Beneficiation in South Africa: a German-South African industry perspective; National Credit Act Amendment Bill [PMB1-2012]: response to submissions

Meeting report

Introduction
The Chairperson reminded Members that Dr M Oriani-Ambrosini (IFP) had spoken to and responded to the earlier submissions. The submissions handed out today were subsequent submissions. Mr Andiswa Potwana, Director of Consumer and Corporate Law, from the DTI would be familiar with that earlier briefing.

National Credit Act Amendment Bill Responses to Submissions nos. 30 to 43
Dr M Oriani-Ambrosini (IFP) said that he had consolidated all the comments and the related responses in a single document (see documents handed out). The submissions prior to submission number 30 had been considered previously. The new submissions began with number 30, on page 4.

He said that the National Debt Mediation Association (NDMA) was a group that sought to find a mediation agreement between the creditor and the debtor, so that what was brought before the magistrate was a consolidated consensus proposal. He had captured the NDMA's comments in his document. However, he had not captured the figures that NDMA had submitted, and he thought it important that Members refer to them.

These figures indicated that, in a 20 month period, the NDMA processed 48 483 applications. This figure reflected only those who, for whatever reason chose to utilise the NDMA's services. This would represent less than half of one per cent of those who were under debt restructuring. One was dealing with hundreds of thousands of people potentially affected by the legislation.

The NDMA had raised the point, common to all the submissions that Members had heard, was that the Bill was little more than a tweaking to a fundamentally flawed process, and Parliament should wait until the end of the Department of Trade and Industry (DTI's) policy review before fixing this specific problem in order to obtain a holistic approach. (No. 30)

Dr Oriani-Ambrosini’s answer, as discussed on previous occasions, was that the Committee had received a notification that the outcome of this review had not yet been tabled in Cabinet. Once it had been tabled in Cabinet, the DTI would receive a mandate from Cabinet to begin drafting amendment legislation. Once the legislation had been drafted it would need to be circulated with consultation of role-players and stakeholders, and only then tabled in Parliament and referred to this Committee. So as of today it was a process with no set time frame. It was an immensely complex process because it was an immensely complex piece of legislation with many requirements from various stakeholders. It would therefore be a very time-consuming process.

The issue before Members was – should Parliament not do something now that it was enabled to do so, once the Bill was before Members and gave them the opportunity to put a bandage on a wound before the patient went into intensive care. He submitted that Parliament should not miss the opportunity to do something good, as the Bill was before it, and Members could either approve it or reject it.
 
The NDMA had agreed that the definition of 'consumer’ had difficulties. Juristic persons could be excluded from the definition with respect to certain Chapters. The problem could be addressed by lowering the threshold in 4(1)(a)(1). (No. 31).

The NDMA, obviously conscious of its own business and role, made a call to change focus, to make a resolution by consensus the rule. (No. 32)

Dr Oriani-Ambrosini responded that it had to be asked what happened when the parties could not reach consensus. Surely it was beyond the purpose of this Bill to force people to reach consensus. Reaching consensus was something that was legally impossible because each person would have the power of veto unless there was an arbitrator who decided.

There was also a submission from the DT Debt Counselling, which supported Clause 1 of the Bill. (No. ‘34’)

Dr Oriani-Ambrosini agreed with DT Debt Counselling's comments on this Clause and did not need to respond.

DT Debt Counselling also supported Clause 2, stating that it was ‘imperative’ to the objectives of the Act but the wording was ambiguous. (No. 33)

Dr Oriani-Ambrosini thought that no comment was required. However, DT Debt Counselling did not indicate how the wording might be found ambiguous.

The Transaction Capital Group welcomed the amendment in Clause 1 on the business-to-business transaction. (No. 34)

Dr Oriani-Ambrosini did not need to respond to this.

The Transaction Capital Group had submitted that Clause 2 would adversely affect credit providers and consequently consumers. Clause 2 stopped the accrual of interest, so that the credit provider – the bank, or the lender – would lose something. The Transaction Capital Group said that this would mean a twofold effect on the credit providers. It would increase the risk profile so that fewer people would obtain credit and would transfer the cost of people who did not pay onto those who did pay by increasing the interest and fees on all other loans. (No. 35)

Dr Oriani-Ambrosini said that this was true, but the Transaction Capital Group failed to understand the alternative. It was also true that, by spreading the cost of debt restructuring among all parties concerned in what remained a limited measure, many insolvencies would be averted. A few more insolvencies would affect credit providers and consequently consumers, more than the compound effect of those to whom Clause 2 would apply.

