IPAP2 and National Investment Participation Programme (NIPP): update

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Trade, Industry and Competition

07 February 2012
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

IPAP2
The Department of Trade and Industry briefed the Committee on progress with IPAP2 and the up-scaling in key strategic sectors. The newest iteration of IPAP2 would be launched in April 2012. There had been progress in creating platforms to facilitate industrial development. A sector designation methodology had been developed, guidelines and instructions to implement the amended Preferential Procurement Policy Framework Act (PPPFA) had been developed and a South African Technical Standard had been developed to verify local content of manufactured products.

R102 billion would be invested in the next five years by the Industrial Development Corporation (IDC). There was R10 billion set aside for a job creation fund, R25 billion for the green economy while R6.1 billion was set aside to support distressed companies. Large manufacturing investments of over R7 billion would be eligible for the 12(i) tax incentive. It was working with the South African Revenue Service (SARS) on customs fraud and the ports staff members had tripled to 3 000. The country had received its first commitment from a Chinese motor manufacturer. 106 companies had been supported in undergoing competitive upgrades in the clothing and textile industries and the decline in employment in the sector appeared to have been arrested. Business Process Services had seen the successful operation of the Monyetla II Training Program. Green industries had benefited from the new building regulations which required that all new buildings must have solar water heaters fitted, in addition solar and wind energy generation strategies had been completed and the first tranche of
Renewable Energy Independent Power Producers Programme (REIPP) tenders for 17.8 gigawatts of electricity generation had begun. The Industrial Energy Efficiency Programme had been launched in November while new regulations for the mandatory blending of biofuels had been published for comment. The amended PPPFA agreement came into effect on 7th December 2011 with six designated industries being targeted, namely buses, train rolling stock, power pylons, canned vegetables, TV set-top boxes and clothing, textile, leather and footwear. The Manufacturing Competitiveness Enhancement Programme would support manufacturers with Capital investment, Working capital, Feasibility studies, Product development, New Market, Value chain and cluster studies and Energy efficiency. The green industries sector, metal fabrication, transport and capital equipment and the agro-industries sector were earmarked for up-scaled interventions.

Challenges and threats that were identified included currency volatility, a protracted recession, weakened domestic demand, massive increases in electricity rates, uncompetitive pricing of intermediate inputs, backlogs in infrastructure expenditure, high transport logistics costs and inefficiencies, slow progress on skills development and intra-governmental co-ordination.

Members asked what the costs of preferential planning were. What was the cost of the upgrade in the clothing industry? How many jobs were created through IPAP2? Would the new building regulations on solar water heaters be applied to existing buildings too? Would the challenge of the electricity price increases be dealt with? How many jobs were created and how much foreign and domestic investment was being attracted? What effect did the steel price have on local manufacturing?

Members said that there was no year on year reporting format and that attention should be given to developing a reporting framework. Was there a good compliance mechanism which obliged other departments to fulfill their obligations?

Members felt that the high cost of transport logistics could be remedied by the entrance of a competitive dynamic. How did the dti get customs, for example, to effect port clearance more efficiently?

NIPP
The dti said it sought to strengthen the National Investment Participation Programme (NIPP) and its alignment and co-ordination in public procurement. Public sector infrastructure expenditure had risen from 4.6% to 9.6% between 2006/7 and 2009/10. About 50% was imported content and thus it was important to strengthen local manufacturing. NIPP monitored US$16.5 billion since its inception in 1996, of which 80% was attributable to the
Strategic Defence packages

. Since inception, 220 projects had been implemented and 21393 jobs were created with a detailed project report having been tabled with the Committee in 2011. NIPP was a tool to leverage public procurement, yet between 1998 and 2009 only 12% of the State’s public expenditure was subject to NIPP.

There were three mechanisms in place: NIPP, run by the dti since 1996, the Competitive Supplier Development Program, run by the Department of Public Works since 2007, and the 2011 amendments to the PPPFA which allowed the dti to designate sectors for domestic production

There would be a project performance review in 2012/13 to strengthen NIPP and align it with other procurement levers.

Passenger Rail Agency of South Africa (Prasa) rolling stock, Eskom power pylons and Transnet locomotives would be designated as fleets. The dti wanted to split NIPP into direct NIPP, where large but irregular procurement (for example aerospace industries) occurred and Indirect NIPP for the balance of public procurement.

It planned to develop the next wave of designations, deepen supplier policy, systems and programmes, strengthen local procurement and ensure commitments were met.

