Industrial Development Corporation & Competition Commission on their 2012 Strategic Plan

Meeting report

Industrial Development Corporation (IDC) briefing
Mr Geoffrey Qhena, IDC CEO, briefed the Committee on the vision, mission, objectives and values of the IDC. The objective of the IDC was to support industrial capacity development by facilitating sustainable direct and indirect employment, focusing on regional equity, growing the entrepreneur and Small and Medium Enterprises (SME) sectors, focusing on expansion and/or Broad-Based Black Economic Empowerment (BBBEE), focusing on environmentally sustainable growth, and growing sectoral diversity and increasing localisation.

Mr Shakeel Meer, Head of Corporate Strategy at the IDC, said the entity's strategy was to focus on leadership in industrial development. The strategy was to:
▪ concentrate on industrial development in line with the National Growth Path (NGP) and the Industrial Policy Action Plan 2 (IPAP2)
▪ contribute to an enabling environment by taking a proactive role in shaping and influencing policy
leveraging the IDC's portfolio for maximum impact and designing customised funding schemes as an enabler for development2010
▪ focus on customer service and the environmental impact by looking at improved customer service, improved efficiencies and reducing industries and the IDC's impact on the environment.

The IDC's focus areas for 2012/13 and budgeted investments include:
▪ Agro industries (7%) - for rural-poor linkages and import replacement
▪ Strategic High Impact Projects (17%) - for industrial infrastructure and localisation of bus, truck and taxi manufacturing
▪ Green industries (21%) - for non fossil fuel based renewable energy, energy efficiency, and emission and pollution mitigation
▪ Venture capital (<1%) - for commercialisation of South African intellectual property
▪ Chemical and allied industries (7%) - for basic chemicals, glass and ceramics, cement and concrete building materials, plastic and rubber products and import replacement
▪ Textiles (3%) - for the competitive local/regional value chain
▪ Metals and machinery (8%) - for fabricated metal, capital and transport equipment, automotive and components for green industries
▪ Forestry and wood products (9%) - for pulp and paper, community forestry and furniture
▪ Mining and minerals beneficiation (17%) - for the junior mining sector, and competitive steel pricing
▪ Media and motion pictures (3%) - for film production, audience development, production facilities and broadcasting
▪ ▪ Tourism (3%) - for under-developed nodes in South Africa
Healthcare (3%) - for pharmaceutical manufacturing and medical devices
▪ Information Communication Technology (4%) - for telecommunication, shared services, and Set-Top Boxes (STBs)

In terms of the IDC's funding model, the entity relied on borrowings, internal profitability, capital growth and exits from mature investments to maintain and expand its funding ability. The balance between the IDC's development role and financial performance was maintained by relying on proceeds from mature equity investments (both dividends and capital growth) to cross-subsidise higher risk activities and loan portfolio. The IDC had put greater emphasis on funding start-ups and expansions, which required a strong balance sheet to withstand the impact of potential failures. Utilisation of funding for start-ups were approved for the period April 2009 to February 2012. 50% of the funds were used for start-ups, 355 was used for expansion, 12% was given to distressed businesses and 2% was used for other activities.

The presentation also spoke to the IDC's regional presence. The entity's regional offices were fully fledged and operational. In addition to the regional offices, branch offices had been established in certain areas, which were permanently staffed. Satellite offices were also being rolled out and co-locates with the new small business finance entity.

Discussion
Mr H Hoosen (ID) asked the IDC to speak to the focus areas in the textile industry and to what extent the IDC invested in the sector to resuscitate it. The impression he got was that the IDC was on the receiving side of requests as opposed to taking action. He wanted to know if the IDC had any data on the failed initiatives they had invested in. What was the percentage of funds that were lost? In terms of energy efficiency initiatives, he wanted to understand the link between the core business of the IDC and reducing energy inefficiency. He asked if the IDC did this for the companies they invested in or if it was a general initiative. He noted the decrease in funding distribution to the mining and mineral beneficiation sector. He asked the IDC to expand on this.

