Department of Trade and Industry 2011/12 Annual Report

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Meeting Summary

The Department of Trade and Industry (dti or the Department) presented the key findings of the Auditor General’s (AG) Annual Report for 2011/2012.  The dti’s focus on four sectors had led to a R14bn investment in the automotive industry, stabilised the decline of the clothing industry through a R1bn incentive programme, and seen the emergence of new investments and growth in the Business Processing Services (BPS) and film sectors.  This had resulted in reindustrialising the country, which the dti wanted to expand to further sectors.  Other achievements included stabilising company registrations, the introduction of new initiatives for small, micro- and medium-sized enterprises (SMMEs,) and the diversification of trade between Africa and China.

Key issues in terms of international trade included the slow down in the global economy (which had resulted in the loss of 600 000 jobs in South Africa) and the importance of the wider African continent and the BRICS (Brazil, Russia, India, China and South Africa) economies to export diversification and growth.  The resurgence of foreign direct investment (FDI) and the improvement in South Africa’s ‘ease of doing business’ ranking were also covered.

The dti presented the industrial development work of the Department, including growth in the automotive, film and Business Processing Services (BSP) sectors, and details and results of various incentive programmes.  It was acknowledged that the industrial incentive programme uptake tended to follow the old industrial patterns – for example, automotive investments in Gauteng and the Eastern Cape.  To achieve a better geographical spread, the dti was planning ten new investment zones.  However, it conceded that the existing Industrial Development Zones (IDZs) had not performed as well as had been expected, although investments in them were starting to be realised.  International bilateral and multilateral agreements and forthcoming regulatory reform were also covered.

Internal issues, including staff vacancies, supplier payments, governance issues within entities, budget growth and anticipated under-spending were covered in the presentation.  Although the AG’s report was unqualified, issues had been raised, and these were explained.  The key challenges for the department in the coming year were the governance of entities, slow global growth and the need to foster short-term job creation.

Members asked questions about irregular expenses raised by the AG’s report, the under-spending of budgeted funds, the R6bn of liabilities and other areas of expenditure, such as consultants’ fees.  They asked questions on the dti overtime policy and the regulation of staff engaged in private enterprise in addition to their staffing roles.  Members requested further clarification on export and foreign investment policy and initiatives, such as export diversification and agricultural policy, as well as national economic development plans, including key sectoral investments, the development of Special Economic Zones, energy prices and programmes to foster exports.  They also asked about trends in employment statistics and support activities for small, micro- and medium-sized enterprises.

Meeting report

Briefing by the Department of Trade and Industry on the Annual Report 2011/12
Mr Lionel October, Director General, Department of Trade and Industry (dti or the Department), presented the key findings of the Auditor General’s (AG’s) Annual Report for 2011/2012.

Mr October advised the Committee that the dti’s focus on four sectors had led to a R14bn investment in the automotive industry, stabilised the decline of the clothing industry through a R1bn incentive programme, and seen the emergence of new investments and growth in the Business Processing Services (BPS) and film sectors.  This had resulted in reindustrialising the country, which the dti wanted to expand to further sectors.  Other achievements included stabilising company registrations, the introduction of new initiatives for small, micro- and medium-sized enterprises (SMMEs) and the diversification of trade between Africa and China.

Mr October presented some key findings in the economic context.

  International Trade:  Exports were still suffering from the European Union (EU) slowdown and no increase was foreseen, even as the EU stabilised.  Globally growth had slowed, but the African continent had provided growth and diversification opportunities.  This global down turn had resulted in the loss of 600 000 jobs in South Africa in 2008/09.  Global figures were given on slides 4 and 6, and presented graphically on slide 5.

  Investment: Foreign direct investment (FDI) had shown encouraging growth in 2011, increasing from just R9bn in 2010 to R48bn, whilst the “hot money” of portfolio investments had collapsed.  Mr October attributed this to South Africa’s move up the rankings of countries in which it was easy to do business, from 74 in 2011, to 44 in 2012.

  Employment: Job figures were recovering after an increase of 365 000 in 2010/11, but this was below the departmental target.

Mr October then presented highlights of the industrial development work of the dti.

  Automotive Production and Development Programme (ADPD): The ADPD had attracted R15bn in private investment, including a commitment from the Chinese First Auto Work to a establish a plant in Gauteng and the establishment of a Toyota taxi production facility in South Africa.

  Public Procurement: Regulations within the Preferential Procurement Policy Framework Act (PPPFA), introduced in 2011, had determined the sectors from which government and state-owned enterprises (SOEs) must procure locally.  These included buses, pharmaceuticals and locomotives.

