Minister of Trade and Industry on State of the Nation Address, Budget; National Lotteries Board presentation

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Trade and Industry

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

Minister’s briefing
The Minister of Trade and Industry said that the world was facing economic challenges and that there were structural shifts occurring. The emerging economies were becoming the drivers of growth, would soon account for 61% of the growth and by 2050 would account for 47% of Gross Domestic Product globally. According to the International Monetary Fund, the African continent had a growth rate of 5.5%. South Africa was well placed both geographically and by virtue of being a member of BRICS to take advantage of these structural shifts. In the immediate future however, there was the threat of contagion of recession and a negative growth from the European bloc of countries, which was South Africa’s major trading partner by region. In this context the State of the Nation Address had focused on infrastructural investment programmes. There had been major advances in infrastructure programmes and it was seen as the driver of industrialization.

The Department had identified that import leakage was too high. It had addressed this through reform of the procurement processes, which had been of an ad hoc nature. Fleet procurement would now demand that even if imports were 75% in the short term, local production had to become a growing percentage in the medium to long term. Certain sectors had been designated as working towards localised production (such as rail rolling stock and electricity power pylons). There had been a lack of clarity whether the National Industrial Participation Plan (NIPP) was applicable to all spheres of government and he affirmed that it was for imports greater than $10m. The dti preferred direct NIPP where, for example, bus manufacturers manufactured buses locally. The dti would present the rolling IPAP2 plan on the 1st of April for the current and outer two years of the Medium Term Expenditure Framework. Motor manufacturers had invested in the Automotive Incentive Scheme (AIS) and there had been investment in Business Process Services (BPS) and in the clothing industry, notably by Foschini.

It was introducing the roll out of the R5.8b Manufacturing Competitiveness Enhancement Programme (MCEP) and was generalising the lessons learnt in the clothing industry. In 2009 the recession caused 1 million jobs to be lost, 200 000 of them in manufacturing. The dti had implemented MCEP in the clothing industry to assist it to become more competitive, this had been successful in the clothing sector and if it could be done there, then it could be successfully applied in other sectors. Companies which had taken advantage of the MCEP had survived and grew jobs.

The Special Economic Zones (SEZ) Bill was out for public comment. Existing Industrial Development Zones (IDZ) were based around ports and exports, while SEZs were designed to decentralize industrial activity from the major nodes by attracting an additional tax incentive. The B-BBEE codes would be restructured. B-BBEE remained an imperative even on a purely economic basis. There were far too many passive shareholders and both simple and complex fronting remained an issue. The Department wanted B-BBEE players to become active participants in the companies they were involved in. It had set up a commission to deal with complaints. There was no symbiotic relationship between big and small business so it had amended the scorecard to promote relationships between big and small companies. It was emphasising incubation and small business had to take an active role to build links with big business. South Africa had to be more engaged in African development and it had hosted the summit on the
COMESA-EAC-SADC Tripartite Agreement [Common Market for Eastern and Southern Africa - East African Community - Southern African Development Community]. These countries consisting of 27 countries with half the population of the continent and having a combined $1 trillion in GDP had to have a development agreement not just a trade one. A North-South road project had been initiated. In addition the Trans-Kunene Spatial Initiative connected the central Angolan highlands, Namibia, the Trans-Kalahari and South Africa with Angola which had the fastest growing economy. It was important that the growth spurt in Africa be turned into a development opportunity. BRICS membership had come at a propitious time for South Africa which had also strengthened trade relations with Turkey and Saudi Arabia and with the Association of South East Asian Nations (ASEAN) countries, especially Indonesia. Doors were opening and the challenge was now for business to take advantage of South Africa’s good strategic positioning. The dti budget had increased by 32%, 14% and 7% for the following three years, respectively.