Mr Qhena explained that the IDC was both proactive and reactive in the case of the textile industry. The IDC was proactive but they also found companies that they had offered distress funding to. When the entity reported on the results, the Committee would see who these companies were. For some of them, if the IDC had not come into the picture, many jobs would have been lost. The provinces that had benefited the most were KwaZulu-Natal and the Western Cape where most of the textiles industries are. The IDC approached these companies to ask what could be done to make them more sustainable. The solution provided had to be a sustainable one. The partnership the IDC had had with the Department of Trade and Industry (DTI) had helped a lot, as they provided grant portions in some cases where companies were not competitive or had old equipment. The IDC would provide data on how many start-ups they were involved in. The entity was well aware that the textile industry was a sensitive sector, and that it offered many employment opportunities.

Mr Meer addressed the question on failed investments. He answered that employment levels were close to approximately 17%, which was relatively high. But, this was a reflection of the high-risk profile the IDC took and it had been growing during the economic crisis. However, this did not equate to 17% of failed projects. When the IDC ran into a problem, they worked with the company to try and turn things around.

In terms of the IDC's energy initiatives, this was part of the entity's funding programme. The initiative was done in partnership with companies they invested in. Many of the major companies the IDC invested in used a lot of energy by nature, so the entity had to find ways of using energy efficiently.

Mr Qhena replied that it looked as if the IDC's contribution to the mining sector had decreased, but this was not the case – the IDC was just doing more in other sectors.

Mr Z Ntuli (ANC) asked if they could quantify the number of jobs they created. Could the growth in the country be attributed to labour intensity and was the IDC getting value for money? When the Committee did oversight they found that there were companies that did not know about the training lay-off scheme.

Mr Qhena answered that the IDC always tried to ensure that it got value for money. The President's State of the Nation Address mentioned unemployment, which still had to be addressed. This was why the IDC tried to come up with its own interventions to stimulate job creation. This was also why the IDC had R10 billion that was approved last year for companies that were able to create jobs at a cost of less than R500 000. The IDC had also engaged with the Unemployment Insurance Fund (UIF) to access money to encourage job creation. However, the IDC understood that some sectors were not as labour intensive as the government wanted them to be, although they did have an indirect effect on job creation. For example, the “green energy space” - a new initiative – did not create many jobs directly, but if one looked at all the components, many jobs were being created. The IDC was looking at creating approximately 30 000 direct jobs this year. They were not counting the indirect jobs created.

Mr Qhena assured the Committee that the IDC had met with businesses to inform them of the training lay-off scheme. However, he could not sit there and tell them that the entity had taken every opportunity they could to make businesses aware of the scheme.

Mr K Mubu (DA) noted that the IDC had not received capital injections from its shareholders since the 1950s. This was very good. He asked how the IDC had been able to sustain itself for so long. The IDC also spoke of regional industrial integration in the SADC region in terms of financing major projects in countries like Mozambique. In the case of a country like Zimbabwe, some of the South African local companies that had invested in the country had been pressurised into conceding some of their shares to the localisation programme. He asked if the IDC saw any similar threats to the financial assistance given to small companies.

Mr Qhena stated that one of the IDC's major strengths was its people – they were the ones that made the decisions and ensured that projects were sustainable. It was the quality of the investments that the entity had made over the years. These had helped the IDC to raise additional funds to invest back into the economy. The IDC also had relationships with other development finance institutions that provide long term funding to the entity for investment purposes. Assistance from the board and the shareholder had also helped the IDC.

In terms of regional integration, Mr Qhena explained that the IDC looked at all the risks when they decided whether or not to invest. However, there was always a challenge that the entity would not be able to identify each and every risk. The IDC had learnt that when they invested in a country, it was important that the people of that country felt that they were part of the investment. The solution provided by the IDC for that country also had to speak to its people. They did this by working with the development finance institutions of those countries. The IDC also had to understand the government positions in those countries. The entity did not want to invest in countries whose governments were not enthusiastic about the initiatives. There might be risks for the IDC to invest in countries in the region, but they were thinking that it was important for trade and investment between countries in the region so that Africa as a whole could have a chance.

Mr X Mabasa (ANC) stated that based on what the Committee noticed regarding closing the gap between the rich and the poor, it was a struggle that would not be won if government did not go all out to defeat it. Also, co-operatives were seen as small entities that need small amounts of money. Most departments did not think of co-operatives as entities that warrant millions. He asked if there were any co-operatives that the IDC had assisted, and how many were helped.

