Minister & Department of Trade and Industry: briefing on Annual Report 2010/11, & Industrial Policy Action Plan

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Trade and Industry

13 October 2011
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

Dr Rob Davies, Minister of Trade and Industry, briefed the Committee on the economic state of affairs in which South Africa found itself, stressing that the world economy was in a fragile position and the manufacturing sector ran the risk of falling victim to this. Although South Africa had showed some recovery it was not yet in the position it had been previously. The Revised Industrial Action Policy Plan (IPAP2) was advancing according to plans, but through difficult circumstances. He noted that government had taken the initiative to designate certain products that would be used by all sectors of government and a procurement process was under way. The New Growth Path (NGP) had also advanced, and there was commitment from the private sector for localisation of green economy products. Exports of manufactured goods remained under pressure, and although South Africa was expanding its trade with China, it was still exporting primary products and importing completed goods, especially electronic goods. The review on the small, medium and micro enterprises (SMMEs) focused on productive entrepreneurs. In December 2011 a Ministerial Conference would consider where South Africa wished to place itself. It was noted that there had been total real gross fixed capital formation decline, and unemployment, at 24% in 2010, declined again in 2011, mostly in the transport, construction and agriculture sectors.

The Department of Trade and Industry (dti) outlined the progress on the IPAP2 and noted that there had been amendments proposed, with effect from 7 December 2011, to the regulations under the Preferential Procurement Policy Framework Act (PPPFA), which would enable designation for local procurement and align this Act with broad based black economic empowerment objectives. The State Owned Enterprises were mobilised to leverage supplier procurement more systematically. The Industrial Development Corporation (IDC) had made available R102 billion, mostly in loan finance for IPAP and NGP sectors, which should create 17 760 direct and indirect jobs. Almost 10 000 jobs had been saved. Phase 1 into a study on  concessional industrial financing was completed. The South African Bureau of Standards (SABS) had developed a range of standards in the green sector, and a new accreditation programme for energy-efficient measurement and verification had been finalised. The automotive investment incentive, for which R2.69 billion was budgeted over three years, had secured R14 billion investment of commitments, which were outlined. R112 million was approved under the Clothing and Textiles Competitiveness Programme (CTCP), and R71 million was disbursed, in support of over 40 000 jobs. An action plan to consolidate the Free Trade Area of the SADC was approved. Strategic partnership agreements were concluded with China, Brazil and India.

The Department then proceeded to highlight the achievements in respect of the Annual Report. It set out the issues around broad participation, highlighting the numbers of cooperatives developed, employment opportunities, new enterprises and Small Enterprise Development Agency outputs. The regulatory changes in this year were outlined. Administrative issues within the dti were explained. Challenges were also identified, which included the global economic crisis, slowdown in public and private fixed investment expenditure, increases in electricity prices and the exchange rate and current account deficit. In relation to the report of the Auditor-General and the financial statements, it was noted that although the Department and 14 of its entities (the Companies and Intellectual Property Registration Office excluded) had received unqualified audits, there were various matters of emphasis in relation to irregular expenditure, material impairments, asset management, financial statements, and management of performance information. These were explained, together with the steps taken to address them. The Department had under-spent, by around 6%, because of vacancies not filled, outstanding accounts, and work that could not be done on a building, as well as saving being achieved on venues, facilities and travel, and delays in the establishment of the National Consumer Commission and the Companies and Intellectual Property Commission.

Members asked what the Department would do to address the economic decline, asked what was being done about training and asked about challenges with the National Regulator for Compulsory Specifications. They enquired how incentives to small businesses were monitored, asked about under-expenditure, asked why South Africa did not participate more in the World Trade Organisation, called for comment on the State Agency Framework, and asked how the designation strategy would work, as well as the costs of specialised procurement. Other questions related to trading relations with countries including Turkey, and desirability of continuing with subsidisation of some sectors. Members asked if more industrial development zones would be created, and said that the ineffective exchange rate was affecting exports and imports, and creating a gap through loss of jobs and expertise.

Meeting report

Opening remarks by Minister of Trade and Industry
Dr Rob Davies, Minister of Trade and Industry, told the Members that the manufacturing industry in South Africa was at risk of becoming a victim of the fragile world economy. During the recession there was a 10% contraction in the manufacturing sector. However, it performed well in 2010, by growing by 5%. Although this sector was one of the main drivers of the South African economic recovery in 2010, its strong rebound was still limited to a few sub-sectors such as the automotive, basic chemicals, iron and steel, and food and beverages industries. In summary, he said that although South Africa had recovered from the effects of the recession to some degree, it had still not reached its previous levels. The major worry at the moment was the volatility of the rand. The main objective was to protect the manufacturing industry. The Revised Industrial Policy Action Plan (IPAP2 ) was moving forward through these difficult circumstances.

