National Industrial Participation Program (NIPP); Industrial Policy Action Plan (IPAP3): briefing

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Trade and Industry

16 April 2012
Chairperson: Mr B Radebe (ANC)
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Meeting Summary

The Deputy Director-General of Industrial Development and officials in the Department of Trade and Industry (dti) presented additional input on the National Investment Participation Program (NIPP) and the latest iteration of the Industrial Policy Action Plan (IPAP).

The Department said a policy review of the NIPP was being undertaken because of a lack of coherence in the procurement mechanisms. Indirect offsets had been problematic, generating projects that were outside of the core business of companies while there had been a wide variation in multipliers used, especially investment multipliers. Future NIPPs would emphasise direct rather than indirect investment and the multiplier systems would be strengthened.

The review would revisit every NIPP project since inception to strengthen the program. There would be two phases, the first dealing with the defence related projects and the second phase dealing with non-defence projects. The review would compare actual project outcomes to those stated in the original business plans. Reasons why projects had not attained their outcomes together with what remedial action was necessary. The Department provided the Committee information on the projects in the form of a table.

Members agreed that most of the NIPP obligations had been discharged and that the Department was on the right track in instituting a policy review, but that one weakness was the poor quality of reports in the Annual Report and the Auditor General’s reports. Clarification was sought on whether the sales figures quoted in the table were actual sales or sales figures arrived at through a multiplier. How were the sales credits calculated? Members wanted to know what the status of the CarboTech carbon manufacturing plant in Estcourt was. Members asked if any action was taken against those companies which had not complied with NIPP. Members asked if a company could get credits for products it had not made. If this was so, it would have to be noted as a policy failure. This was important for the next round of defence acquisition

The Department then turned to IPAP and said that this iteration of IPAP would solidify strategic investment to grow particular manufacturing sectors, namely, rail locomotives and rolling stock, green industries and agro processing.

A Department official proceeded to outline some of the achievements. The new Preferential Policy Procurement Framework Act (PPPFA) empowered the dti to designate sectors in which public sector procurement had to procure locally, The first round of sector designations being rail rolling stock, power pylons, buses, clothing and textiles and leather and footwear, canned vegetables and set top boxes. The Renewable Energy Independent Power Producer Procurement (REIPPP) program stipulated minimum and increasing levels of local content. A Procurement Accord process also sought to secure co-commitments from business and labour. The Industrial Development Corporation (IDC) was being refocused to provide industrial finance for investment in IPAP and New Growth Path (NGP) sectors. In addition section 12(i) of the tax laws amounted to a tax incentive while tax deductions could also be claimed for Research and Development. There had been a concerted and integrated effort to tackle customs fraud with R1 billion worth of goods confiscated over the past three years. In addition there had been a strategic focus on anti-competitive behaviour in industries which provided inputs to the production sectors. The automotive sector had garnered R15 billion in investment commitments. The Clothing Textiles Competitiveness Program had supported 208 companies. The footwear sector was aiming to double production over the next three years from 52 million shoes to 100 million. The dti had provided R736 million in incentives over the past three years in the agro processing industry sector. Major Transnet investments in its rail stock would create 65 000 direct and indirect jobs over the next 20 years. R4.1 billion of investments in Business Process Services would create over 15 000 jobs over three years. The first Amazon customer service centre in Africa, based in Cape Town, would be launched in August. New building regulations would make it obligatory to install solar water heaters in new buildings. The first round of renewable energy generation bids had been awarded and an industrial energy efficiency program had been launched in November 2011. Intra government coordination had resulted in accelerated progress in renewable energy, biofuels and water license issuance while the electricity price hike had been lowered from 25% to 16%. R1 billion of port tariff rebates had been negotiated.