The dti came under close questioning by the Committee on the Arms Deal Offset programme. Members asked for a list of those who had defaulted on their milestone offset investments. A Democratic Alliance Member said that the NIPPs appeared to be a “monstrous political fraud”. How much had Ferrostaal invested in South Africa? He had documentary evidence that it was obligated for offsets worth €3bn but had fulfilled only €63m. What systems were in place to police the offset investments as companies tried to dodge their obligations by seeking loopholes. With which countries was NIPP benchmarked. How much technology transfer was occurring? Could the Department elaborate on the $11.5 billion export credits and investment credits of $21.4 billion? Was the target figure of 65 000 jobs for direct jobs or was it a total for direct and indirect jobs? How many new plants and factories had been created? What was the multiplier for Ferrostaal. Could the dti explain the discrepancy between the 6 million euros Ferrostaal had invested in the movie “Long Walk to Freedom” while the dti report documented it at 300 million euros? Was the investment amount of 501 000 euros into the Condomi condom factory by Ferrostaal correct and did the condom project fail completely? Members said that only 16 000 jobs were created by the Arms Deal package. If this were the case then the State could access performance guarantees held as bank guaranteed deposits. Were there still amounts held as bank guarantees that could be claimed back? Members queried the utilisation of a multiplier to calculate the value of an offset. What multiplier factors were used to calculate the multiplier and what were the international benchmarks.

Members asked for a written reply to clarify benchmarking and were astounded at the under preparedness of the dti. They felt this was not acceptable.


Meeting report

Industrial Policy Action Plan 2 - 2010-2013: briefing
Mr Nimrod Zalk, dti Deputy Director General: Industrial Development, briefed the Committee on progress with IPAP2 looking at progress and development and the up-scaling in key strategic sectors.

The newest iteration of IPAP2 would be launched in April 2012. There had been progress in creating platforms to facilitate industrial development. They had developed a sector designation methodology, guidelines and instructions to implement the amended Preferential Procurement Policy Framework Act (PPPFA) and a South African Technical Standard to verify local content of manufactured products.

R102 billion would be invested would be invested in the next five years by the Industrial Development Corporation (IDC). There was R10 billion set aside for a job creation fund, R25 billion for the green economy while R6.1 billion was set aside to support distressed companies. Large manufacturing investments of over R7 billion would be eligible for the 12(i) tax incentive. The trade policy had a strategic tariff regime. It was working with the South African Revenue Service (SARS) on customs fraud and had tripled staff at ports to 3 000. He said the Automotive Investment Scheme was the first step in a shift to the Automotive Development Scheme. The country had received its first commitment from a Chinese motor manufacturer. There had been a significant increase in the volume of production and more importantly in the levels of local manufacture with the greatest employment benefit being felt at component manufacture level. 106 companies had been supported in undergoing competitive upgrades in the clothing and textile industries and the decline in employment in the sector appears to have been arrested. Business Process Services had seen the successful operation of the Monyetla II Training Programme. Green industries had benefited from the new building regulations which required that all new buildings must have solar water heaters fitted, in addition solar and wind energy generation strategies had been completed and the first tranche of Renewable Energy Independent Power Producers Programme (REIPP) tenders for 17.8 gigawatts of electricity generation had begun. The Industrial Energy Efficiency Programme had been launched in November while new regulations for the mandatory blending of biofuels had been published for comment. The amended PPPFA agreement came into effect on 7 December 2011 with six designated industries being targeted: buses, train rolling stock, power pylons, canned vegetables, TV set-top boxes and clothing, textile, leather and footwear. There had been high level commitments secured from business and labour for the procurement accord. The dti had engaged with Treasury for additional support resulting in the Manufacturing Competitiveness Enhancement Programme (MCEP). The MCEP was to support manufacturers with regard to:       
▪ Capital investment
▪ Working capital
▪ Feasibility studies
▪ Product development
▪ New Market, value chain and cluster studies
▪ Energy efficiency.

In all cases employment maximization and the value added would be taken into consideration. The support would exclude those benefiting from another programme, capital intensive sectors and where there was high market concentration and anti-competitive behaviour. The green industries sector, metal fabrication, transport and capital equipment and the agro-industries sector were earmarked for up-scaled interventions.

Challenges and threats that were identified included currency volatility, a protracted recession, weakened domestic demand, massive increases in electricity rates, uncompetitive pricing of intermediate inputs, backlogs in infrastructure expenditure, high transport logistics costs and inefficiencies, slow progress on skills development and intra-governmental co-ordination.

Discussion
Mr M Oriani-Ambrosini (IFP) asked what the costs of preferential planning were. What was the cost of the upgrade in the clothing industry?