Dr Davies noted that certain products had been designated to be used by all sectors of the government. A procurement process was under way to carry these designations forward.  The Department of Trade and Industry (dti) had introduced new building regulations concerning energy efficiency. One million solar water heaters would be rolled out by 2014/15.

The New Growth Path (NGP) had also advanced, in terms of new accords. In relation to the green economy, a commitment had been received from the private sector, who also gave commitment for the localisation of products.

Exports of manufactured goods remained under pressure, due to poor global demand, especially from the traditional trading partners of South Africa from the developed world. China had made a big investment in Coega, and would be manufacturing items from that base. Trade with China was expanding. The main problem on this remained that South Africa was exporting primary products, and it imports from China items such as cellphones.

Dr Davies noted, in regard to the Review on Small, Medium and Micro Enterprises (SMMEs) that there was a focus on creating productive entrepreneurs. A draft that would be looking at this matter was currently being developed. The incubation programme was being acknowledged.

He noted that a Ministerial Conference would be held in December 2011, and that Parliamentarians and members the National Economic Development and Labour Council (NEDLAC) would be invited to attend. He said that there would be substantial discussion on where the country wished to place itself.

Dr Davies reported that the total real gross fixed capital formation declined by 3,7% in 2010, deteriorating from a 2,2% decline experienced in 2009. The economic decline was mainly due to a persistent contraction in investment by the government. This showed an aggregate decline of 10,9% for the year, after showing consecutive declines in all quarters of 2010. Lack of investment by private business enterprises also contributed significantly to this decline, showing a contraction of 4,4% in 2010.

Unemployment was still high at 24% in 2010, though it had declined by 0,1% in the first quarter of 2011. The number of employed people increased slightly to 13 132 million in the fourth quarter of 2010, but that increase was short-lived. A further 14 000 people lost their jobs in the first quarter of 2011, reducing the number of employed people to 13 118 million. The decline in employment was driven mainly by the transport, construction and agriculture sectors. On the other hand, finance and other business services, manufacturing and mining increased the numbers of people employed by 37 000, 20 000 and 15 000 respectively.

Industrial Policy Action Plan progress: Department of Trade and Industry briefing
Mr Lionel October, Director General, Department of Trade and Industry, spoke of the progress made in relation to the Revised Industrial Policy Action Plan (IPAP2). He noted that in relation to public procurement and state owned enterprises supplier development, amendments had been suggested to the regulations under the Preferential Procurement Policy Framework Act (PPPFA). The effective date for these amendments was 7 December 2011. This would enable designation for local procurement and align the PPPFA with broad based black economic empowerment (BBBEE) objectives and proactive promotion of local procurement in non-designated sectors.

The dti was busy with the first phase of mobilisation within the State Owned Enterprises (SOEs) in order to introduce localisation and supplier development into the procurement process. SOEs introducing new policies, processes, systems and capacity building to embed supplier procurement had leveraged more systematically. One major success story was that of Transnet, which procured 100 locomotives, of which 90 would be assembled in South Africa.

In relation to industrial financing, Mr October reported that the Industrial Development Corporation (IDC) had made available R102 billion, mostly in loan finance for IPAP and NGP sectors. R25 billion was earmarked for the Green Economy. The IDC funding was meant to create about 17 760 direct and indirect jobs, and 9 880 had been saved as a result of this funding. The completion of Phase 1 of a study into concessional industrial financing laid the foundation for a framework for securing long-term sources and provision of concessional industrial financing, and the requisite financial products for key sectors.

Mr October then noted that in regard to trade and technical infrastructure, South African Bureau of Standards (SABS) had developed a range of enabling standards for various industries or products, including solar water heaters, water-efficient buildings, wind energy turbines, energy efficient appliances, electrical components, water efficient components, energy/electricity co-generation, and transport of dangerous goods. A new accreditation programme for energy-efficient measurement and verification had been finalised. The Draft Legal Metrology Policy proposal was still the subject of a stakeholder consultation process.