The Chief Director of Industrial Policy outlined structural challenges the country faced, opportunities available for business people and the strategic priorities of the Department. He said the medium term outlook presented a number of structural challenges. There was significant global economic uncertainty. There was protracted recession and decreased demand for exports in South Africa’s traditional markets of Europe and the USA. Currency volatility and overvaluation, uncompetitive pricing of intermediate inputs, large increases in electricity, rail and other tariffs, slow progress on skills development in priority sectors, backlogs in infrastructure expenditure, slow re-orientation of exports to other regions, inadequate provision of long term financing instruments for industry and significant subsidies, trade measures and other distortion in global trade. Another challenge he added was the need to build capacity within the Department. He said manufacturing opportunities existed in sectors such as metal fabrication, rail and renewable energy, in clothing and textiles footwear, agro processing and in products linked to mining, infrastructure and construction. The IPAP budget of R5.8 billion represented a significant increase. There had been a shift in emphasis on regional integration from focusing on market access to one of production capability and infrastructure. The tariff reform was not a protectionist trade policy, with the department seeking to reduce tariffs where there was a need. Standardisation, Quality Assurance, Accreditation and Metrology (SQAM) institutes were being strengthened to support industrial development. The dti was working with the South African Revenue Service (SARS) to clamp down on customs fraud and under invoicing. The dti was continuing work on a dedicated IPAP National Artisan Development Program for priority sectors. Three key sectors in this regard was the green sector, agro processing industries and metal fabrication. He said IPAP had one of the most detailed transparent reporting programs of government with annual documents including the setting out of Key Action Plans and milestones, biannual Cabinet updates and a detailed annual report within six months of the end of the financial year

Members said that in 1991 South Africa produced 81 million shoes, but by 2007 imported 160 million shoes. What was the market share of shoe imports? Would the projected increased local production be in addition to what was imported or would it be reducing the amount of shoes imported. What was the situation regarding textile import agreements that had been reached with China? Why was South Africa importing chickens from the USA and Brazil? Someone commented that the IPAP presentation had not addressed mining enough. In recent years a global mining boom had bypassed South Africa. Members said that the role of the dti was to introduce competition so that price collusion could be routed. In this regard could the terms of settlement with SASOL be presented to the Committee? Why had the dti stopped funding to the Berlin Trade Fair? Members asked for clarification on the South African Bureau of Standards (SABS) and the South African National Accreditation System (SANAS). Members wanted the Committee to do an oversight visit to the clothing industry factories where the Manufacturing Competitiveness Enhancement Program (MCEP) had resulted in increased jobs. Members asked which other departments were involved in reducing customs fraud and which department was the lead department; how far the steel pricing issue had been resolved; how technology skills transfer would be ensured through the procurement process; and what regulations governed rare earth exports to China? Members said skills would be needed because of the huge investments in industry and that the market was not getting the artisans that it wanted. Local pharmaceutical manufacturers were losing out on tenders to outside countries

The Chairperson noted that the Committee meeting with the National Credit Regulator and Banking Association of South Africa scheduled for the 9 May would be shifted to the 2 May to allow Minister Rob Davies to be present.

Meeting report

National Industrial Participation Program (NIPP): dti briefing
Mr Nimrod Zalk, dti Deputy Director General of Industrial Development, said a policy review was being undertaken of the National Investment Participation Program (NIPP) because of a lack of coherence in the procurement mechanisms. The lack of coherence was also a consequence of the ramping up of public investment not covered by the procurement mechanisms and also because of procurement non-compliance at the municipal level. Indirect offsets had been problematic, generating projects that were outside of the core business of companies. There had been a wide variation in multipliers used, especially investment multipliers. NIPP would emphasise direct rather than indirect investment and the multiplier systems would be strengthened.

The review would revisit every NIPP project since inception to strengthen the program, There would be two phases, the first dealing with the defence related projects and the second phase dealing with non-defense projects. The review would compare the performance of projects by looking at its actual outcomes in relation to the outcomes of the original business plans. If projects had not attained their outcomes, the reasons why would be sought together with what remedial action was necessary. The Department provided the Committee information on the projects in the form of a table (see document).

Discussion
Mr D Maynier (DA) said he agreed that most of the NIPP obligations had been discharged and that the Department was on the right track in instituting a policy review, but that a weakness was the poor quality of reports in the Annual Report and the Auditor General’s reports. He wanted clarification on whether the sales figures quoted in the table were actual sales or sales figures arrived at through a multiplier. How were the sales credits calculated?