Mr W James (DA) said that there was no year on year reporting format and that attention should be given to developing a reporting framework. Was there a good compliance mechanism which obliged other departments to fulfill their obligations?

Mr J Hill-Lewis (DA) said he supported a standard reporting format as there was scant detail on the R6.1 billion for distressed companies for example.

Mr A Alberts (FF+) asked how many jobs were created. He asked if the new building regulations on solar water heaters would be applied to existing buildings too.

Mr G Selau (ANC) asked if there was a focus to create jobs with regard to the transport infrastructure plans.

Mr N Gcwabaza (ANC) asked if the dti was dealing with the challenge of the electricity price increases. How many jobs were created and how much foreign and domestic investment was being attracted?

Mr B Radebe (ANC) asked what effect the steel price would have on manufacturing.

Mr Zalk replied that IPAP2 was not about government taking part directly in economic activity, but rather of government facilitating and incentivising private sector investment through a range of instruments. The dti worked through The Enterprise Organisation and the IDC for example. He said that he could aggregate the information from these two sources to provide the figures requested. The dti had reported in detail in its Annual Report and in reports on its key action plans and that therefore there was a well-established mechanism to report back. On financing, since 1994 there had been a massive growth in private credit extension and that 95% of this was in household debt. Only 5% was going into fixed investment, mainly because of the short term nature of the sources of finance. This needed to be taken into account when calculating costs per job.

The dti worked at cluster level and inter-ministerial levels to unclog inter-departmental blockages. On electricity prices, he said that because the user paid for the investments over a short time period, it resulted in massive price increases and placed a heavy burden on manufacturers. On the distressed companies’ funds facility, he would consult with the IDC and provide more detail on progress to date. On applications for incentives, he would reply in writing. On energy efficiency and the question of existing buildings, it did pose a challenge but they were discussing with the insurance industry that when geysers broke down, they be replaced with solar water heaters with a high local manufacturing content. Regarding infrastructure expenditure and job opportunities, he could only answer to the manufacturing industries and the job opportunities that arose where public procurement was used to leverage job creation and technology transfer. Government was extending financial incentives because of a range of market failures as explained previously. On how government was ameliorating the high cost of electricity, larger companie could replace older equipment with energy efficient products. Most of the foreign investment was in the automotive industry and then in the Business Process sector but he would give an aggregated written reply. He said it was important not to miss the green technology wave and to embed themselves in it. The steel price was a difficult area. One was looking at private sector influence over the price, because of a company’s market dominance. What the State had done was not to worsen the situation through tariff control. He said it had sought to ameliorate the skills issue and that incentives were dealt with by another division. If questions were written, he would endeavour to get the answers. On incentives, he would get the information from the division in the dti responsible for incentives. Regarding Mr Ambrosini on parameters, he said the dti worked under price preference points allocated to BEEE in conjunction with the new parameter where particular sectors were marked as designated sectors.

Mr James said the high cost of transport logistics could be remedied by the entrance of a competitive dynamic. How did the dti get customs, for example, to effect port clearance more efficiently?

Mr Zalk replied it was difficult to comment on competitive entry into the electricity and rail sectors and this could more appropriately be addressed by the line function department, but that the issue of infrastructure planning was covered by the department in what its impact was on industry, for example, the increases in electricity prices.

National Investment Participation Programme (NIPP): u
pdate on status of commitments and alignment to IPAP2
Mr Masizakhe Zimela, Chief Director: National Investment Participation Program, said the dti sought to strengthen the National Industrialization Participation Programme (NIPP) and its alignment and co-ordination in public procurement. Public sector infrastructure expenditure had risen from 4.6% to 9.6% between 2006/7 and 2009/10. About 50% was imported content and thus it was important to strengthen local manufacturing. NIPP monitored US$16.5 billion since its inception in 1996, of which 80% were attributable to the strategic defence packages. Since inception, 220 projects had been implemented and 21 393 jobs were created with a detailed project report having been tabled with the Committee in 2011. NIPP was a tool to leverage public procurement, yet between 1998 and 2009 only 12% of the State’s public expenditure was subject to NIPP.

There were three mechanisms in place:
▪ NIPP run by the dti since 1996
▪ The Competitive Supplier Development Programme run by the Department of Public Works since 2007
▪ The 2011 amendments to the PPPFA allowing the dti to designate sectors for domestic production.

There would be a project performance review in 2012/13 to strengthen NIPP and align it with other procurement levers.