In respect of automotives, he reported that the Automotive Investment Incentive, with a budget of R2,69 billion over the MTEF period, had been instrumental in securing R14 billion investment of commitments, including R9 billion investment from assemblers. Volkswagen was to produce 136 000 new Polo and Vivo cars per annum, whilst the Toyota production expansion was to reach 130 000 vehicles every year. He noted that BMW South Africa had to increase the production of fourth generation 3-Series to 80 000 units from the current figure of 50 000, with more than 80% for export. General Motors had brought production of the Chevy Spark to South Africa. Production at Nissan had to rise to 76 000 cars per annum. Daimler Chrysler was to produce 70 000 new C-Class Mercedes Benz per annum.

Mr October then reported that, in regard to clothing and textiles, a sum of R112 million was approved under the Clothing and Textiles Competitiveness Programme (CTCP), under 22 applications, for 106 companies. A production incentive for 189 applications, totaling R619 million, had been approved. A sum of R71 million was disbursed in the period. This was in support of at least 40 591 jobs. South Africa had entered into contracts with Australia and France on the local handmade leather brand called ‘Tsonga’.

In relation to trade, investment and exports, Mr October reported that the Southern African Development Community (SADC) Ministerial Task Force had approved an action plan with nine priority focus areas that would help to consolidate the SADC Free Trade Area and provide greater impetus to regional industrialisation.

South Africa and China had signed a Comprehensive Strategic Partnership Agreement that included an undertaking to increase the value added exports of South Africa to China and to encourage Chinese investment in South Africa. Agreements had been reached with Brazil and India to address non-tariff barriers that impeded the bilateral trade. South Africa participated in the World Trade Organisation Doha Development Round negotiations, with a view to ensuring a developmental outcome.

The Trade Policy Strategic Framework had been finalised. This set out the approach of the government to trade policy and strategy. The Cabinet had also approved the Policy Framework on Bilateral Investment Treaties of the dti, which would guide the approach of South Africa to future international investment treaties.

Mr October then addressed the Committee on issues around broadened participation. He noted that the dti, in addressing enterprise development, developed 100 new small-scale co-operatives, which created a minimum of 500 self-generated income and employment opportunities. The Technology Incubation Programme of the dti had created 202 new SMMEs. The Department, through the Small Enterprise Development Agency (seda) had, to date, established a network of 42 branches, 17 mobile units and 58 Enterprise Information Centres countrywide. 232 cooperatives had been supported under the Co-operatives Incentive Scheme.

He noted that the BBBEE Advisory Council was operational. The Presidential Council recommendations were formulated, developed, and tabled in Cabinet, and this resulted in the reorientation of BBBEE and its alignment to broader government priorities, including IPAP and the NGP. Support was given to 1 209 SMMEs, 35% of which were women owned and 91% black owned. The Bavumile Skills Development Programme supported close to 80 women in two provinces, Northern Cape and Eastern Cape, in the clothing and textile and arts and craft sectors.

Mr October then turned to regulatory issues. In 2010/11, the Companies Amendment Bill and Regulations had been finalised, which had simplified business registration processes, reduced red tape and enhanced the transparency of companies. The Consumer Protection Act Regulations had also been finalised to give effect to the Consumer Protection Act. The Intellectual Property Laws Amendment Bill was tabled, for the protection of indigenous knowledge.

In relation to administration and co-ordination, Mr October noted that the dti had facilitated the implementation of key projects within the IPAP2 through its participation in the Economic Sectors and Employment Cluster of Cabinet. A major upgrade of the ICT infrastructure, which resulted in a reliable and faster ICT network, had been concluded. The Fraud Prevention Plan had been revised and implemented.

Mr October noted some of the challenges facing the dti. These included the recovery of the country from the global economic crisis and slowdown in public and private fixed investment expenditure. Large increases in electricity prices were making it increasingly difficult for the manufacturing sector to absorb the workforce. A large drop in manufacturing employment had been recorded during the first two quarters of 2011. South Africa had undergone a continuous appreciation of real effective exchange rate to its highest level on record in the third quarter of 2010, in the context of massive capital inflows and a large current account deficit. Rail and port inefficiencies, coupled with high port charges, were problematic.

Auditor-General’s report on the financial statements 2010/11
Mr October noted that the report of the Auditor-General (AG) noted an unqualified audit opinion for the dti on the 2010/11 annual financial statements. Of its 15 agencies, fourteen had received unqualified reports, but the Companies and Intellectual Property Commission (CIPC), formerly the Companies and Intellectual Property Registration Office (CIPRO) had a qualification because of a lack of a management system to accurately account for revenue and debtors from annual returns. Increased capacity and strengthened processes had been established in the new entity to assist with oversight.

