for less regulation. There was considerable concern over the increasing levels of unemployment. Committee members asked an array of questions which tackled the issue of global competitiveness for South African industries.

MINUTES
Textile Federation of South Africa submission
The presenter began by outlining the history of the federation and highlighting that it represented 61,000 employees. In terms of DTI strategies, the federation supports the macroeconomic policies pursued. However, he admitted that the industry needed more time to adjust as many of its plants were 15-30 years old. He pointed out that despite the resilience of the textile industry, over the last two years there were 30-40 closures of factories. He continued by highlighting one of the problems facing the industry in South Africa. In the Far East factories operated 364 days of the year, while in South Africa only 92% of working hours were being utilised. There needed to be an improvement on this for global competitiveness. Another problem was the lack of accurate tariff related statistics. It still takes two months to get relevant statistics.

The federation did commend DTI for ensuring that less illegal goods flooded the local market. Despite the progress the federation did recommend that the anti-dumping unit become more proactive. Other recommendations included; government assistance in the provision of anti-retroviral drugs to HIV positive workers; assistance with security at factories and the promotion of cotton growing in the country.

Questions
The following questions were asked:
- Ms Hajaij (ANC) asked what percentage of textiles was produced for the domestic market and what percentage was for export? Whether training in the textile industry complied with labour requirements? Finally, what progress the industry had made in research and development?
- Ms September (ANC) asked what investments the industry had made in training centres? Why should anti-retroviral go directly to the industry when there were clinics that could provide these.
- Mr Moosa (ANC) asked whether the textile industry was doing the right thing by trying to compete with Asia? Should they not be concentrating their resources elsewhere?

The following responses were given:
-The presenter said that the president had made it clear that he would like to see the textile industry prosper. He said that one of the problems was that because of the continued restructuring of DTI the federation had been unable to establish contacts with officials at DTI. Overall, transformation had been difficult for the industry. Some factories had survived while others folded.
- In response to the question as to whether the SA textile industry had a place in the global market, the presenter stated adamantly that he believed the industry could compete globally. His argument was that the industry should aim to be the best at whatever it does rather than simply searching for a niche market.
- In terms of HIV/AIDS the presenter made in clear that the rapid spread of the disease demanded special responses from both industry and government.
- The presenter also commented that massive sums of money had been invested in training. Furthermore, employment within the industry was in line with the Employment Equity Act.

Foundation for Education Science and Technology (FEST) submission
The CEO, Dr. Pouris, began by explaining the role of FEST in encouraging the growth of science and technology in secondary and tertiary institutions. The organisation acts under the auspices of the Department of Arts, Science and Technology. The objective of FEST is to demonstrate how science and technology of a necessary and cultural aspect for the whole of South Africa.

The submission focused on industries that South Africa should be aiming to compete in. Dr Pouris emphasised that there were many fields that SA could not compete in as they had lagged to far behind other countries. The key according to FEST was identifying the industries where we could compete and become world leaders.

Questions
Dr Davies (ANC) commented that the presentation often ranked South Africa alongside developed nations. He asked how South Africa compared to other developing nations? He also commented that it seemed disturbing that as well as the state, the private sector had also decreased its spending on research and development.
-Dr. Pouris said that the state should be increasing its spending on research and development. The private sector was decreasing spending as many of the large global corporations were experiencing problems due to excessive spending on research and development.

Ms September (ANC) asked what changes could be made to the industrial policy to ensure that South Africa moved swiftly towards the technological revolution that FEST proposed.
-Dr. Pouris replied that the government must provide long-term incentives to those who want to study science. Furthermore, the state had some responsibility to ensure that science graduates remained in South Africa.

Ms Hajaij (ANC) asked to what extent South African universities were geared towards a more technologically advanced society.
-Dr Pouris said that the problem was that 80% of university graduates had studied human sciences or arts. This needed to be addressed to ensure more graduates were trained in hard science disciplines.

Mr Lockey (ANC) commented that he doubted as to whether South Africa could become an innovator in any technological field. He said that the country should rather be concentrating on becoming an early follower, like Japan for example.
-Dr Pouris disagreed with the comment, saying that due to changes in the capitalist system there were no longer any followers. He asserted that the gap between the rich and poor was widening. This means that being a follower only will result in losing ground on other nations.