Prasa’s rolling stock, Eskom’s power pylons and Transnet’s locomotives would be designated as fleets. The dti wanted to split NIPP into direct NIPP, where large but irregular procurement (such as aerospace industries) occurred and Indirect NIPP for the balance of public procurement.

It planned to develop the next wave of designations, deepen supplier policy, systems and programmes, strengthen local procurement and ensure commitments were met.

Discussion
Mr James asked for a list of people who defaulted on their milestone offset investments bearing in mind that it was anticipated to create 65 000 jobs and provide R110 billion in investment at 1999 exchange rate prices.

Mr D Maynier (DA) said the presenter had indicated that the strategic defence contracts amounted to 80% of the NIPP’s package. He said it was his impression that “NIPPs was a monstrous political fraud”. He said the September report by the dti noted that the German submarine consortium, Ferrostaal, had met its obligation of €3 billion in full. He asked how much Ferrostaal had invested in South Africa. Was it true that only €63 million euros had been invested of an obligated €3 billion? If this was true it would be of huge concern. Had the Department not misled Parliament and was this not indeed a monstrous political fraud.

Mr Alberts wanted to know what systems were in place to police the offset investments as he knew of companies that tried to dodge their obligations by seeking loopholes.

Mr Radebe asked with which countries were NIPP benchmarked. How much technology transfer was occurring? Could the Department elaborate on the $11.5 billion export credits and investment credits of $21.4 billion?

Mr Oriani-Ambrosini queried the utilisation of a multiplier to calculate the value of an offset. He wanted to know what multiplier factors were used to calculate the multiplier and what the international benchmark was.

Mr Zalk replied that NIPP was applicable to imports which were in excess of $10 million. Offset projects used multipliers and the projects were adjudicated by a committee. The NIPP rules and guidelines were in the public domain and cases were adjudicated on a case by case method with the multiplier varying in each case.

Mr Zimela said there were guidelines for the multiplier tables. There were no defaulters on offsets with respect to the Strategic Defence Package but there were one or two other companies who still needed some time. Some state owned companies were resistant to complying with NIPPs. There were various ways of implementing technology transfer and it was sometimes difficult to measure. Exports caused to the value of $1 were equal to $2 export credits.

The Chairperson asked for a written reply to clarify benchmarking.

Mr Oriani-Ambrosini said multipliers were usually in a factor of 3 or 5, could one have a multiplier of 48.3?

Mr James asked
for a list of people who defaulted on their milestone investments. He said 21 393 jobs had been quoted in the presentation as having been created yet the target in 1999 was 65 000 jobs. Was the target of 65 000 for direct jobs or was it a total for direct and indirect jobs.

Mr Radebe asked for the figures for developing countries like China and India regarding benchmarking. How many new plants and factories have been created?

Mr Maynier said if Ferrostaal had not invested 3 billion euros and only invested R62 million (which amounted to 2% of the total obligation), what was the multiplier. Ferrostaal had received credits for investing in the movie “Long Walk to Freedom”. It had invested 6 million euros, while the dti report documented it at 300 million euros. Could the dti explain this discrepancy as here once again the multiplier was 50?

Mr T Harris (DA) said that an offset investment by Ferrostaal had been made into the Condomi condom factory of 501 000 euros which failed and the entire investment had to be written off. Was this investment amount of 501000 euros correct and did the project fail completely.

Mr Zalk replied said he would give a written reply on how NIPPs works, the benchmarking issue and on the direct and indirect jobs issue. The companies which were beyond the timeframe were Beretta, Tenex and SPG who had not met their milestone obligations. He would also reply in writing on project multipliers in the cases of Ferrostaal and Condomi.

Mr Hill-Lewis said it was a pity Mr Zalk could not respond definitively on the dti’s September 2011 report on Ferrostaal’s investment but asked if Mr Zalk could confirm verbally that the figure was significantly less than reported in that document and that the multiplier was 50.

Mr Oriani-Ambrosini asked if one could conceivably have a multiplier of 48.3. How could the condom factory fail in a country where its products were bought by Government and distributed freely on demand? What type of oversight occurred?

Mr Harris said the arms deal was anticipated to create 65 000 jobs created. Since NIPP’s inception 21 000 jobs had been created and that if one took 80% of that figure, 16 000 jobs were created by the Arms Deal package. If this were the case then the state could access performance guarantees held as bank guaranteed deposits. Were there still amounts held as bank guarantees that could be claimed back.

Mr Maynier said he was astounded at the under preparedness of the dti it was not acceptable that the dti did not have the documents at hand and that his three questions were not answered.

The meeting was adjourned

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