Industrial Policy Action Plan (IPAP) 2012 implementation: progress report
Trade, Industry and Competition
25 October 2012
Chairperson: Ms J Fubbs (ANC)
Meeting Summary
Several Committees from the Economic Cluster received a progress report from the Department of Trade and Industry on the implementation of the Industrial Policy Action Plan (IPAP) 2011/12. The report looked at achievements in terms of strategic platforms and sectors, critical challenges to implementation, critical challenges, intra-government issues of concern, key opportunities, the huge electricity tariff increases and growth rates in administered prices.
The amended Preferential Procurement Policy Framework Act/Regulations had empowered the Department of Trade and Industry to designate sectors and industries for which government departments and state owned enterprises must procure locally. On the National Industrial Participation Programme (NIPP), the policy review had been completed and the project review was in progress. The Committee was briefed on the key achievements in the sectors of automotives; agro-processing; clothing, textiles, leather and footwear; metal fabrication, capital and transport equipment; business process services and green industries.
Challenges had been the protracted recession and slow demand for South Africa’s exports particularly from the country’s traditional markets in the Eurozone and the USA. There was significant global uncertainty about the resolution of financial and economic crises and other geopolitical risks. There was the challenge of the slow and difficult process of re-orienting exports to high growth developing regions and countries and securing foreign direct investment into strategic sectors. There was inadequate provision of suitable long-term financing instruments for industry. There was an absence of financing mechanisms to fund majority black owned manufacturing companies. The Committee was briefed on issues of concern with regards to electricity, biofuels, iron and steel, beneficiation, aquaculture and upstream oil and gas.
In the discussion that followed, Members asked about the cost drivers at South African ports, the pact between government and businesses to keep administered prices down; the causes and possible solution of the intra-governmental challenges; preparedness of South African exporters and ports for the application of US legislation to enforce scanning of all containers entering the US; the possibility of regional industrial decentralisation and the conversion of military manufacturing capacity into commercial manufacturing.
Meeting report
Industrial Policy Action Plan (IPAP) progress report by Department of Trade and Industry (dti)
dti’s Acting Deputy Director General: Industrial Development Division, Mr Garth Strachan, provide the progress report.
Key Achievements
On public procurement, the amended PPPFA Regulations had empowered the dti to designate sectors and industries from which government departments and state owned enterprises must procure locally. The first round of sector designations included rail rolling stock, power pylons, buses, clothing, textiles, leather and footwear, canned vegetables and set top boxes. The second round included 70 pharmaceutical products. Instruction notes had been sent out by the National Treasury on these items. There was work on the third round of designations to include school and office furniture and cables. Work on other capital equipment was underway. On the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme, minimum and increasing levels of local content had been secured as a fundamental criterion. Current local content thresholds vary between 25% and 35% with targets set to rise to 65%.
On the National Industrial Participation Programme (NIPP), the policy review had been completed and the project review was in progress. Revised proposals to deepen and extend NIPP were contained in submission and memorandum to Cabinet. The new NIPP regulations will be formulated and tabled to achieve alignment and maximum impact. This was going to shift to direct offsets in key IPAP sectors.
In terms of Industrial Financing, there was ongoing reorientation of Industrial Development Corporation (IDC) to finance IPAP and New Growth Path (NGP) sectors. The IDC calculation of jobs created and/or saved through funding approvals from 2009/10 to 2011/12 was 111 349 jobs. IDC was also going to lower the cost of funding for businesses, by sourcing an additional R2 billion from the UIF for funding more labour intensive businesses. A budget allocation of R5.8 billion over the current three-year MTEF had been announced in the 2012/13 budget.
On Developmental Trade Policies, tariff setting was informed by strategic sectoral priorities with ongoing processing by the International Trade Administration Commission (ITAC) to tariff increases, rebates and reductions. There had been concerted and integrated efforts to tackle customs fraud, illegal imports and importation of substandard goods. There had also been achievements in terms of competition policies on fuel, steel, construction bid-rigging, cement and food.
The Committee was briefed on the key achievements in the sectors of automotives; agro-processing; clothing, textiles, leather and footwear; metal fabrication, capital and transport equipment; business process services and green industries (see document). For example, for business process services, investments of R4.1 billion had been leveraged and the approved projects were to create approximately 15 149 jobs over three years. 3000 young trainees had been trained under the Monyetla II Programme. The Amazon African customer service centre in Cape Town was launched in August 2012 to service global English and German speaking clients.
Green industry achievements included the IDC approved funding for two local manufacturers of solar water heaters. This was done in support of government’s bid to promote local production. Two rounds of renewable energy generation bids had been awarded with minimum levels of local content ranging from 25% to 45% and maximum targets set to increase to 65% with stronger local component requirements in solar and wind. The Industrial Energy Efficiency Programme was launched in November 2011.
Critical Challenges
There was the challenge of the protracted recession and slow demand for South Africa’s exports particularly from the country’s traditional markets in the Eurozone and the US. There was significant global uncertainty around the resolution of financial and economic crises and other geopolitical risks. There was the challenge of the slow and difficult process of re-orienting exports to high growth developing regions and countries and securing foreign direct investment into strategic sectors.