Small Business Project submission
Mr D Christianson presented. Overall the submission supported a market-driven approach to small businesses. Mr Christianson crirticised the industrial strategy for being to interventionalist. He said that although the document acknowledged that the survival rate of small businesses in South Africa was low by international standards, it made no attempt to explain why this was the case.
The submission ended with the suggestion that the DTI go back to the drawing board and redraft a strategy that will be more conducive for the growth of small businesses.

Questions
Mr Bruce (DP) asked what the appropriate strategies for growth would be? He commented that the submission gave no alternative options to the one suggested by DTI.

Dr Davies (ANC) continued by saying that the only recommendation suggested is a regulatory view with a view towards deregulation. He asked whether it was possible to look at the SMME programme outside the parameters of the reality of the country. This reality was that there needed to be significant growth in small black businesses. How could this growth be ensured?

Mr Lockey (ANC) said that surely some government intervention was required to ensure that growth could be achieved. He used the examples of the Asia tigers saying that government intervention was integral to growth in these countries during the 1980s. Furthermore, Mr Lockey argued that relying on market forces would not lead to growth for small businesses.

Mr Christianson answered all the questions by saying that his organisation did not believe that the state should totally withdraw from the economy, but that it should recognise its limitations. He argued that the industrial strategy document did not lay the basis for the correct forms of intervention.

Chemicals Energy Paper Pulp and Allied Workers Union (CEPAWU) submission
Ms van Meelis noted that a written submission from CEPAWU would come with the COSATU submission to be heard later in the hearings.

She commended the DTI for identifying a number of labour concerns. The biggest of these concerns was the loss of jobs across all sectors. These job losses, particularly in the paper industry, were leading many families to the brink of poverty. Some families were forced to try and survive on R332 per month. It was important that all parties recognize the reasons for job losses.

One of the major reasons was increased mechanisation within many factories. This was clearly a difficult issue as mechanisation resulted in greater exports but had an adverse effect on employment. Another problem identified by CEPAWU was that many managers were moving towards benchmarks rather than looking at the socio-economic conditions of its workers. This inevitably resulted in job losses.

On the whole it was disturbing that many managers were unwilling to engage with the unions.
Other problems identified were; increased outsourcing; increased accidents in factories; low level of skills development; loss of organisational memory.

An example was given to demonstrate the problem with neglecting local markets. The local furniture sector recently experienced a significant growth in contracts with international retailers. Local suppliers were increasingly only dealing with international companies. These international companies then began squeezing costs. The local suppliers were left with no choice but to remain with the international companies as they had lost their domestic markets. This example demonstrated the importance of producing for the domestic market.

The submission also highlighted the importance of more social dialogue to address issues on industrial strategy. One of the hurdles to overcome was business' focus on short-term profits rather than long-term success.

Questions
Mr Zita (ANC) asked for figures on how much outsourcing was taking place in CEPAWU's industries.
-Ms van Meelis replied that the figures were not available. She suggested that in terms of outsourcing, procurement measures should be adjusted. She also suggested the promotion of alternative forms of capital growth.

Dr Davies (ANC) commented that there was a need to move beyond social dialogue towards collective action. He asked what progress had been made on research and development within the chemical industry.
-Ms van Meelis said that progress had been made on research and development as one of the major firms had opened a research facility.

The meeting was then adjourned.

Appendix 1:
SUBMISSION BY THE TEXTILE FEDERATION TO THE PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY ON INDUSTRIAL POLICY FOR SOUTH AFRICA

  1. INTRODUCTION
  2. The textile industry in South Africa has been involved in a Sector Summit process which culminated with a Textiles and Clothing Summit Report in August 2000. More recently (March 2002) it has been involved with the Department of Trade and Industry in devising and agreeing a strategy for the industry. The industry is currently finalizing its strategy plan project, co-financed by the Sector Partnership Fund. This will be presented to Labour and Government by the end of May 2002.

    Consequently many of the issues that the Portfolio Committee seeks to address on Industrial Policy for South Africa have been discussed and recommended upon in the various aforementioned fora.

