Department of Trade and Industry on its Annual Report 2010/11

Meeting report

Mr Lionel October, Director-General of the Department of Trade and Industry (DTI), said the Department had had to react to the challenges presented by one of the deepest recessions to hit the domestic and international economies. In South Africa, about one million jobs had been lost, although manufacturing output had grown by 5% after declining by over 10% in 2009. Export markets had been hard hit by the economic situation in Europe and the United States.

The comprehensive Industrial Policy Action Plan II (IPAP2) had been finalised, with the objective of supporting Government’s industrial development and employment creation projects, with the key focus on skills development, technological innovation and public procurement.

Major industrial development achievements during the review period had been:

▪ The clothing and textile sector had been turned around from “a bloodbath”, with 171 companies benefiting from the new Clothing and Textiles Competitive Programme (CTCP) and the Production Incentive (PI) programme. This saw 40 591 jobs being supported or saved and at least 1 111 new jobs being created. The industry had now stabilised and was showing signs of growth. Local retailers, such as Foschini, were again sourcing from South African suppliers.
▪ Investment of R40 million in the Business Process Services sector had resulted in the creation of 950 jobs, while new investment commitments worth R42 million had been approved and could be linked to 806 jobs.
▪ The new incentive programme for the automotive industry had resulted in investment commitments of R14 billion from the “big six” motor assemblers and component suppliers. This would create at least 12 000 jobs and increase production capacity in the sector.
▪ Cabinet approval of amendments to the Preferential Procurement Policy Framework Act would allow for the designation of sectors for local production and alignment with Black empowerment legislation. The new regulations would come into effect in December.
▪ The Enterprise Investment Programme (EIP) had approved investments of R11,3 billion, which were expected to create 12 394 jobs in the manufacturing sector and 2 624 in the tourism sector.
▪ The Industrial Development Zones in East London and Coega had attracted investments of R342 million and R402 million respectively, and would support an estimated 4 551 construction and 1 400 direct job opportunities.
▪ The Export Marketing and Investment Assistance programme had supported 1 753 firms, which had realised export sales to the value of nearly R2,9 billion.
▪ DTI incentive schemes had assisted nearly 4 000 firms in total.

Turning to trade, investment and exports, Mr October said the Southern African Customs Union (SACU) had faced serious challenges because of the dependence of neighbouring countries on the revenue-sharing formula, and the massive decline in revenues they had received as a result of the economic downturn. The formula was being revised, and the focus shifted from simply revenue-sharing to infrastructure development. A common position had been developed to merge Southern African Development Community (SADC) with the Common Market of Eastern and Southern Africa (COMESA) and East African Community (EAC) into a free trade area embracing 26 countries and about 600 million people, a process which would take about two to three years to finalise. A comprehensive agreement had been signed with China which had changed the structure of the trade between the two countries, to ensure that not just raw materials but also finished products were exported from South Africa, and that China invested locally in value-added production facilities.

As South Africa’s traditional trading partners were not growing quickly, an objective to diversify trade into the African continent and fast-growing economies such as the BRICS (Brazil, Russia, India, China, South Africa) nations, had resulted in several visits to foreign countries and a large number of trade missions.

In its enterprise development programmes, the Department had helped to establish 100 new small-scale cooperatives, and had formulated amendments to the 2005 Cooperatives Act. A further 232 cooperatives had been assisted through the Cooperatives Incentive Scheme.

Under the Black Business Supplier Development Programme, for which only black businesses which had survived at least a year were eligible for cost-sharing grants, 1 104 enterprises had been supported.

New regulations had been developed or finalised in the areas of business registration, consumer protection, estate agents, liquor licensing, lotteries and gambling.

The Department had a major task in addressing its vacancy rate, which stood at 18,2% at the end of the review period, but which had been reduced to 13,2% by the end of June this year. One of the challenges was that filling vacancies with internal promotions still left vacancies needing to be filled.

Twelve of the DTI’s 13 agencies had received unqualified audit reports, the exception being the Companies and Intellectual Property Commission (CIPC), formerly CIPRO, whose qualified audit was due to the lack of a management system to accurately account for revenue and debtors from annual returns. This issue was being addressed.

The Auditor-General had drawn attention to matters requiring corrective action, such as irregular expenditure, material impairments, asset management, management of performance information and unauthorised expenditure.

Mr October said the DTI had underspent its budget of R6,2 billion by 6,4%. However, the bulk of this under-expenditure was due to delays in paying incentives under the Automotive Investment Scheme, as the programme had been finalised only in December and applications were received late. The programme was now on track.

The key challenge facing the DTI was to preserve the country’s manufacturing sector during the current economic downturn so that they could survive to take advantage of the opportunities when conditions improved.

Discussion
Mr N Mnguni (ANC, Free State), asked if there were key strategic objectives which the DTI felt they had not achieved, and what the reasons were.

Mr October said the filling of vacancies was a major issue, where the Department was working on the principle of “use it or lose it” – if a post was not filled within a certain period, the position would be lost. Incentives aimed at broadening participation in the economy were not yet operating effectively in the field of cooperatives and emerging new small businesses. There was also an urgent need for the country to expand into new markets and become less dependent on Europe and the United States.

Ms B Abrahams (DA, Gauteng) asked how many jobs had been saved in Gauteng as a result of the DTI’s interventions in the clothing and textile industry.

The Director-General said he would provide a breakdown for each province.

Mr A Nyambi (ANC, Mpumalanga) asked for an explanation for the Auditor-General’s criticism of the way in which performance information had been presented.

Mr October said the issue related to how the DTI set and measured targets. These were based on exports and trade agreements. The Auditor-General had said these targets were not clearly measurable, but the level of exports was determined by economic factors, and not by the Government. The DTI was therefore looking at a different method of setting targets to meet the Auditor-General’s requirements.