A Member commented that the current government was resorting to a socialist approach with increased government intervention. What had been done to maintain the
African Growth and Opportunity Act (AGOA) accord and what would the recessionary effect be of not maintaining it? South Africa had adopted a policy of industrialisation and the building of small steel mills so that steel could be beneficiated locally, but the Sishen-Saldanha line expansion meant that more ore would be leaving the country and this undermined beneficiation. Would the MCEP be accessible as a means to enhance people‘s skills? Would the Department focus on making non-financial costs less onerous on business? Were there projects to enhance the efficiency of manufactured goods leaving South Africa’s ports? What were the top ten value-added export products? Had the Department looked into bio and nano-technology? What measures were being taken to mitigate any risk should sanctions be imposed on Iran? In the discussion, the noted the State Owned Enterprises (SOE) Procurement Forum (www.soepf.org.za) and aimed to build into it black economic empowerment and small business empowerment.

National Lotteries Board (NLB)
The Minister said that the Ministry and the Department’s role were defined by the National Lotteries Act. Decisions on the allocation of funds were in the hands of people other than the political office bearers and this was as it should be. Since 2009 there had been a ton of complaints concerning the non-allocation of funds of the Lotteries Distribution Trust. Since then it had embarked on incremental reforms. It had started with administrative matters, regulatory matters needed to be addressed and a new Lotteries Board had been appointed. In 2008, R635m had been disbursed, in 2009, R949m, in 2010, R1.9b and in 2011 R3.5b had been disbursed. It had unblocked some administrative blockages, it had relaxed some of the conditions attached to applications and it had embarked on road shows to encourage more applications. The Lotteries revenue had not continued to expand with income remaining stagnant for the past three years. The reforms were not completed yet and dealing with corruption and fraud would be followed through. He noted the early retirement on the part of the CEO had nothing to do with the Lotteries Fund. He had retired because the coming year would see the Lotteries Consortium licence expire and the awarding of a new operator’s licence and the CEO had wanted to be an advisor to one of the applicants.

Members said that the lottery was a regressive tax on poor people thus all funded projects had to be for the benefit of poor people and grant applications had to be tested to see they were consistent with this goal. Members asked for a provincial breakdown of the funding. They noted there were continual complaints from organisations about the service they received from the Lottery offices. Was the distribution of funds countering the imbalances of apartheid? Was there a way of ascertaining what percentage went on administration costs of the project and what amount actually benefited communities? From where did the Lottery prize money come?

Meeting report

Briefing by the Minister
The Minister of Trade and Industry, Mr Rob Davies, said that the world was facing economic challenges and that there were structural shifts occurring. The emerging economies were becoming the drivers of growth, would soon account for 61% of the growth and that by 2050 would account for 47% of Gross Domestic Product (GDP) globally. According to the International Monetary Fund, the African continent had a growth rate of 5.5%. South Africa was well placed both geographically and by virtue of being a member of BRICS to take advantage of these structural shifts. In the immediate future however, there was the threat of contagion of recession and a negative growth from the European bloc of countries which was South Africa’s major trading partner by region. In this context the State of the Nation Address had focused on infrastructural investment programmes. There had been major advances in infrastructure programmes and it was seen as the driver of industrialization.

The Department had identified that import leakage was too high. It had addressed this through reform of the procurement processes, which had been of an ad hoc nature. Fleet procurement would now demand that even if imports were 75% in the short term, local production had to become a growing percentage in the medium to long term. Certain sectors had been designated as working towards localised production (such as rail rolling stock and electricity power pylons).  There had been a lack of clarity whether the National Industrial Participation Plan (NIPP) was applicable to all spheres of government and he affirmed that it was for imports greater than $10m. The dti preferred direct NIPP where, for example, bus manufacturers manufactured buses locally. The dti would present the rolling IPAP2 plan on 1 April for the current and outer two years of the Medium Term Expenditure Framework (MTEF). Motor manufacturers had invested in the Automotive Incentive Scheme (AIS) and there had been investment in Business Process Services (BPS) and in the clothing industry, notably by Foschini.

It was introducing the roll out of the R5.8b Manufacturing Competitiveness Enhancement Programme (MCEP) and was generalising the lessons learnt in the clothing industry. In 2009 the recession caused 1 million jobs to be lost, 200 000 of them in manufacturing. The dti had implemented MCEP in the clothing industry to assist it to become more competitive, this had been successful in the clothing sector and if it could be done there, then it could be successfully applied in other sectors. Companies which had taken advantage of the MCEP had survived and grew jobs.