Mr Qhena replied that the IDC did not see co-operatives as being only micro businesses. They thought that there were opportunities for them as well, but it depended on how co-operatives were configured. For example, the IDC was increasing its investment into the green energy initiative and one of the requirements was that the communities had to be participants in the initiative.

The Chairperson asked what the IDC meant when they spoke about investment budgets and pushing themselves to implement their strategies so they can finance R88 billion. To her, this seemed like a hanging statement. It did not give her concrete commitment that this was what the IDC would be doing over the next five years. She needed the IDC to tell the Committee what challenges they were facing that might hinder them from achieving this goal.

Mr Qhena answered that the commitment the IDC had made over the next five years was to invest R88 billion. The amount of R111 billion had set economic constraints as the economic climate changed for some of the projects. The IDC board had approved the amount of R88 billion and the shareholder had agreed. The IDC was looking to increase the level of investment in the future. There was a definite commitment from the IDC to do more.

The Chairperson asked what the constraints were that hindered the IDC from increasing investment.

Mr Qhena replied that some of the issues were environmental, some had to do with the economic climate. The IDC was looking at how they could improve or “unlock” infrastructure so opportunities could be achieved. Once this happened, it was easier to increase capacity. Since the IDC highlighted some of the constraints, they had worked with the EDD and seen a lot of improvement.

A Member stated that the CEO said that R10 billion had been approved for companies to create jobs. However, the President said that R10 billion had been set aside, but only R1.5 billion had been approved. She asked for clarity on this and an update on the progress the entity was making.

Mr Qhena apologised for the confusion. When he spoke of the R10 billion, he was refering to the facility that the IDC had. He referred Members to the 2011 State of the Nation Address (SONA), which said that the IDC would set aside R10 billion and in addition to this there would be a jobs fund administered by the DBSA. The figures the President mentioned in the 2012 SONA were the correct figures.

Ms D Tsotetsi (ANC) said that Walmart had said much about how they could benefit the country but their history worked against them. It was worrying that Walmart had an interest in the agro industry, a sector that had always been dominated by giants and was very centralised. The scope for emerging black farmers in the agro industry was very limited. The National Development Plan document had alluded to this fact. She wondered how the increase of funding was going to work for emerging black farmers in the agro industry. She was also worried that the situation could change and Walmart would enter the sector quickly. How was the IDC going to handle this?

Mr Qhena explained that perhaps the Competition Commission could answer the question on Walmart better. IDC saw an opportunity to work with Walmart to increase local procurement if it entered the market. This was not only for agriculture, but for everything that they were involved in.

Mr Ntuli addressed the skills development fund. The Committee was told that each entity would have to set aside funds for skills development. He asked for clarity. The Committee was also told that Germany was leading in solar energy. He asked why South Africa was so behind. What was Germany doing that South Africa was not? He was worried that the IDC counted its delivery by the amount of money it dispersed. But, no one was checking what happened after the money was dispersed, and what the effect was on job creation.

Mr Meer replied that the IDC supported learners in four ways. The entity had a top learnership programme that supported people to register as chartered accountants and to do their articles through the IDC. The entity also took on matriculants to help them to pick up office administration skills and unemployed graduates to take them through a business learnership. Over and above this, bursaries were given to students. There were over 200 students to whom the IDC was giving bursaries. The IDC tried to focus on areas where there were scarce skills.

Mr Qhena addressed the question on solar energy. He said that the process government was involved in to promote investment in alternative energy was trying to address the matter of solar energy. It was not only in Germany, Spain was also a leader in the technology that they used for creating alternative energy. It was perhaps due to the high costs of technology that developing countries were lagging behind. This was something that the Committee always had to bear in mind.

He said that the IDC looked at the jobs it created and where they were created. This was why the entity had offices in the different provinces. There should be developments happening all over the country. The IDC based its success on how many jobs it helped to create and the sectors they were created in.

The Chairperson addressed the financing for distressed companies. Last year the IDC told the Committee they had a problem with monitoring these companies. She asked if there was any difference in the sustainability of these companies. What were the challenges and was the IDC seeing any improvements in the repayment levels? Were these companies at the micro level? She was aware that the IDC was into “bigger picture” issues. She asked if this was correct or if this could be delegated to the “merged entity” going forward so the IDC was not diverted from their other, bigger responsibilities. The Committee was often told that “green jobs” were not sustainable and that if the government was to invest in the green economy and produce green jobs, they ran the risk of established companies retrenching employees if they were to focus on green issues. She asked if the IDC envisaged creating more sustainable jobs when they invested in the green economy.