  3. VISION, STRATEGIC OBJECTIVES AND STRATEGIES
  4. It is appropriate that the Vision and strategic objectives for the industry agreed at the Sector Summit be repeated: -

    1. Vision
    2. The vision of the South African textile and clothing industry is to create and sustain quality jobs and living standards for its employees, increase competitiveness and outputs, attract investment and promote exports in an integrated pipeline.

    3. Strategic Objective
    4. The strategic objective is to forge consensus between Government, Labour and Business on a clear vision and set of objectives and strategies for the South African Textiles and Clothing Industries to maintain and develop employment opportunities by transforming the industry into a strong, internationally competitive and growing industry capable of sustaining and attracting jobs and investment.

    5. Strategies

It was agreed to meet this objective that the parties would need to develop strategies to:

  • Aggressively grow exports
  • Strengthen the local market
  • Introduce world class manufacturing standards throughout the Industries
  • Ensure co-ordinated action from Government, labour and Business
  • Commit to Investment
  • Ensure fair labour standards
  1. POLICY ISSUES
    1. Industrial Policy as an Element of Micro Economic Policy

Government's intention to formalize industrial policy for South Africa, indicated by the presentation of the "Integrated Manufacturing Strategy" (IMS) by the DTI and the current Portfolio Committee hearings is most welcome, albeit long overdue.

To facilitate development in the desired direction at the micro economic level a clear unambiguous industrial policy needs to be put in place. In addition the policy that is implemented must meet the overall objectives for the economy that Government has set for South Africa. Amongst these objectives are the following: -

  • Retain and Grow employment opportunities
  • Increase international competitiveness
  • Promote the SMME Sector
  • Promote Black Economic Empowerment
  • Develop the SADC Region
  • Grow exports and investment
  • Grow the economy.

The textile industry is well placed and ideally suited to assist in achieving these objectives. What is required is a clear industrial policy with an enabling environment that facilitates the process.

    1. Significance of Value Chain Strategy Processes
    2. It is vitally important that SA pursues a strategy in line with an industrial policy of maximizing the value added process through the beneficiation of raw materials all the way to final product. In the past South Africa has exported raw materials and imported finished goods. This needs to be re-aligned so that South Africa becomes a significant manufacturing economy based on both domestic and imported inputs.

    3. Role of Parastatals like the IDC
    4. The IDC should adopt a neutral stance in supporting local or foreign productive investments. In the case of foreign investments it should be far more circumspect and vigilant to avoid some of the past foreign investment failures.

      To more aggressively encourage investments and consequently job creation, more favourable lending rates should be considered. Currently the IDC's lending rates are not much different to the commercial lending institutions.

    5. Structuring of Incentives by the DTI
    6. Firstly while an extensive list of incentives offered by the DTI exists, the incentives have been poorly publicized and marketed.

      While sporadic attempts have been made to disseminate and inform their user public this has not been persevered with.

      In addition the package of incentives should be made more user friendly. A more efficient commercially styled practice should be adopted by the DTI in processing incentive applications and benefits.

    7. "Traditional" Manufacturing and Other Sectors.
    8. There is an acknowledged priority for the development of SMME's and small business in the SA economy. However to pursue SMME development to the exclusion of traditional manufacturing would be shortsighted. Development of both sectors should be tackled be in tandem and in parallel. Each is dependant on the development of the other.

    9. Policy for Employment Creation, SMME development and BEE
      1. Tariff Structure on Textiles
      2. At the last tariff round of the WTO, South Africa was granted 12 years to phase down its textile tariffs. South Africa however decided to accelerate the phase down of its tariffs over seven years instead of the twelve years and to lower end rate tariffs. In September this year South Africa's tariffs on yarns, fabrics and clothing will be 15%, 22% and 40% respectively as against the 27%, 38% and 73% respectively that the WTO granted to South Africa.

        With the next tariff round of the WTO, shortly to be negotiated it is important for the sake of job creation and investment in the textile industry and the SMME sector that South Africa resist further tariff reductions: at the very least we should postpone any contemplated tariff reductions until the previous Uruguay Round tariffs are reached i.e. in five years time.