Dr Oriani-Ambrosini observed that the Bill’s provisions were a benefit to the credit providers rather than otherwise.

Transaction Capital Group had submitted that Clause 2 was a taking covered by Section 25 of the Constitution (No. 35).

Dr Oriani-Ambrosini responded that the taking was not effected by or for the benefit of the state. It was akin to insolvency, which had universally passed muster of constitutionality but in a much lower measure and scope, and therefore was covered by the limitation clause.

Dr Oriani-Ambrosini referring to insolvency in the mediaeval market place noted that in the Middle Ages bankruptcy was literally the breaking of the bank.

Transaction Capital Group had submitted that Clause 2 should spell out the criteria that the magistrate should use in exercising his or her discretion. (No. 36)

Dr Oriani-Ambrosini responded that that the criteria were set out in the objective of the Act.

Transaction Capital Group had submitted that, before the accrual of interest was suspended, interest rates should be reduced. (No. 37)

Dr Oriani-Ambrosini responded that the cascade approach suggested by Transaction Capital Group required many steps each of them designed to determine whether the debtor could rehabilitate him- or herself under the preceding step before taking the following one. This was burdensome for all parties concerned, including the courts.

Prof Michelle Kelly-Louw, Department of Mercantile Law at the University of South Africa (UNISA), had submitted that Clause 1 was confusing because there was no definition of business-to-business transaction. (No. 38)

Dr Oriani-Ambrosini responded that the definition was within the Amendment: when the goods or services were not required for consumption but when they were acquired to sell them on.

Prof Kelly-Louw had submitted that all juristic persons should not be excluded. (No. 40)

Dr Oriani-Ambrosini responded that the amendment did not exclude any juristic person otherwise included in the Act and did not refer to ‘persons’ but to ‘transactions’, by whomsoever such transactions were carried out.

Prof Kelly-Louw had submitted that, with respect to Clause 2, that courts should address the problems by declaring lending reckless. (No. 41)

Dr Oriani-Ambrosini responded that if the courts did so when in fact the lending was not reckless, this proved the need for the amendment. If the courts limited themselves to reckless lending, then the problem was not addressed as it related to the meritorious case when the debtor could not carry his or her burden under his or her present possibly changed circumstances even though his or her borrowing was not reckless.

Prof Kelly-Louw had submitted the consumer would still need to pay the full amount. (No. 42)

Dr Oriani-Ambrosini responded that this comment misinterpreted the amendment which suspended the ‘accrual’ of interest amounts not the interest amounts themselves; hence such interest amounts did not accrue and were not due. The Committee might consider changing the word ‘accrual’ with ‘occurrence’ or similar words for greater clarity.

Prof Kelly-Louw had made a comment similar to that of NDMA that Parliament should wait for the end of DTI’s policy review (see No. 30). (No. 43).

Dr Oriani-Ambrosini’s response was similar. Moreover, the Committee had the opportunity to fix a problem, even while there were greater problems to fix, and should therefore seize the opportunity to fix the problem.

Discussion
The Chairperson noted that Prof Kelly-Louw was from the Department of Mercantile Law at the University of South Africa (UNISA).

Mr G Hill-Lewis (DA) as a general point observed that Dr Oriani-Ambrosini's responses were very clear and self-evident. If there was need to change any of the wording, this could be done when the Bill was deliberated further.

The Chairperson said that what concerned her per se was that she had studied some of the submissions in full and wanted to clarify something with Dr Oriani-Ambrosini in this regard, in particular, the one from Prof Kelly-Louw, who did not agree with the amendment in its current form. What Prof Kelly-Louw referred to in that regard was the need for a more holistic approach to the matter. With regard to the restructuring of debts, she had also made certain pertinent comments, in particular where she referred to the proposal to suspend interest [upon the debtor] while [the debtor] was under debt review. Dr Oriani-Ambrosini had made some reference to that in another submission. What remained uncertain was, as observed in the first submission, the question of how the consumer was going to be assisted in this five-year period while the debt was under review. Prof Kelly-Louw had proposed that a better solution might be the option that the interest rates be reduced in certain circumstances. Dr Oriani-Ambrosini had looked at this in the first submission as well as in this one. Perhaps Dr Oriani-Ambrosini could respond.   