Mr Zalk replied that sales credits were generally upfront and that the credits were based on estimates of sales forecasts of the project.

Mr Masizakhe Zimela, Chief Director: National Investment Participation Program, said that the sales credits were based on actual sales over a period of years and that only 20% of the projects had upfront credits.

Mr G Mackintosh (COPE) asked about the CarboTech carbon manufacturing plant in Estcourt. It had been established but had then lain dormant, then had operated and currently nothing was happening at the plant.

Mr Zalk replied that a case like that of CarboTech was precisely why the review of projects would be taking place. The review would cover all the projects in detail.

Mr G Selau (ANC) asked if any action was taken against those companies which had not complied with NIPP.

Mr Zalk replied that the non-compliance he had mentioned earlier referred more to public procurement entities like municipalities. not companies.

Mr Maynier asked if a company could get credits for products it had not made. If this were so, it would have to be noted as a policy failure. He said this was important for the next round of defence acquisition

Industrial Policy Action Plan
(IPAP3): briefing
Mr Zalk said that this was a significant iteration of IPAP, which would solidify strategic investment to grow particular manufacturing sectors, namely rail locomotives and rolling stock, green industries and agro processing.

Ms Zukiswa Ncapayi, dti Director of Monitoring and Evaluation of Industrial Policy, said the new PPPFA empowered the dti to designate sectors in which public sector procurement had to procure locally. The first round of sector designations being rail rolling stock, power pylons, buses, clothing and textiles and leather and footwear, canned vegetables and set top boxes. The designations included mechanisms to ensure value for money. The Renewable Energy Independent Power Producer Procurement (REIPPP) program stipulated minimum and thereafter increasing levels of local content. A Procurement Accord process also sought to secure co-commitments from business and labour. The IDC was being refocused to provide industrial finance for investment in IPAP and New Growth Path (NGP) sectors. In addition, Section 12(i) of the tax laws amounted to a tax incentive while tax deductions could also be claimed for Research and Development. There had been a concerted and integrated effort to tackle customs fraud with 112 raids launched last year and R1 billion worth of goods confiscated over the past three years. In addition, there had been a strategic focus on anti-competitive behaviour in industries which provided inputs to the production sectors. The automotive sector had garnered R15 billion in investment commitments. The Clothing Textiles Competitiveness Program had supported 208 companies. The footwear sector was aiming to double production over the next three years from 52 million shoes to 100 million. The dti had provided R736 million in incentives over the past three years in the agro processing industry sector. Major Transnet investments in its rail stock would create 65 000 direct and indirect jobs over the next 20 years. R4.1 billion of investments in the Business Process Services would create over 15 000 jobs over three years. The first Amazon customer service centre in Africa, based in Cape Town, would be launched in August. New building regulations would make it obligatory to install solar water heaters in new buildings. The first round of renewable energy generation bids had been awarded and an industrial energy efficiency program had been launched in November 2011. Intra-government coordination had resulted in accelerated progress in renewable energy, biofuels and water licence issuance while the electricity price hike had been lowered to 16% from 25%. R1 billion of port tariff rebates had been negotiated.

Mr Garth Strachan, dti Chief Director: Industrial Policy, said the medium term outlook presented a number of structural challenges. There was significant global economic uncertainty, There was a protracted recession and decreased demand for exports in South Africa’s traditional markets of Europe and the USA. South Africa was experiencing currency volatility and overvaluation, uncompetitive pricing of intermediate inputs, large increases in electricity, rail and other tariffs, slow progress on skills development in priority sectors, backlogs in infrastructure expenditure, slow re-orientation of exports to other regions, inadequate provision of long term financing instruments for industry and significant subsidies, trade measures and other distortion in global trade. Another challenge, he added, was the need to build capacity within the Department. He said manufacturing opportunities existed in sectors such as metal fabrication, rail and renewable energy, in clothing and textiles footwear, agro processing and in products linked to mining, infrastructure and construction. The IPAP budget of R5.8 billion represented a significant increase. There had been a shift in emphasis on regional integration from focusing on market access to one of production capability and infrastructure. The tariff reform was not a protectionist trade policy, with the Department seeking to reduce tariffs where there was a need. SQAM institutes were being strengthened to support industrial development. The dti was working with SARS to clamp down on customs fraud and under invoicing. The dti was continuing work on a dedicated IPAP National Artisan Development Program for priority sectors. Three key sectors in this regard was the green sector, agro processing industries and metal fabrication. He said IPAP had one of the most detailed transparent reporting programs of government with annual documents including the setting out of Key Action Plans (KAPs) and milestones, biannual Cabinet updates and a detailed annual report within six months of the end of the financial year