Mr Qhena answered that the IDC did not have the information regarding distressed funding on hand but they could provide the Committee with the stats in terms of the size of the companies. There were examples where distressed companies had turned around with the help of the IDC. These included both small and large companies. Some of them were even listed companies.

Mr Qhena explained that the sustainability of green jobs was informed by technology. There was a report that the IDC did with the Development Bank of Southern Africa and Trade and Industrial Policy Strategies (TIPS) on green jobs. The entity would ensure that this was forwarded to the Committee. The report looked at where the jobs could be created and if it was possible to create jobs in the green economy. There were sectors that could create more green jobs than others.

The Chairperson stated that she wanted to give Members more time to do discuss the financials but they had run out of time with the IDC. This was not the end of the Committee's engagement with the IDC. She thanked the Mr Qhena and his team for the sterling work they continued to do.

Competition Commission (CC) briefing
Mr Shan Ramburuth, Commissioner of the Competition Commission, gave the Committee an overview of the entity's planning process for its Strategic Plan for 2012/13. He stated that the plan had been developed for the years 2010-2013. There was an annual review of the achievements by Exco where risks and changes to the environment were taken into account.

A situational analysis showed the role of competition law and policy in bringing about economic transformation, it gave a deeper understanding and approach to priority sectors, it showed the impact of adverse court decisions on initiation and the investigation of complaints, and it focused on stakeholder engagements.

In alignment with the Economic Development Department’s Outcome 4 (decent employment through growth), the CC's outputs included:
▪ reporting on the obstacles to growth – commission cases illustrate obstacles
▪ labour absorbing growth – the CC prioritises cases that raise input costs to develop a labour absorbing manufacturing sector
▪ reducing youth employment – the CC placed conditions on mergers to limit job losses and offered  employment opportunities to youth through its graduate training programme
▪ raising competitiveness – the CC used enforcement and advocacy to change business culture and promote local rivalry to make firms competitive
▪ costs in the economy – the CC prioritised cases that raised costs to the end consumers
▪ support for small businesses and co-operatives – the CC had broken up cartels and addressed anti-competitive behaviour to open up markets for new businesses to enter and grow.
▪ expansion of the public works programme – the CC prioritised cases in input to construction and bid-rigging for government contracts

The CC noted an increase in their workload. There was an increased demand on the CC's knowledge management, which led to strained human capacity. The entity was in the process of expanding human resources to implement strategic priorities. They recognised the urgent need to strengthen information and knowledge management.

Strategic Plan 2012-2017
Strategic priorities included:
▪ Achieving demonstrable outcomes by continuously prioritising sectors, developing and implementation guidelines for the prioritisation of cases, undertaking market enquiries and developing methodologies and capacity to undertake assessments of the CC's interventions
▪ Increasing the competitive environment for economic activity by engaging with key stakeholders to influence policy formulation and decision-making
▪ Realising high performance organisation by developing and strengthening the CC's management and leadership capability and implementing knowledge management systems.

Annual Performance Plan 2012-2013
In terms of mergers and acquisitions, the total number of mergers to be considered for 2012/13 were 287. The amount of merger fee income to be earned was expected to be R52.75 million. Cases were classed into three phases. Phase one cases were readily identifiable by the absence of competition issues, phase two cases were more complex and involved transaction between potential competitors or between customers and suppliers. Phase three were very complex cases that were likely to create or result in a substantial prevention or lessening of competition.

In terms of advocacy and stakeholder relations, the CC had aimed to engage with government and business stakeholders to promote a competitive culture, to promote policy and legislation that was consistent with the Competition Act, and participate in international policy development. For human resources, the CC's graduate trainee programme consisted of 14 current graduate trainees that were recruited through university career days.

Budget for 2012/13 to 2014/15
Most of the CC's income was from fees – people that filed their merger cases. Other income included refunds and interest and funds from the Department of Trade and Industry (DTI). Most of the entity's money was spent on human resources and salaries. Some of the risks identified included space constraints, adverse and constraining decisions by the courts, the case load, difficulty in predicting litigation costs, measuring the CC's impact, and knowledge management.