Another challenge was the exchange rate overvaluation and volatility with high relative real interest rates. Also there was the matter of significant subsidies, trade measures and other distortions within global trade
Mr Strachan said that the “user pay” principle for funding electricity build programmes was inducing massive economic shocks to the manufacturing sector. South African port charges were amongst the highest in the world. Port pricing on manufactured goods was above global norms and port pricing on iron ore and coal was below the global average. There was also the challenge of monopolistic/oligopolistic pricing of intermediate inputs into manufacturing.
The Committee was told of the inadequate provision of suitable long-term financing instruments for industry. There was an absence of financing mechanisms to fund majority black owned manufacturing companies with strict conditionalities on owner/management participation, risk sharing and raising competitiveness. There was slow progress with skills development programmes for priority sectors. There was the need to ensure close alignment with Presidential Infrastructure Coordinating Commission (PICC) driven infrastructure programme and dti programmes on localisation in support of local manufacturing.
Intra-governmental Concerns
The Committee was briefed on issues of an intra-governmental nature with regards to electricity, bio-fuels, iron and steel, beneficiation, aquaculture and upstream oil and gas (see document).
Key Opportunities
There were increased manufacturing opportunities linked to large public sector infrastructure programmes in the metals, capital and transport equipment, rail and renewable energy sectors. There were opportunities to grow manufacturing exports to net food importing countries in Sub-Saharan Africa linked to mining, infrastructure and construction and growing single export markets linked to consumer goods. There was strong enforcement and alignment with customs on fraud and illegal imports and non-compliant products.
There was the launch of the Government/Business and Labour “Buy SA” campaign. In this regard, strengthening of private sector commitments to buy local was going to be significant. The better utilization of South Africa’s enormous competitive advantage in minerals endowment to build up and downstream sectors was a key opportunity.
The Committee was shown graphs showing the steep increases of the electricity tariff compared to the CPI annually between 1989 and 2011 and the steep growth rates of administered prices between 2000 and 2010.
Discussion
Mr W James (DA) said that the presentation was a good outline of what South Africa was developing as a country in terms of industrial planning. The renewal of the rail road rolling stock and the focus on renewable energy were greatly welcomed. What were the cost drivers at the ports and what could be done strategically to drive the costs down? Was it not important for there to be a pact between government and businesses to keep administered prices down? Examples could be drawn from the Netherlands and Germany where a cost reduction caucus had been introduced.
Mr Strachan replied that the cost drivers at the ports could be obtained from the National Ports Authority. However, there were costs drivers such as infrastructure. Transnet was subsidizing other parts of its operations with high cost charges.
Mr X Mabaso (ANC) said that there were remarkable improvements with regards to the IPAP but the help given to the industries was not supposed to focus only on the big players. Was it a good move to take the production of iron and steel away from government to the private sector? What was the position of the IPAP with regards to the empowering of cooperatives?
Mr Strachan replied that in as much as small companies and cooperatives were important, it was good to recognize that the role of large companies in manufacturing was significant. The small enterprises were going to benefit from the value chain which was being created when the demand and supply aspects were taken into consideration. The use of clusters was important and this was an area where the dti had succeeded in the enhancing of small and medium sized companies. South Africa had 40 clusters but a country like Brazil had 4 020 clusters supported by the government. Mr Strachan said that the nationalization of iron and steel production was a political issue and he did not have the competence to respond on the matter. What the country had ended up with was a privately owned monopoly that was providing the most important intermediate product into the manufacturing sector at export parity prices instead of a developmental steel price.
Mr Z Ntuli (ANC), a member of the Portfolio Committee on Economic Development, asked why there was the inadequate provision of long-term financial instruments.
Mr Strachan replied that looking at the IDC’s financing model showed that apart from issues of risk aversion, the IDC worked from a balance sheet and therefore relative to key peer competitors, the cost of industrial financing goes high and the term of financing was very short.
Mr G Hill-Lewis (DA) asked how the IPAP and the dti were preparing South African ports and exporters to handle the effects of the US legislation which required that all in-bound containers to US ports be scanned. This was going to be implemented from 2013. With regards to government procurement, why were vehicles not included in the list for preferential local procurement? What was the Enterprise Investment Programme all about? What was the dti doing to engage with state-owned entities to try and remove blockages with regards to administered prices?
Mr Strachan replied that the preparation of the ports could be better answered by the South African Revenue Service and Customs. However, the US was already involved in processes which examined containers at the port of export so the country was already well prepared. The dti was working on the potential to designate vehicles for preferential local procurement. It was a long process which involved stakeholder engagement and research.
Ms S van der Merwe (ANC) asked why there were intra-governmental issues when the IPAP was a government driven programme. There had to be a forum for the resolution of these intra-governmental issues and blockages.
Mr Strachan said that he agreed with the comment made by Ms van der Merwe.