  Sectors: Large investments from BPS companies had been experienced, including Entersite (creating 5 000 jobs) and Amazon (creating 1 000 jobs) regional customer service centres.  The Clothing and Textiles Competitive Incentive Programme (CTCIP) had resulted in commitments from Foschini, Truworths and Edgars to procure locally.  The dti was hoping that Woolworths might agree also.  Further corporate investments were detailed on slides 16 and 17, including those from the Nigerian Sephaku cement company.  A number of film productions made in South Africa were displayed on slide 18.

  Incentive Schemes: Quantitative results of incentive schemes were presented on slide 19.  The Small Enterprise Development Agency (SEDA) had supported over 1 000 companies through a network of 34 incubators.  There were also proposals for 44 more incubators to be developed in partnership with the private sector, science council and higher education institution partners.  Workshops had been undertaken with municipalities on the reduction of red tape for SMMEs.   SEDA’s SMME Payment Hotline had assisted with the payment of R300m to companies whose invoices were outstanding for over 30 days.  The Broad-based Black Economic Empowerment (B-BBEE) code of good practice had been released.  Figures for the take up of the Black Business Supplier Development Programme (BBSDP), the Co-operative Incentive Scheme (CIS) and the Enterprise Investment Programme (EIP) were presented on slide 24.   Slide 25 demonstrated that the industrial incentive programme uptake tended to follow the old industrial patterns, for example, automotive investments in Gauteng and the Eastern Cape.  To achieve a better geographical spread, the dti was planning ten new investment zones.  However, it acknowledged that the existing Industrial Development Zones (IDZs) had not performed as well as had been expected, although investments in them were starting to be realised.

  Trade, Investment and Exports: A number of corporate investments were presented on slide 27, including increased investments from Proctor and Gamble (R560m) and Unilever (R1.371bn) and new investors such as LG (R90m).  A foreign investment mission had enabled ACSA (Airports Company of South Africa) to win a R72bn concession to operate the Guarulhos International Airport in Brazil.  Slides 28 and 29 provided provincial figures for financial assistance and export sales for National Pavilions and Missions.  The dti had reduced 90% of South African trade tariffs within SADC (South African Development Community) to zero, meeting its target.  A summit to launch the T-FTA (tripartite free trade area) combining SADC, EAC (East African Community) and COMESA (Common Market for Eastern and Southern Africa) had taken place, which would ultimately facilitate exports across much of the continent.  The dti had continued to undertake missions and sign bilateral agreements (memoranda of understandings and technical co-operation arrangements) with a number African partner states.  South African membership of BRICS (Brazil, Russia, India, China and South Africa) was a major multilateral achievement in strengthening South-South relations.  The EU had traditionally taken the bulk of South African exports, but this had slowed down.  The BRICS partners, whilst currently only small markets for South African manufacturers, had high potential for growth and would become a key geographical focus.  The dti had taken 70 companies to China, where it was hoped that from a low base, South Africa could become a key supplier of food, wine and wool products. The dti was continuing to negotiate the Economic Partnership Agreement (EPA) with the EU.

  Regulations: The dti was hopeful that a Bill on co-operatives would be finalised in 2012 and had tabled a Bill on gambling and the B-BBEE Amendment Bill.  Cabinet had approved the Bill on Special Economic Zones (SEZs). The Security Regulatory Panel had now been established as the Takeover Regulation Panel.  Slide 39 presented the applications, approvals and cancellations of liquor licences in each of the province.

Mr October then presented on the state of administration within the dti, and advised that vacancies had been reduced from 18% to 8.45% (at 31 March 2012), which comprised 113 vacancies in a total staff complement of 1 300.  The dti had made 95% of all invoice payments within 21 days, thereby supporting SMME supplier cash flow.  Women filled 43% of the dti’s senior management positions.

The dti oversaw 16 entities, through dedicated governance teams.  The dti had suspended staff accused of fraud or corruption, made critical interventions in a number of entities listed on slide 43, and stabilised governance problems in other entities.

The dti had a growing annual budget and had reduced under-spending to just 1.1% (or R75m) and would expect a lower underspend in the current financial year.