Discussion
Mr Ntuli addressed the mandate of the CC and the unemployment rate in the country. He asked the CC to take the Committee into its confidence. The Committee had been talking about supporting co-operatives. The government had been talking about ring-fencing local procurement for people around hospitals and schools. He understood that many small co-operatives would not succeed because of competition and big companies that were coming from “outside” to supply hospitals. He asked if the CC had ever looked at ways to assist co-operatives to acquire local procurement.

Mr Ramburuth replied that there was not anything specific that a competition authority did around creating more co-operatives or boosting the cooperative movement. In so far as a cooperative was a form of ownership, some people sometimes confused it with firms getting together to collude. A cooperative was a company that was owned in a particular way. The CC would create, like they did with every other kind of firm, a playing field that would allow the cooperative to be as competitive as any other type of firm. The CC ensured that existing co-operatives were able to compete on a level playing field, which spoke to the CC's general mandate. The point that he was making was that the CC was not the policy instrument to ensuring there were more co-operatives in the economy.

Mr Mubu asked what the most serious sanctions were that could be imposed on cartels found to be price-fixing. He noted that the CC had lost many cases in court. He asked what the implications were on the CC when they lost. Did it diminish the CC's credibility? He also wondered if mergers were so bad after all if companies wanted to become bigger competitors.

Mr Ramburuth replied that in any case where there was contravention of the Competition's Act, the CC could fine a firm up to 10% of its annual turnover. The CC had found that 6-7% was quite a sizeable amount. In addition to this, if a problem was found to be structural, the CC could make an order that the firm had to divest – to break up and sell off some of its operations. This was one of the ways to fix a competition problem. However, it was something that the CC would not do “willy nilly”; this was the most drastic measure the entity could take. The CC also had the power to nullify anti-competitive contracts.

Ms Wendy Mkwanzani, Chief Legal Counsellor at the CC, added that with the Amendment Act coming into play there was going to be an additional dimension of criminalisation of cartel conduct. This would serve as an additional deterrent measure.

Mr Ramburuth addressed the question on cases lost in court. He explained that with every new piece of legislation all over the world, it was always challenged in the first instance. People wanted to create jurisprudence and a particular way of interpreting that law. This happened in the case of having a new competition law in the country. The CC understood that this was a normal, natural thing that happened with new laws. However, the CC had stood its ground and fought for its particular interpretation. If the Committee looked at the cases that had gone to the Constitutional Court, all of them were won by the CC when they were before the Competition Tribunal. But, when the cases were presented to the Supreme Court of Appeal the CC lost the cases. The CC did not just sit back and accept these decisions, they appealed them and defended them right up to the Constitutional Court. The decisions on the cases will be made in the next few months.

Mr Ramburuth answered that mergers were not always a bad thing. 98% of all the mergers were approved without a problem. In many cases mergers created efficiencies and economies of scale that were good for consumers as it assisted with the creation of new products, cheaper products etc. A lot of the well-known cases that were on the news focused on how much weight public interest was given in deciding if the merger would go through or not. Many of the mergers that the CC was involved in now had nothing to do with public interest, they were all “bad” in terms of competition law.

Mr Hoosen noted that the CC had been able to stamp its authority in a very short period of time, in a manner that gave many South Africans hope. The downside was that the more people knew about the good work the CC did, the more cases they would get. This was starting to reflect on the CC. He asked what the CC attributed the increase in the case load to, specifically around the food industry. How had it impacted on it? Was advocacy working as far as this was concerned and were there any positive spin-offs from it? He understood that the Minister of Health was very committed to trying to reduce the pricing in the private sector on operations and medications. He wanted to make the services more available to poorer communities. However, the CC ruled against this saying it was anti-competitive. He wanted to know how the CC found the balance in directing a market to provide a service as cheaply as possible, but on the other hand try to prevent anti-competitive behaviour.