Emphasis of matters were raised. In regard to dti, these matters related to irregular expenditure, material impairments, asset management, financial statements, and management of performance information.
One of the issues on irregular expenditure related to single source procurement where, in most instances, the service provider was a sole supplier of such a service, such as SABC, or various training. To counter this, additional controls had been introduced, such as the new internal control unit being established and additional capacity approved. This resulted in the creation of Group Chief Financial Officer and Deputy Chief Financial Officer (CFO) posts. The impairments largely related to the General Export Incentive Scheme, which had been in existence prior to1994, and where debts formed the subject of litigation.

Asset verifications were to be continued on a bi-annual basis. These would include reconciliation between the fixed asset register on LOGIS, and count sheets. An analysis would be performed at a more senior level to ensure accuracy of the asset register. The Department was considering procuring an asset management system to address the LOGIS limitations, which included the fact that some fields were not able to capture the full serial number and specific location of an asset.

In relation to the financial statements, additional quality checks would be implemented, including a review by the Internal Audit section. A policy has been developed to manage performance information. It resulted in a strategic planning session which identified key priorities that would be set for each area. An Annual Departmental Plan has been introduced. The Minister would approve the Departmental performance information. Quarterly performance reviews to monitor and manage progress had been formalised.

Mr October dealt with the one instance of unauthorised expenditure, incurred in the 2004/05 financial year, when R31.075 million of debt was incurred in relation to the General Export Incentive Scheme debts written off prior to 1994. A claim was made against dti for loss of investment for R6.1 million. A full report was presented on this matter to the Standing Committee on Public Accounts (SCOPA).

Mr October noted that dti had also taken a collective decision to buy 200 tickets for the World Cup as part of its investment promotion drive to showcase South Africa as an investment destination. International potential investors were invited, with whom officials interacted.  

In this financial year, Mr October reported that a sum of R243,74 million was not spent. Firstly, the Automotive Investment Scheme only became operational in December 2010. 53 projects had been approved by the Adjudication Committee, with the total concession amount of R1,861 billion as at 31 March 2011. R293,918 million was paid during the first quarter of the new financial year.

An amount of R70, 996m was not used because of outstanding foreign mission accounts from Department of International Relations and Cooperation. Their account for March 2011 was only received on 19 May 2011 and charged against the budget for 2011/12.

Payments for funds earmarked for variation orders for a building currently occupied by CIPC could not materialize, pending their move to new promises. Cost savings initiatives on venues and facilities, as well as on travel, contributed to the under expenditure. The amount of R36.813 million was unspent owing to vacancies not filled. He noted that the vacancy rate was reduced to 16,9% as at 31 March 2011, despite  an increase in newly created posts and normal attrition. As at 30 June 2011 the vacancy rate was standing at 13,2%.

R33, 782 had not been put to use because of delays in the establishment of the National Consumer Commission and the Companies and Intellectual Property Commission.

The budget allocations for the 2010/11 and a comparison to the 2009/10 financial year was given (see attached presentation for full details). The budget allocation had been R6.194 billion, but expenditure was at 93.6 % of budget. Approximately 58% of the expenditure consisted of incentives and 22% was accounted for by transfers to the Departmental agencies. The remaining funds were utilised for operational expenses.

Mr October summarised that the challenges identified included the global economic climate, the need for more job creation and skills for the economy, the need to grow the manufacturing sector, the need for further funding and business support for the informal sector and establishment of new innovation incubators, and the need to strengthen corporate governance of some agencies.

Discussion
Mr G McIntosh (COPE) wanted to know what the dti was doing about the economic decline in the country.

Minister Rob Davies replied that a Presidential level Commission had been established to look at public investment on infrastructure. Matters were beginning to move, and the priority was being shifted to the public investment infrastructure.

Mr B Radebe (ANC) asked why there was zero allocation on training, especially in respect of International Trade and Investment, Consumer and Corporate Regulations and Communication and Marketing. His fear was that at some stage people would have to be moved forward but they would be under-prepared.

Mr October said that training had been centralised, so it was happening, and there were training programmes within the dti.

Mr J Smalle (DA) commented that it appeared the two entities, South African Bureau for Standards (SABS) and National Regulator for Compulsory Specifications (NRCS), were not aligned well

Dr Davies explained that the dti was experiencing a serious challenge of enforcement, and the national regulators had been told about multiple infringements, with the result that legislation such as the Consumer Protection Act became even more important. He noted, however, that it would be impossible to have regulators policing everything. It was preferable that they should receive information from intelligence structures.  Standards were now becoming the tool to protect consumers and products all the world over.