The dti had received an unqualified audit opinion from the AG, which noted that the Department had successfully dealt with asset management and performance information issues from the previous audit.  Two current matters had been raised by the AG report.  Firstly, incentive payments within the dti contingent liabilities were not being claimed within the year.  Secondly, the AG report highlighted irregular expenditure, which corresponded to a technical issue, rather than unauthorised or poor value for money payments.  These related to expenditures of between R10 000 and R500 000, for which three quotations would be required, but were not always possible.  As an example, Mr October mentioned international conference accommodation that might have been stipulated by the conference organisers for security reasons, where three quotes could not have been obtained.

Mr October concluded the presentation by highlighting the key challenges for the Department.  Firstly, the global economic slow down was impacting on exports.  Secondly, two or three departmental entities required improvements in governance. Thirdly, the dti was not meeting the demand for support from cooperatives and small black businesses.  Finally, while the dti industrial policy was having an impact on long-term employment growth, more needed to be done to foster short-term job creation.

Discussion
Mr M Maine (ANC, North West) asked for a further explanation of the AG’s report on the irregular expenditures.

Mr A Nyambi (ANC, Mpumalanga) said that the AG’s report suggested that the dti leadership was not taking sufficient steps to avoid irregular or fruitless expenditure.

Mr K Sinclair (COPE, Northern Cape) asked for an explanation of the R94m in irregular expenses mentioned on page 158 of the annual report, of which R30m had been incurred in 2010/11 and a further R64m in 2011/12.

Ms E van Lingen (DA, Eastern Cape) asked for the total value of the single quotation procurements that had been flagged as irregular expenditures, and for details of how these would be monitored in future.

Mr October replied that the AG’s report on the dti was unqualified, so these were simply issues raised, for which he took full responsibility as the accounting officer.  Under the Public Finance Management Act (PFMA), all contracts over R500 000 had to follow a defined procurement process, with which the dti was fully compliant.  For tenders valued between R10 000 and R500 000, three quotes had to be requested and received.  This was not always possible, for example, if only one airline flew to a particular airport, or an area had only one hotel.  In order to deviate from the three quotations, expenditure needed to be approved by the accounting officer, which was the Director General.  This proved problematic with so many payments, and although the costs were justified, the AG had found the sign offs were missing.  The dti had now implemented a system of delegations to overcome this.

Mr K Naidoo, Group Chief Financial Officer, dti, advised that the statement on the leadership was included as standard in any AG audit report which included findings.  A broad range of expenditures were included where three quotations were not possible, including training sessions, conferences and seminars. 

Mr Nyambi asked the dti to elaborate on the expenditure variances for each programme.

Mr Naidoo replied that the variances were largely due to cash rather than accruals accounting, and they therefore reflected invoicing for an activity that occurred in one financial year, but was not invoiced and paid until the following year.  As detailed on page 156 of the Annual Report, the dti had received invoices after the year-end to the value of R69m, which meant that the total underspend was only R6m on an accruals basis.

Mr Sinclair asked for further explanation of the substantial level of liabilities mentioned on page 185 of the Annual Report.

Mr Naidoo confirmed that liabilities stood at R6bn, since these comprised all potential incentive payments for a three-year period.

Mr Sinclair replied that it also included payments such as R500m to the South African Tyre Manufacturers Association, and requested further explanation.   What could be done to improve the turnaround time for the ECF (Employment Creation Fund), of which only about R800m had been allocated from a total fund of R1.3bn?

Mr October replied that the fund had a particularly unwieldy structure, because it comprised donor funds from the UK Department for International Development (DFID) and USAID.  It was also subject to joint management by four departments (dti, Department of Economic Development, Department of Enterprise and the Department of Science and Technology), and would be overhauled to improve the disbursement of funds and improve turnaround times for applications.

Mr Sinclair asked for justification of the R42m spent on consultants during 2011/12, as detailed on page 237 of the Annual Report.

Mr Naidoo replied that the dti had undertaken considerable legislative work during the year for which specialist expertise had been required, but this would not be needed on an on-going basis; therefore making permanent posts would not have been appropriate.

Mr October added that they had worked on complex technical matters, but that the dti would look into this further to ensure that consultants were used only for high-level skills in future.

Mr Sinclair asked why the dti had spent R4m on World Cup tickets.

Mr Naidoo replied that these were all purchased to entertain overseas visitors interested in investing or investments in South Africa, and there would have been only about one government official at each match.

Mr Nyambi asked for further clarification of the movement of R5.6m from the Enterprise and Investment Programme Incentive Schemes (programme 6), and other virements, as there was also an incidence of a programme receiving additional funding, but ending the year with a surplus.  This raised concerns about planning and budgeting within the Department.

Mr October replied that a written response would be provided on the remaining financial questions, including virements and transfers.