      3. Labour Legislative Environment
      4. The current rigid labour legislative environment does not promote investment or employment opportunities in the industry. An enabling, less rigid legislative environment will promote employment and job security for the industry.

        Currently, based on a 168-hour working week, legislation only permits a maximum of 92% utilization of the available production hours per annum.

        This is at an excessive premium to employers. Based on a 144-hours/week-shift pattern, the maximum utilization of productive hours is 78% while the utilization on a 120-hours per week shift pattern is only 65%.

        A less rigid approach to legislation would result in utilization of up to 98% of available production hours per annum. This would result in an average of a 30% increase in production and employment of an additional shift, which is estimated would result in an additional 10 000 jobs in the industry.

      5. Investment
      6. Investment in technology and equipment will result in retaining employment levels in the industry in the short term. However this will result in the South African Textile Industry becoming more competitive in the world market. Opportunities for future growth would result in increased employment opportunities and job security.

      7. Development of the Small Scale Cotton Growing Sector
      8. Small-scale cotton farmers urgently require infrastructural assistance and in many instances start up subsidies.

      9. Access to Foreign Based Skills
      10. As South Africa strives to become an emerging global player, industrial sectors will need access to globally best-trained and experienced personnel. These skills brought in to the country would then be passed on and used to coach and train local talent.

      11. Infrastructure and Logistics

The inordinately high cost of locally transporting energy input materials such as coal is placing local industry at a distinct disadvantage. A corrective process needs to be put in place which involve the introduction of preferential haulage rates.

Recently introduced inspection costs by SA Customs on exports are making SA's exports less competitive on the world markets. These costs need to be waived.


Appendix 2:
IDC comments on Industrial Policy

Submission to: The portfolio Committee on Trade and Industry


Date: 19 April
2002

1. INDUSTRIAL POLICY AS AN ELEMENT OF MICRO -ECONOMIC POLICY AND THE TYPE OF INDUSTRIAL STRATEGYIINDUSTRIAL POLICY/COMPETITIVE STRATEGY SOUTH AFRICA NEEDS

The DC welcomes the government's shift in focus from macro-economic stabilisation to micro-economic reform. We believe that most countries are getting their macro-economic situation in order and that micro-economic issues will become the basis for sustained economic growth and competition for foreign direct investment.

South Africa needs an industrial policy that is predictable, explicit and accessible and that is flexible enough to deal with changing conditions. Also the strategy should consist of a clear plan, which the current industrial strategic document lacks. The current document creates uncertainty regarding its purpose of whether it is a vision or a strategy document.

2. THE SIGNIFICANCE OF SECTOR OR VALUES CHAIN STRATEGY PROCESS

The IDC supports the sectoral approach outlined in the industrial strategy document to promote exports and also to reduce input costs. This approach will benefit the targeted input cost reducing sectors such as energy and ICT and export growth sectors like agro and agro processing, mining technology and mineral beneficiation, textile and clothing, cultural industries, automotive and Tourism

3. IN WHAT WAY OR TO WHAT EXTENT SHOULD WE (GOVERNMENT) BE ACTING WITH OR AHEAD OF THE LOGIC OF MARKETS IN PROMOTING INDUSTRIAL POLICY

The industrial policy's wider focus to cover new non-productive activities undertaken by manufacturing firms can address the direction or extent to which the government can act ahead of the market's logic. Focusing in new areas has the potential to amplify contribution to economic development.

4. WHAT IS THE ROLE OF INFRASTRUCTURE DEVELOPMENT AND HOW SHOULD THIS BE DONE

Economic infrastructure is pivotal to creation of investment and encouraging foreign direct investment. With the development of essential economic infrastructure, Governments can achieve its focus creating a favourable working and investment environment.

In the development of the economic infrastructure the policy need to understand the country's economic stage in terms of competitive advantage. The industrial strategy is currently too advanced for South Africa's current state of competitiveness.