The Special Economic Zones (SEZ) Bill was out for public comment. Existing Industrial Development Zones (IDZ) were based around ports and exports, while SEZs were designed to decentralize industrial activity from the major nodes by attracting an additional tax incentive. The B-BBEE codes would be restructured. B-BBEE remained an imperative even on a purely economic basis. There were far too many passive shareholders and both simple and complex fronting remained an issue. The Department wanted B-BBEE players to become active participants in the companies they were involved in. It had set up a commission to deal with complaints. There was no symbiotic relationship between big and small business so it had amended the scorecard to promote relationships between big and small companies. It was emphasising incubation and small business had to take an active role to build links with big business. South Africa had to be more engaged in African development and it had hosted the 2nd summit on the
COMESA-EAC-SADC Tripartite Agreement [Common Market for Eastern and Southern Africa - East African Community - Southern African Development Community]. This represented 27 countries with half the population of the continent and having a combined $1 trillion in GDP, had to have a development agreement not just a trade one. A North-South road project had been initiated. In addition the Trans-Kunene Spatial Initiative connected the central Angolan highlands, Namibia, the Trans-Kalahari and South Africa with Angola which had the fastest growing economy. It was important that the growth spurt in Africa be turned into a development opportunity. BRICS membership had come at a propitious time for South Africa which had also strengthened trade relations with Turkey and Saudi Arabia and with the Association of South East Asian Nations (ASEAN) countries, especially Indonesia. Doors were opening and the challenge was now for business to take advantage of South Africa’s good strategic positioning. The dti’s budget allocation had increased by 32%, 14% and 7% for the following three years, respectively, according to the MTEF.

Discussion
Mr M Oriani-Ambrosini (IFP) said that in the late 80s the International Freedom Foundation had classified South Africa as being socialist from an economic perspective and that the current government was resorting to a socialist approach with increased government intervention. He said he had heard that to a socialist approach with increased government intervention. He said he had heard that the
African Growth and Opportunity Act (AGOA) accord would not be renewed, what had been done to maintain the accord and what would the recessionary effect be?

Mr B Radebe (ANC) replied to Mr Ambrosini’s question, saying that apartheid and socialism were mutually exclusive terms. South Africa had adopted a policy of industrialisation and the building of small steel mills so that steel could be beneficiated locally. However, the Sishen-Saldanha line expansion meant that more ore would be leaving the country and undermined beneficiation. Would the MCEP also be accessible as a means to enhance people‘s skills?

Mr X Mabasa (ANC) wanted a space to be created for co-operatives.

Mr G Hill-Lewis (DA) asked whether the Department was focussed on making non-financial costs less onerous on business.

Mr W James (DA) asked if there were projects to enhance the efficiency of manufactured goods leaving South Africa’s ports as there appeared to be a lack of a one-stop shop to interact with.

The Chairperson asked about the high cost of electricity for manufacturers.

Mr Davies replied that the Department was working energetically towards getting the AGOA agreement rolled over. It believed it had attained this as there was no coherent alternative and it would send the wrong message; that successful programmes were being closed down. He said that the Sishen-Saldanha project was seeking a return of 21.4% at development prices of cost plus 3% to support competitiveness in South Africa and that this would not be delinked. He said green industrialisation examples were Unilever in Durban, which operated on 50% less electricity and recycled all its water. Going green was an element of competitiveness. A quarter of the country’s energy needs would in future come from renewable sources. South Africa had missed the last wave of industrialisation, which had been cellphones, and it had to be involved in manufacturing products for the next wave which was the greening of the economy. The Co-operatives Amendment Bill would create the support measures for co-operatives as it was a different form of business and there were opportunities unique to this form of business. Co-operatives would work well in the agro-processing industries. On Mr Hill-Lewis’ question he said trade facilitation was on the agenda of SADC and the Tripartite Agreement countries, but that infrastructure was also important. On efficiencies and costs, he said that it was part of the infrastructure programme. There were anomalies, however, in that it was cheaper to export raw materials than high value-added manufactured products. The dti was strongly promoting oil and gas field services at South African ports and was in discussions with port authorities on this. He said the energy price was a significant factor for many manufacturers and that government was re-examining the issue and working towards mitigating it.