Mr Nyambi asked why the AG’s report suggested that the dti still did not have an official overtime policy.

Mr Naidoo replied that there had been an overtime policy, but it had not been signed off.  This had now been rectified, and no overtime had been allowed outside of the regulations.

Mr Maine asked what the response was to the AG’s claim that not enough was being done to tackle departmental staff who were also running private businesses.

Mr Nyambi asked what was being done about staff undertaking other work outside of their government duties, which was in violation of the Public Service Act.

Ms Van Lingen asked why there was no national legislation in progress aimed at preventing government officials from involvement in additional private sector work. 

Mr October replied that the dti had used databases of responses to government tenders to determine which employees had directorships in private companies.   The dti took disciplinary action against any staff found working outside of the Department.  The dti offered many incentives for SMMEs, therefore departmental staff running businesses could potentially benefit from the work of the Department, running the risk of conflicts of interest.  Senior management staff had entered into voluntary commitments within the dti not to maintain private businesses.  He understood that national legislation might be on the way, but recognised that some people might consider this an infringement of their constitutional rights.

Ms Jodi Scholtz, Group Chief Operating Officer, dti, added that all staff were provided with training on this issue, and it was included in all induction programmes.   In addition, corporate governance checked all staff ID numbers against relevant databases.

Mr B Mnguni (ANC, Free State) asked what the dti considered the major area of investment for the Department.

Mr October replied that both the automotive and BPS sectors had been the major focus for investment, incentives and support.

Ms Van Lingen asked whether the export strategy for China focussed on value added activities, rather than on raw materials and exporters from smaller provinces.

Mr October agreed that changing the nature of exports to China (currently 90% of which were raw materials) to more value-added products, was a priority.

Mr Mnguni mentioned that China had set up a chrome smelting plant in South Africa, but had started importing raw materials for processing in China, as energy costs in South Africa were too high. He asked how many investments were being lost due to the escalating energy prices.

Mr October agreed that electricity prices were the biggest problem faced by the Department, and these were chasing away investment. The Minister was raising this at Cabinet level.

Mr Mnguni mentioned that trade agreements negotiated with various African countries had taken four or more years to conclude, and asked what measurements were used to ensure that they met national objectives.

Mr Brendan Vickers, Chief Director:
International Trade and Economic Development Division (ITED), dti, replied that all trade negotiations were designed to support industrial policy and thereby achieve employment growth and support diversification into value-added industries.  For example, the agreements within the African continent had expanded market access for manufactured products, rather than commodities, raw materials and minerals.

Mr Mnguni asked what measurements were used to ensure that these aims were achieved.

Mr Vickers replied that various indicators were used, including growth in exports where concessions had been implemented, or the broadening of export products. 

Mr October added that while the dti did not have the specific breakdown to hand, the volume of manufactured exports to the EU had quadrupled since an agreement in 2000.  The fastest growing market was now the SADC region, where manufactured products were exported. The dti could present figures at a later date.

Mr Mnguni asked what the South African position was on agricultural exports, for example, when negotiating the European tariffs on produce.

Mr October confirmed that increased access for agricultural products to EU markets was a sticking point in negotiations.

Ms Van Lingen commented that the winning of the Brazilian airport tender should not be at the expense of South African airport taxes.

Mr October agreed that ACSA rates had been high due to the 2010 World Cup, but were reducing, and that winning the Brazil concession would actually help with this reduction.

Mr Sinclair asked how the Committee could assist the department in supporting the Foreign Economic Offices, which were repeatedly asking for more funds.

Mr October replied the Committee’s assistance would be required and that the dti was currently tabling proposals to National Treasury, in order to find a more suitable replacement for the General Export Incentive Scheme, which had been abused, to support South African companies to access export markets.

Mr Maine asked for further assurances that the dti was not overly supporting the four strongest provinces and thereby marginalising the smaller provinces.

Mr Sinclair asked what the SEZs would do differently to ensure that they were more successful than the IDZs, and commented that the Northern Cape was desperate for economic development initiatives.

Mr October replied that as an example, new automotive industry investments had clearly chosen to locate both where there was a market for the products, but also where the supply chains were already developed, which primarily meant the Eastern Cape, Durban and Gauteng. The IDZs had been intended to diversify industrial activity across the provinces.  However, without additional incentives for investing in these zones, they had failed.  The SEZs would have incentive packages, such as financial and tax breaks, and the dti was working with all provinces.  For example, the Northern Cape was earmarked for a renewable energy park, for which the feasibility study was due to commence.