Discussion
Ms S Van Der Merwe (ANC) said that in 1991 South Africa produced 81 million shoes, but by 2001 production had dropped to half of that and that by 2007 had imported 160 million shoes. What was the market share of shoe imports? Would the projected increased local production be in addition to what was imported or would it be reducing the number of shoes imported. What was the situation regarding textile import agreements that had been reached with China? Why was South Africa importing chickens from the USA and Brazil? She felt that the IPAP presentation had not addressed mining enough. In recent years a global mining boom had bypassed South Africa.

Mr W James (DA) said that the role of the dti was to introduce competition so that price collusion could be routed. In this regard could the terms of settlement with SASOL be presented to the Committee? Why had the dti stopped funding to the Berlin Trade Fair?

Ms C Kotsi (COPE) asked for clarification on the SABS and SANAS. She wanted the Committee to do an oversight visit to the clothing industry factories where the MCEP had resulted in increased jobs. She wanted to know which other departments were involved in reducing customs fraud and which department was the lead department.

The Chairperson asked how far the steel pricing issue had been resolved. He wanted to know how technology skills transfer would be ensured through the procurement process.

Mr Zalk replied that the steel issue was the work of the Department and other departments. The questions on mining, agriculture, energy and steel he could not answer directly as they involved other departments, but that through joint sessions with other departments, greater coherence could be achieved. He could not give exact figures on shoes but was confident that the industry could double production. The agreement with China had been a temporary one only. Developments in China was such that they were looking to balance their economy, they were letting their exchange rate appreciate slowly and allowing wages to rise which opened up opportunities for South Africa. He said that the USA had a great demand for white meat and that the rest were dumped. He said that maize was not being used as a feedstock for biofuels. Competition was being stimulated through the introduction of small-scale maize milling in various parts of the country. Trade fairs were not in the ambit of the IDD but that he would take the matter back to the relevant department. Buses were already a designated sector and that bus bodies had to have 80% local content. The IDC had been approached on the financing side to make it beneficial both in South Africa and regionally. He said that if government was committed then it wanted the private sector to have a co-commitment. SARS had added to its HR capacity to conduct analysis and raids to combat fraud. The dti was also looking at noncompliance with mandatory standards. China and India had been large trading partners in terms of raw material exports, not for value added products. It was important from a jobs and immigration point that the region as a whole develops industrially. He said solar water heaters were to be one of the next sector designations, currently low cost imports might be cheaper but were not SABS compliant nor were they reliable in the long term. He said the dti were not concerned that the MCEP might fall foul of the WTO as it did not fall under the red light subsidy category.

Mr James asked what regulations governed rare earth exports to China.
 
Ms Kotsi said skills would be needed because of the huge investments in industry and that the market was not getting the artisans that it wanted. She said pharmaceutical manufacturers were losing out on local tenders to outside countries.

Mr Zalk replied that he was not aware of any specific measures that limited rare earth exports. He said that the department wanted a stronger alignment between skills development and IPAP. Late last week the Minister had held a press conference where it announced that it had reached an agreement with the Department of Health on the definition of terms, price and benchmark prices.

The Chairperson said that the Committee meeting with the NCR and BASA scheduled for 9 May would be shifted to 2 May to Allow the Minister Mr Rob Davies to be present.

The meeting was adjourned

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