Mr J Selau (ANC) asked what the top ten value-added export products were.

Mr N Gcwagbaza (ANC) said infrastructure programmes could only be regarded as successful if, for example, big construction companies developed smaller companies in the process.

Mr Oriani-Ambrosini (IFP) asked again about the recessionary effect of the ending of the AGOA accord. He wanted to know if the Department had looked into bio and nano-technology.

Mr Radebe said the country was losing money with platinum exports being sold as tin. He wanted to know what measures were being taken to mitigate any risk should sanctions be imposed on Iran.

Mr Mabasa said that there should be consequences for fronting.

Mr James asked for the cost structure of SA ports.

Mr Hill-Lewis said that given the National Consumer Commission’s importance, could there be a greater budget allocation for them.

Mr Lionel October, dti Director General, replied that the ten products were agro-processing, canned food, plastics, stainless steel, alloys, aluminium, automotive components, mining equipment, mining safety equipment and pumps.

Mr Davies replied that other fast growing countries were seeking South Africa out. He said the infrastructure programmes were meant to produce black constructors and manufacturers. There would be criminal penalties for fronting. On Mr Ambrosini’s question, he said that AGOA was non-reciprocal and any replacement would be difficult or damaging. The dti had recently launched a biotechnology plant in pharmaceuticals while the Department of Science and Technology was doing work in nano technology. Regarding fraud as mentioned by Mr Radebe, he said that there was fraud in DVDs, abalone, drugs and scrap metal. The Minister of State Security had said that the illicit economy was a sizeable portion of the economy. South Africa bought only oil from Iran and sold almost nothing to it and the oil issue had been looked at. He did not have the data for the port authorities as they fell under the Department of Public Enterprises but he acknowledged that overall port charges were high. He said the
International Trade Administration Commission (ITAC) had said that measurement regarding investments was an art and not a science. He pointed out that if an agency asked for more money, the Department had to interrogate its budget across all of its agencies not just the one applying for the increase.

Mr October said that with regard to infrastructure programmes and black contractors, it had established the State Owned Enterprises (SOE) Procurement Forum (www.soepf.org.za) and wanted to build into it black economic empowerment and small business empowerment and hoped to institutionalise the SOE Procurement Forum.
           
National Lotteries Board (NLB): commentary by Minister, NLB CEO and Board Chairperson
The Minister said that the Ministry and the Department’s role was defined by the National Lotteries Act. Decisions on the allocation of funds were in the hands of people other than the political office bearers and this was as it should be. Since 2009 there had been a ton of complaints concerning the non-allocation of funds in the Lotteries Distribution Trust. Since then it had embarked on incremental reforms. It had started with administrative matters, regulatory matters needed to be addressed and a new Lotteries Board had been appointed. In 2008, R635m had been disbursed, in 20009, R949m, in 2010, R1.9b and in 2011 R3.5b had been disbursed. It had unblocked some administrative blockages, it had relaxed some of the conditions attached to applications and it had embarked on road shows to encourage more applications. The Lotteries revenue had not continued to expand with income remaining stagnant for the past three years. The reforms were not completed yet and dealing with corruption and fraud would be followed through. He said the early retirement on the part of the CEO had nothing to do with the Lotteries Fund. He had retired because the coming year would see the Lotteries consortium licence expire and the awarding of a new operator’s licence, and the CEO had wanted to be an advisor to one of the applicants.

Professor Ntshengedzeni Nevhutanda, NLB Chairperson, said that the Board distributed 5% of the funds while the distribution agencies distributed 95%. The distribution agencies’ members were appointed by public nominations in consultation with the Departments of Social Development, Arts and Culture and Sports and Recreation.

Mr Jeffery Du Preez, NLB Chief Operating Officer, said that in the period 1 April 2000 to 31 March 2011 revenue received from the Lottery was R12.3b and that total revenue amounted to R15.9b and R10.9b had been disbursed. Administrative costs were a low 2.4%. He said it was not feasible or possible to give every applicant a grant. The Lotto was still the largest funder of Community Based Organisations (CBOs) and Non-Government Organisations (NGOs).