Mr Tumelo Chipfupa, Deputy Director General: The Enterprise Organisation (TEO), dti, added that the incentives on offer in SEZs would differ to those in IDZs.  These included, for example, working with National Treasury to determine appropriate tax incentives.

Mr Mnguni suggested that South African labour laws made workforce costs expensive compared to other developing economies, and asked whether there had been consideration of more flexibility in the IDZs and whether the unions had been consulted.

Mr October replied that the dti had not found that cheap labour and a lack of unions were necessarily important to the success of IDZs elsewhere, but that other incentives were, especially those that made the investment more financially viable than investing in another location.

Mr Sinclair asked for greater co-ordination between departments, as local authorities complained that they were not adequately involved in local economic development.

Mr Chipfupa replied that as an example of improved co-ordination, the SEZ project advisory boards would include representatives from parastatals (such as Eskom and Transnet), National Treasury and the South African Revenue Service (SARS), among others.

Ms Van Lingen asked whether a rail line had been planned to service the Eastern Cape IDZs (East London and COEGA) coal mining developments, and what kind of refinery and transport was planned for the COEGA IDZ.

Mr October advised that he could not comment on the nature of the refinery, but that energy needs would increase in the future. However, National Treasury had advised that the current project was not viable.

Ms B Abrahams (DA, Gauteng) asked for a breakdown of temporary and permanent positions within the additional 365 000 jobs created in 2011/12, as well as employment figures and provincial data on the textile industries.

Mr Mnguni asked how many jobs had been created in the current year to date, and since these were often created within SMMEs, what was the mortality rate for SMMEs nationally and provincially.

Mr October replied that the figures represented both formal and informal jobs across the whole economy, and that the growth in the current period was already at 300 000, which demonstrated an upward trend.  Further details would be provided, along with employment information and terms of incentive programmes for the textile sector.

The mortality rate of SMMEs was decreasing, year-on-year by 10% from 3 900 companies in 2010/11 to 3 500 in 2011/12.

Ms Van Lingen asked whether dormant enterprises had been cleaned from the SMME databases.

Mr October replied that de-registered companies were being removed.

Mr Mnguni asked what impact phasing out the Close Corporation (CC) Act had had on SMME development, since CCs had been acknowledged as a fast method for starting a business.

Mr October replied that SMMEs had been hardest hit by the global down turn.  While it was no longer possible to set up a close corporation, those already registered could retain this status.  Additionally, the registration processes for forming new companies had been streamlined, and although lead times were still long, they were improving.

Ms Van Lingen asked for details of the SEDA (Small Enterprise Development Agency) hotline.

Mr October replied that this would be forwarded.

Ms Abrahams asked for notification of when provincial dti events were taking place.

Mr October agreed to advise the Committee Members of events.

Ms Scholtz added that the numbers in the presentation for ‘Taking dti to the People’ were not the total figures for each province, since the dti also liaised with municipalities to stage and to attend locally-organised events.

Mr Sinclair asked what was being done to ensure that regulations on local sourcing were being adhered to by all government departments.  He also commented that the abundance of liquor licences, wehich seemed to be having a negative impact on the social fabric.

Mr October replied that both of these points had been noted.

Ms Van Lingen asked whether the Committee could access the liquor licences database, in order to ask provincial police forces to target unlicensed venues.

Mr October replied that this would be forwarded.

Mr Sinclair asked for the results of the court case involving the Consumer Commission.

Mr October advised that four court cases had taken place and the court had agreed that the commissioner’s contract was issued for only a three-year period. The dti had been awarded costs.

Mr Sinclair asked what the issue was with the PPP (Public Private Partnership) that was developing the new dti campus.

Mr Naidoo replied that there were no known issues, other than the current aim to build an additional block.

The following questions were raised, but there was not time for responses.

Ms Abrahams asked whether there was a mentorship programme for the incubators, and for detail on exit criteria for businesses supported to enable more to enter the facilities.

Mr Maine asked for the names of the 70 companies taken on the mission to Shanghai, China.

Ms Van Lingen asked whether the dti had information on FDI attracted to provinces by all sources, including national, provincial, municipal and private sector initiatives.

Mr Sinclair asked what was being done to increase investor confidence in South Africa, as reflected in the Standard and Poor rating, which he believed might have had a greater impact on inward investment than electricity costs.

The Chairperson advised that he would be sending a few follow-up questions for written responses and declared the meeting closed.

Meeting adjourned.

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