Mr Nyambi asked from which provinces the business people assisted by the DTI to visit overseas export markets, were drawn.

The Director-General said a provincial breakdown would be provided, and agreed that all provinces should be represented, with a bias towards those areas which were less well resourced.

Mr K Sinclair (COPE, Northern Cape) described the Government’s objective of creating 5 million jobs by 2020 as “pie in the sky”, and suggested that it was time for the Cabinet to take a more realistic view before it came back to haunt them. People wanting to start businesses were hindered by a vast amount of “red tape,” with several departments involved, and it was time for the new CIPC to play a role in resolving this issue.
 
Mr October said the point was taken, that when setting economic policy, one should not focus on short-term targets, as industrial development was a long-term process. The issue of “red tape” was receiving attention, and a process was under way to eliminate unnecessary forms and information requirements. CIPC had by now cleared the backlog it had inherited from its predecessor, and the turnaround time for company registrations would be much quicker in future.

Mr Sinclair said a lot of effort was put into developing cooperatives, but only eight to nine per cent of them were productive. A serious debate about the causes of this situation was needed, as he believed the effort was not worthwhile.

The Director-General agreed that South African cooperatives were nowhere near the standard of those in other parts of the world. On the supply side, measures had been put in place to increase financial and technical support, but there was also a need to help cooperatives to market their products. In the past, this function had been provided by marketing boards, but since 1994 the boards had been abolished or privatised. The Department of Agriculture was now working on a full revival of marketing boards.

Mr Sinclair said the challenge was not purely about markets, but more about the issue of ownership. Cooperatives failed, for instance, when there were 10 members and only three or four worked, and the rest got the benefit. Oversight visits showed that people became disillusioned. It was crucial that people got value for the work they put in.

Mr October said the challenges existed mostly at the primary level. Cooperatives did not work as well there as they did at the secondary level, where products where handed over for processing or distribution. Focus would be directed at secondary cooperatives in future.

Mr Sinclair criticised the proliferation of liquor outlets, particularly in small towns, where he said shebeens outnumbered churches. He described the situation as a national disaster, with its impact on family violence and crime levels.

Mr October said the Government was well aware of the seriousness of the situation, particularly the Minister of Health. It was becoming a “lifestyle” problem, and he forecast that more programmes would be introduced to deal with it.

Mr Sinclair said the DTI’s footprint in the South African embassies was a cause for concern, as there were crucial locations in Africa and other parts of the world where the DTI had no representation, with many vacancies for economic councillors and marketing officers. Allowing for funding problems, what were the reasons for these vacancies?

The Director-General agreed that there were only 20 offices around the world where the DTI had representatives. In the past month, ten people had been sent to take up posts, having completed their training. The matter was on the DTI agenda with a view to increasing its footprint in Africa, as well as important emerging markets such as Turkey, Indonesia and Mexico.

Ms E van Lingen (DA, Eastern Cape) asked if time frames were attached to the automotive industry’s R14 billion investment commitments.

Mr October said the time frames varied from manufacturer to manufacturer, which generally had to revamp their production lines for new models every four years. The incentives were also linked to increasing the level of local components in their vehicles.

Ms Van Lingen said the report on IDZs had contained no reference to Richards Bay, and asked if anything was in the pipeline. She was supported by the Chairperson, who said since the establishment of the IDZs in 2002, the focus had been on only East London and Coega, with no priority accorded to Richards Bay. He also questioned the effectiveness of these two IDZs, where the considerable investment did not seem to have benefited the inhabitants of a poor region of the country.

The Director-General conceded that the IDZ programme had not had the anticipated effect. The initial scope had been too small, and most provinces had not been included. New legislation was now being finalised and should soon become effective, which would provide for the establishment of Special Economic Zones (SEZs). These could be set up in all the provinces. The DTI was involved in discussions with National Treasury, and there was a commitment to put “serious funding” into both the IDZs and SEZs. The new legislation would improve coordination between all three tiers of government, which was a prerequisite for the SEZs to succeed. Locations for SEZs had been identified in Harrismith, Saldanha, Upington, Limpopo and North West Province.

Ms Van Lingen asked for details on energy deals entered into between South Africa and China, France, Russia and Scandinavian countries, and whether any new developments had taken place in the current financial year.

The Director-General said he expected an announcement in the next two weeks to give details of an initiative to consolidate all the renewable energy funding commitments into a single entity.

The Chairperson said that as the Committee’s representation was intended to ensure all provinces had the opportunity to exercise oversight, it was important for the DTI to give a statistical breakdown by province of its activities. In this regard, he referred to issues such as youth training programmes and assistance to exporters.

The Chairperson said the Auditor-General’s Report had raised several issues, and he sought assurance that these were being addressed.

The Director-General said active measures had been put in place to address all the issues.

The Chairperson noted that no reference had been made to the “green economy” in the DTI report.

Mr October responded that this aspect had been placed at the top of the Department’s agenda, although most of the work involved was done by other departments.

Mr Sinclair said the Committee needed advice regarding its overseas oversight visit, and would appreciate the Director-General’s guidance on where to find the best practice of entrepreneurship.

Mr October said he believed Malaysia would be a good choice, because in the past 50 years it had solved its equity and industrial development problems, both of which had parallels in South Africa. Formerly a rural backwater, it today had almost full employment and was highly industrialised.

Mr F Adams (ANC, Western Cape) said he was concerned to note that 124 consultants had been employed on 48 projects, and this had cost the DTI R24,4 million.

The Director-General said the DTI tried to use consultants only where necessary, and to manage their involvement closely. However, the Department was dealing with very complex matters, and this required the use from time to time of specialised consultants.

The Chairperson thanked the delegation for their presentation, and closed the meeting.