Professor Nevhutanda said that the Lotto also funded projects in rural areas. Major sporting grants of R344m went to SASCOC and R75m to Swimming South Africa. A worrying concern was that of fundraising management agents who sought a 10% commission on funds raised or entered into management contracts which sought a fee of 25%. The National Lotteries Board had embarked on outreach programmes which had resulted in charity-related applications increasing from 4 000 to 8 000 and arts and culture related applications increasing from 1 000 to 1 600. A help desk had been established and the application documents had been translated into more official languages to assist those for whom English was not a first language. The call circulation period had been increased to two months. He said the distribution agencies were not being accountable for the distribution, and a procedure manual had been developed to reduce friction between the Board and the National Lotteries Distribution Trust Fund (NLDTF).

He said that the Board had operated as a very lean structure for the past ten years, with administration costs accounting for 2.5% where the norm was closer to 10%. In the previous year the Board had agreed to restructure and strengthen the executive group with a CEO, a senior executive in charge of grant funding, a compliance officer, an Information Technology officer, a risk officer and a corporate services executive. These positions would be advertised within a week or two.

He said the different distribution agencies would be adjudicating via an agreed set of same standards because in the past they had all had differing guidelines. The Board would be applying a tracking system to applications and sms alerts would be sent out to inform applicants at what stage their application was. The Board wanted to establish provincial offices in all provinces and Limpopo and the Eastern Cape offices were up and running. It would be launching an independent whistle blower phone line on 1 March 2012. In the interests of good governance all the interests of Board members, NLDTF members and management would be published on its website.

Mr Du Preez said the Board took note of the
South African Education and Environment Project (SAEP) and Sikhula Sonke versus the NLDTF, NLB & DTI Minister court judgement but that the findings had to be in alignment with the Act. The distributions agencies were only allowed to look at those applications which met the minimum requirements and submitted all the mandatory documents. There needed to be tighter guidelines on what the NLDTF was willing to fund. In the case of the National Youth Development Agency (NYDA), they had applied for R140m but had only received R40m for what the Board thought were items consistent with the scope of funding under the Miscellaneous purposes.

Discussion
Mr G Mackintosh (COPE) felt that some of the positions in the expanded management team could be combined.

Prof James said that the lottery was a regressive tax on poor people and therefore that all projects that were funded had to be for the benefit of poor people and that there had to be a way grant applications could be tested to be consistent with such a goal.

Mr Hill Lewis said he was shocked that the previous CEO had no performance agreement.

Ms S Van Der Merwe (ANC) asked for a provincial breakdown of the funding. She said there were continual complaints about the service organizations received from the lottery offices.

Mr Mabasa asked if the distribution of funds were countering the imbalances of apartheid. Were the funds being granted to township and rural organisations?

Mr Gcwagbaza asked whether there was a way of ascertaining what percentage went on administration costs of the project and what was spent that actually benefited the communities.

Mr Selau asked from where the Lotteries prize money came.

Professor Nevhutanda did not think the management group would become bloated. The National Development Agency as a comparison had an administrative cost of 15%. The Board was working with the Minister on the evaluation of proposals and that it be score based. At issue for debate amongst the Committee was the question of what the Lotteries Board should and should not fund as the Act was silent on the matter. He said the Annual Report only indicated the amount paid for the current period. An organisation might receive R24m of a grant of R40m but would have to account for that money first before receiving the rest of the money. He said the previous CEO had an indefinite contract and the Board had initiated that a fixed term contract with a performance agreement be signed.

Mr Davies wanted it noted that lotteries were not a tax as it was voluntary and that the emphasis in the distribution of the funds had to be towards the poor of the country but the Act included other areas also. The area that was missing from the Act was that of job creation projects in communities. He said that the weak service levels issue had to be taken up and improved. He said there was no guarantee that if one received lottery funds that one would continue to get it indefinitely. The dti had a shareholders compact with the Board. He welcomed constructive criticism as this was a continuous process of reform.

Mr Du Preez said that 50% of Lottery ticket sales income went to prize money, 34% were distributed by the distributing agencies, 6% was commission to the ticket sellers and the lottery operator received 10%.

The meeting was adjourned.


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