Mr B Radebe (ANC) said that the presentation showed that the country had a lot of resources but the people who were supposed to benefit from these resources were not benefiting from them. What could be done to ensure and guarantee that as the government was pumping money into industries, the workers also benefited from these schemes? What could be done with regards to intra-governmental relations? It was time for a law to be passed which compelled all state-owned enterprises to align themselves with the IPAP and its strategic objectives. What could be done about cooperation with the Department of Home Affairs in facilitating the papers and permits for investors and workers?
Mr Strachan replied that he did not think that any of the incentives were done without very strong consultation with National Treasury and the various stakeholders. These consultations and engagements included in each case, talks with the unions and workers so as to secure their interests. There could be instances where workers were exploited but that had to be taken up with the Department of Labour. The dti was involved in strong monitoring and evaluation of the industries which received the incentives. The dti had been working with the Department of Home Affairs and permits were granted only where there were scarce skills and where the skills could not be accessed within the country. The granting of permits was also informed by the sector in which the permits were required.
The Chairperson said that the dti and the Department of Home Affairs had been having bilateral talks on the granting of permits and facilitation of the entry of investors into the country.
Ms Sithole asked if the whole problem of the poor distribution of the benefits of the country’s mineral resources could not be solved by beneficiation. Why was the dti not coming up with legislation which enforced beneficiation?
Mr Strachan replied that he agreed with Ms Sithole and that was why the dti raised the issue of intra-governmental relations. It was important to avoid saying that policy instruments were the solution to the issues of beneficiation. The most significant policy instrument was the Mineral Resources Development Act. There were policies and instruments across government which addressed the issue of beneficiation.
Ms D Tsotetsi (ANC), a member of the Portfolio Committee on Economic Development, asked in terms of IDC funding, to what extent the dti ensured the effectiveness of the transformation policy. For funding approvals, what was the most reasonable timeframe to approve an application?
Mr Strachan replied that there was no dti programme or incentive which was not governed by a policy framework informed by the need for transformation. All incentives had conditionalities around Black Economic Empowerment linked to the Charters and the BEE Codes.
Mr G Selau (ANC) asked how dti ensured that the majority of the jobs created were not filled by foreigners. Did the dti have the same incentives for foreign investors as it had for local investors? Was the dti able to quantify progress in respect of the achievements in the automotive sector? Were the incentives for the automotive industries only for the car assembly industries or did it include the various industries in the chain of car manufacturing?
Mr Strachan replied that the issue of the designation of jobs for locals could be raised with the Department of Labour and not the dti. The dti had incentives for foreign direct investments and there was an added impetus to secure foreign direct investments. The dti was working on reviewing the Automotive Production and
Mr G McIntosh (COPE) asked if Wal-Mart was involved in the Emerging Organic Farmer Retail Programme. Where was the Amazon Africa Customers Centre located in Cape Town?
Mr Strachan replied that Wal-Mart was not included in the EOFRP but Wal-Mart had put in place a supplier development programme with respect to small scale farmers into their fresh produce base. The Amazon Africa Customer Center in Cape Town is in Woodstock.
Mr D Gumede (ANC), Chairperson of the Portfolio Committee on Tourism, noted that there was a Memorandum of Understanding with China around agribusiness and the Chinese were expecting South African businesses to export to China. He asked if the dti had considered facilitating a migration of manufacturing technology from the military manufacturing industry to commercial manufacturing? Could the dti work with ARMSCOR and DENEL to convert the technology used in military manufacturing to the benefit of commercial manufacturing? What were the incentives in place to empower vulnerable communities and rural areas where there could be possible manufacturing?
Mr Strachan said that he had not personally seen an MOU with China but he was aware of the fact that the country had high level political and bilateral trade agreements with China. The first trade fair had been held in Shanghai where South African traders and exhibitionists took part and this trade fair raised an amount of R400 million for manufacturers from South Africa. DENEL and ARMSCOR were the key players in terms of military manufacturing and the dti had a very small role to play. There was work done on a partnership between the CSIR and local manufacturers. Further work was in progress in this regard.
Mr N Gcwabaza (ANC) asked for a breakdown of the jobs that had been created through the incentives and jobs which were new in the labour market. This was to help in monitoring the creation of jobs. Did the dti have plans to move out of the established industrial areas and begin to establish new industries in the rural areas where possible, and the revival of closed down industries? Did the IPAP consider re-establishing the ship manufacturing industry?
Mr Strachan replied that the dti was working on the problem of capturing, monitoring and evaluating the impact of a broad range of policy interventions. It was difficult to work out the jobs being created or lost in sectors because the sectors did not always equate to the dti or IDC sectors so there had to be detailed and firm level studies. The dti was working closely with the Centre for Strategic Industrial Research (CSIR) to put in place a mechanism to measure the loss and creation of jobs. In terms of regional industrial decentralisation, there was a Chief Directorate working on the issue and National Treasury had set aside R3.8 billion for this programme.
The Chairperson said that the presentation was very informative and complimented the Annual Report of the dti. However, there were issues which were definitely going to be raised after a closer study of the reports and the Committee hoped that during the public hearings, the dti was going to be present so that more in depth engagements could be made.
The meeting was adjourned.
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