 

We disagree with the document's implied assumption regarding South Africa's stage of competitive advantage. A country typically moves through various stages: (1) factor-driven stage; (2) investment-

driven stage; (3) innovation-driven stage; and (4) wealth-driven stage. Given the document's focus on knowledge-based activities and innovation (pages 2g to 34), it is implied that South Africa has already reached its stage 3 and should move to stage 4. We disagree with this assumption and are of the opinion that the industrial policy-focus is too advanced for South Africa's current state of competitiveness. We are of the opinion that our economy has not yet reached the investment-driven phase. This is motivated by our relative low investment-to-GDP-ratio, the volatility in gross fixed capital formation, our relatively low levels of foreign direct investment as well as our reliance on portfolio inflows. It is, therefore, not optimal to focus on policies to take us to the innovation-driven stage. We should rather increase our efforts to raise and sustain investment in productive capacities.

5. WHAT IS THE ROLE OF PARASTATALS LIKE THE IDC WITH A MANDATE TO ACT STRATEGICALLY AHEAD OF THE LOGIC OF THE MARKETS

The parastatals like IDC are in a position to give effect to policy and contribute to the implementation of the sectoral strategies out lined in the industrial strategy.

Since the restructuring of the IDC in ~ the Corporation embarked into new areas that were not traditionally associated with the IDC. These new areas included, amongst others, investments in tourism, techno-industries, entrepreneurial mining, wholesale and bridging finance, empowerment as well as some cultural industries. We believe that these new focus areas have the potential to amplify our contribution to economic development. Our focus in the non traditional markets addresses gaps in the market and therefore developing resources and capacity in undeveloped non traditional sectors.

6. HOW SHOULD INCENTIVES/OFFERINGS OF THE DTI GIVE EFFECT TO POLICY

The integration of incentives/offerings of the DTI with other institutions and key stake holders in the economy should give synergic benefit and increase access to the offerings and magnify the effect that policy will have in the market and the economy as whole. Available Incentives and offerings needs to be co-ordinated and linkages DTI agencies need to be enhanced.

7. WHAT R&D AND TRAINING PROGRAMMES ARE NEEDED

We need research and development and programs that will direct resources and increase effort in raising and sustaining investment in productive capacities to expand existing productive capabilities and create new ones based on locally available skills, raw materials and resources. This can help in creating new jobs, consistent with the strategies for improving economic conditions. Trends have significantly changed, research and development needs to look into latest trends and also look at the factors of production in the manufacturing sector and what percentage they contribute to overall GDP.

8. HOW SHOULD WE RECONCEPTUALISE THE RELATIONSHIP BETWEEN "TRADITIONAL MANUFACTURING "AND OTHER SECTORS

It is important to determine the development potential of the ICT sector relative to old economy or traditional manufacturing sectors such as automotive exports and the relationship between the two.

We disagree with Industrial strategy's comment that raw material prices, relatively cheap labour, proprietary technology and market access are so-called 'old' sources of competitiveness and that we should not rely on the 'old' ways. The analysis provided in the document is not convincing, as it hasn't been quantified or applied to the South African situation. From the Idec's experience with foreign direct investors as well as successful domestic clients these factors are still significant for South Africa and SADO. We agree that they are certainly not the only sources of competitiveness, but they should not be disregarded.

We agree that South Africa should not ignore the global challenges of the new economy, but it should not dominate our current base of competitiveness, which is still very much factor-driven. The IDC saw the need to enhance the new economy and created a Techno-Industries business unit, which focuses on IT and telecom investments

9. HOW SHOULD POLICY BE STRUCTURED TO GIVE EFFECT TO STATED PRIORITIES, SUCH AND EMPLOYMENT CREATION AND RETENTION, SMME DEVELOPMENT AND COOPERATIVE DEVELOPMENT AND BEE

The integration of various policies towards an integrated strategy is an important factor in the formulation of industrial policies. Policies need to be co-ordinated and linkages between government departments and institutions need to be enhanced. The policy should indicate its positioning regarding the "Integrated Action Plan to Accelerate Growth, Employment and Investment" recently approved by Cabinet and illustrate where industrial policy interacts with this larger government strategy.

We believe that SMME development; empowerment as well as job-creation rather than the creation of a knowledge-based economy should stand central to an integrated industrial strategy.

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