Mr Smalle enquired how incentives to small businesses were monitored

Dr Davies explained that, in regard to monitoring, the dti had a system in place by which it paid out over a period of time. A contract would be signed, and the client would have to prove that it had invested in a particular venture. Inspectors would conduct site visits. There was a special agency entrusted with looking at this issue in the automotive industry. There were mechanisms in place to make sure the dti achieved the desired outcome.

Mr Smalle asked why there had been underexpenditure of 6,5%.

Mr Davies said that in fact the real underexpenditure was probably below 5%,and he noted that there was a programme to address this as well as a Committee set up to look into the matter. A contract had been signed with the automotive industry to make sure that there was no under-spending.

Ms C Kotsi (COPE) enquired what South Africa was doing about training people to work on the World Trade Organisation (WTO), noting that South Africa had no representatives here. She said that there had been suggestions that South Africa did not respond to advertisements of vacancies to be filled in WTO.

Minister Davies explained that South Africa was focused on strengthening its mission in the WTO. Its mission was not large, with the result that few South Africans were represented on the multilateral agencies; so indeed the country was under-represented.

Dr M Oriani-Ambrosini (IFP) asked how much was budgeted for the clothing industry incentive schemes

Minister Davies explained that the programme looking into this matter was managed by the Industrial Development Corporation (IDC). The cost was around 5% of the budget. The company was compelled to make productivity improvements first, and the dti would intervene.

The Chairperson asked the dti to comment on the status of the State Agency Framework, now that it had been finalised.

Minister Davies answered that the debate was still continuing, in government, about this Framework, which was starting to be seen as a consumer protection agency, especially when consumers were involved in the largest purchases in their lives. That is why it had a fidelity fund.

Ms S van der Merwe (ANC) wanted to know how the designation strategy was going to work. She feared that there would be problems of capacity in all seven designated sectors, and wondered whether there would be capacity to grow these sectors. She also asked about the trading relations between South Africa and Turkey.

Minister Davies explained that this process had been researched, and consultations were done, based on the capacities the State had in these sectors. He warned that the dti would not be coming with a designated price discount. He added that South Africa had enormous engineering capacity but it had let it go, and now must recover and build on that capacity.

Minister Davies added that the investment by Turkey was interesting, because Turkey would be investing in Defy products. However, the main challenge with this was that Turkey was not part of the European Union, yet had entered into the European Customs Union and now wanted South Africa to offer reciprocal arrangements. South Africa had agreed in principle, but wanted to identify areas of commonality first.

Mr Radebe enquired why beneficiation was taking longer, especially in the mineral sector, and wanted to find out about the ultimate standards that South Africa was going to use. He pointed out that the private sector had its own standards.

Minister Davies said that beneficiation was being promoted through indirect policy interventions. SABS was the standards-writing body in South Africa, and it had a major focus on SMMEs.

Mr Smalle asked if there were any plans in place to create more Industrial Development Zones (IDZs), noting that there were currently only four.

Minister Davies said that a few more would be created. There was already one in Saldanha. However, it was thought that a concept rather broader than IDZs was needed.

Dr Oriani-Ambrosini wanted to find out about the costs of specialised procurement, and asked when subsidies would be stopped, saying that they could be seen as addictive.

Minister Davies clarified that there was no price premium approach taken, but that instead sectors would be designated. The dti had designated in areas where it had capabilities. There were modalities to identify that there would not be price premiums. Another possible approach was that of a two-stage tender process. He reminded Members that this was the first round of designations, and improvements would be made as the process went forward. In relation to the suggestion that support by subsidy should be halted in respect of the clothing industry, he noted that the Department would have to do an analysis and identify the areas on which to implement that. Another possibility could be explored when there was a state of healthy competition in the industry.

The Chairperson commented that at present South Africa had an ineffective exchange rate that was affecting its exports and imports. She further asked what measures were put in place to address this. South Africa was, on the one hand, creating jobs, but on the other it was losing jobs and expertise and now there was a huge gap.

Minister Davies agreed that the country had the highest exchange rate, said that this had been going on for years, and that it was damaging the export market and leading to contraction. He noted that the government was cognisant of the shortage of skills, which was one of the reasons why two separate Departments of Education had been formed. He noted that the dti was still supporting some skills development programmes, but it was looking at niche areas.

The meeting was adjourned.

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