Mr Ramburuth explained that there could be a number of reasons that the CC's case load was increasing. It was a difficult question to answer. In countries where they deal with corruption more effectively, it was felt by many that their society was more corrupt. But, this was not the case. It could be that these countries were dealing with corruption more effectively. It was more worrying to hear about countries that did not have any cases of corruption. There were a lot of issues. There were corruption problems in South Africa, which seemed to be historically determined – where government and business had a sort of “incestuous” relationship in the past where government handouts were given to businesses. The country had come from a period where there was greater government involvement in the economy than there was now. 1994 occurred in the middle of a time when the rest of the world was liberalising its economies and this was something the country had inherited in policy. However, a lot of the old policies and relationships remained. The country also had a lot of cases of corruption because the CC was such an effective enforcer of the law and in catching people. One of the factors was the Corporate Leniency Policy that allows the first person who comes forward the opportunity to be excused from punishment. This had proven to be an effective way of catching people out.

In the case of whether advocacy was working, Mr Ramburuth's view was that it was, and the CC was ready to do some serious research around it. This could not be done before because there was too short a time lag between when the CC started and when they could see effects. It would be rare to find a boardroom in the country that did not think or talk about the competition authorities and the implications. He thought that enforcement was a very important part of advocacy. Without the threat of being caught, people would not change their behaviour.

Mr Ramburuth addressed the Member’s question on the health sector. In the mid Nineties there was a wave of liberalisation in markets throughout the world. Policy decisions were taken on liberalising markets. This was the decision taken around healthcare. In other words, there was no longer the matter of government deciding on prices and there was no longer the matter of pricing decisions taken under the auspices of some structure run by government. While this happened in policy terms and on paper, all of the old relationships once again continued and all the industry associations continued to set prices the way they did before, in a collective bargaining sort of way. So, you would get the hospitals, practitioners and medical aids sitting around and negotiating collectively what the different prices would be. For a competition authority, this was seen as “straight down the line textbook collusion”. It would have been different if government was overseeing this process because then it would be seen as policy. What happened was that the country's liberalisation process replaced public regulation with private regulation, and private regulation equalled collusion. Private entities could not regulate themselves without government having a hand in it. This was what had happened. The CC saw it as 'low hanging fruit” for them and they were prosecuted. However, what got left in the wake of all of this was a complete vacuum around the policy structure that governed all of this. Some of the players were still too powerful. He thought that this was what the Minister of Health was going to address. The matter was about competition as well, but more importantly it was about what the policy paradigm was in which healthcare was going to function in going forward. These were very big questions.

Ms Tsotetsi applauded the CC's initiatives to limit job losses. She wondered how they ensured that companies did not retaliate by retrenching staff when they were fined.

Mr Ramburuth noted that the CC often heard that companies threatened to fire their staff after being fined. He did not think this was a sustainable argument and he did not think this actually happened. At the end of the day, fines were not borne by the consumers.

The Chairperson noted that the Act exempted companies from engaging in anti-competitive behaviour only if it benefited previously disadvantaged enterprises. She wondered if the CC had appealed the verdict given to the Health Minister. This spoke to the CC's mandate to promote a greater spread of ownership, in particular the ownership stakes of the previously disadvantaged. To what extent had the CC assisted in ensuring their was more participation of historically disadvantaged companies in the economic mainstream? The CC also mentioned that it was difficult to evaluate the impact it was making on the ground because it lacked the necessary tools due to the nature of work it did. Being so, they worked within a particular mandate that demanded they had to achieve certain objectives. It demanded that the CC had to measure itself in terms of its Key Performance Indicators. She asked if the CC had begun to look at some of the indicators that would help them to measure their mandatory requirements.

A Member asked to what extent the CC's budget for human resources included employing people with disabilities and graduates from previously disadvantaged schools.

Mr Ramburuth replied that the CC included in their human resources budget employment of people with disabilities and graduates from previously disadvantaged schools.

The Chairperson said that the Committee had run out of time to interact with the CC. She noted that it was not enough to find out and expose cartels in terms of anti-competitive behaviour. It was important to know what happened with the damage created by price-fixing, especially to consumers. This was important to know, especially to the CC whose mandate it was to create a competitive environment for companies. She warned that it was important to be aware of populace pressure. If people were opposed to the CC's decisions, it did not mean they had less regard for the work the CC was doing. It could just mean that the CC's decisions did not favour their expectations. She said the Committee wanted to thank the CC and its team. They would continue to support the entity.

The meeting was adjourned.