Dr Oriani-Ambrosini replied that this was also in his point (see no. 37), which he had been going to address. For the benefit of the colleagues who may not themselves have read the submission in detail, he said that the suggestion here was to take one step at a time. The key was to enable the debtor to carry his burden. He suggested first taking the step of reducing the interest rate. Then, if this did not work, [the lender] would suspend the accrual. This was the cascade approach suggested by the Transaction Capital Group (TCG). In theory this was fine. However, having a two-step approach involved going back to debt counselling, and going back to the magistrate's court, which was extremely overwhelmed. He argued that one could achieve the same thing conceptually by suspending the accrual of interest in the first place. If one had ten years, at 10%, and one reduced it to 5% over the ten years, it was equal, on the basis of simple rather than compound interest, to eliminating the accrual for five years. Therefore, with one action, it was possible to achieve exactly the same purpose at one time, rather than verifying the incapacity of the debtor taking the second measure of relief. He noted that the suggestion here was not five years, but a period of up to five years. So the debtor could be given a reprieve of only a year, two years or three years, depending on the debtor's condition. Therefore one needed to look at debtors who increased their capacity to pay because they had another job or they had already established their businesses. Given the numbers of people having problems, this suggestion would appear to be beneficial.

Mr N Gcwabaza (ANC) said that it would be counterproductive to deal with a small amendment to this Act when the Committee knew that there was a whole bill coming back to it in the course of this year to amend the National Credit Act (No. 34 of 2005) in its totality. When the Committee reached this stage, the matters raised by Dr Oriani-Ambrosini could be dealt with at that point. It did not make sense for the Committee to amend the same Act twice. He suggested 'parking' Dr Oriani-Ambrosini's Bill, but taking the issues further, together with the submissions being made by those who were responding now, when the Committee dealt with the comprehensive amendment.

Dr W James (DA) had a different view. To the extent that this Bill succeeded in providing immediate relief and remedy to those who were stuck in a corner, the Committee should proceed with it. Looking to the future, the process was indeterminate; there would be an election in one year from now. He did not know how long it would take for the Committee to deal with this matter if it waited for the comprehensive amendment. The latter was too vague and too indeterminate. What the Committee had before it was something credible, and therefore the Committee should consider Dr Oriani-Ambrosini's Bill.

Mr Andiswa Potwana, DTI Director: Consumer and Corporate Law, affirmed that the Department stood by its earlier submissions, that the policy objective of the National Credit Act was to extend the protection afforded in terms of the Act to small businesses, regardless of the kind of credit transaction into which they were entering. If one took some of the comments that had been made, Prof Kelly-Louw had made the example of Spaza shops and small businesses. It was for that purpose that the legislators had deemed it fit to give the Minister the powers and the authority to issue a threshold upon which it was then said that small businesses deserved the protection of the Act. This was for the simple reason that such small businesses did not have the legal know-how or the legal abilities to challenge credit providers or might not have the ability to contract on an equal footing when entering into credit agreements with credit providers if they, the small businesses, were not afforded protection in terms of this particular Act. There were no intended consequences. It was the initial policy objective, and, as the DTI had submitted earlier, the DTI was currently doing the policy review, which was already about to be submitted to Cabinet. This issue of amending Section 1, to change the definition of business-to-business transaction, had never been an issue. The DTI saw no basis to tamper with the definition. However, once Cabinet had granted the DTI permission to consult widely, it was a matter that could also be consulted on. There was value in that kind of consultation much as the DTI respected the processes of the House, and the processes of the Constitutional Court, which had allowed Members to introduce their own bills. However, the DTI strongly felt that there would be a loss of value if this amendment were passed without consultation, as this issue had not been raised before. However, it could be raised during the broad consultation phase. He affirmed that there were no intended consequences, and, if one wanted to submit that there were, there would be a process during the wider public consultations.

He added, with reference to Clause 1, that the Act was very clear in various parts, for example, in Section 13, which talked about persons. Within the context of the Act, one had to interpret that Section to include juristic persons below that particular threshold. It was the intention of the Act to include them. There had been other criticisms of the definition of business-to-business transaction and the Department ‘associated itself’ with such statements.

On the second issue, the Bill was crafted in such a way that it talked about the suspension of interest. With due respect to Dr Oriani-Ambrosini, one could not be sure what he was talking about, since at the last meeting of this Committee, what was proposed was the stopping or writing off the interest. Nonetheless, whether it was the actual suspension of the accrual of interest, or totally writing it off, the Department held the same view as Prof Kelly-Louw. It was not clear to the Department how the concerns of credit providers would be affected by the stopping of interest, and their concerns must be taken into account. This would become very clear when the broader consultations would take place, and a regulatory assessment was done as to how this enormous step would affect credit providers. Moreover, if the interest was stopped or suspended, it was not clear how it would affect the consumer.    

Adv Charmaine van der Merwe, Parliamentary Legal Advisor, said that the submissions received on this Bill were of great assistance to this Committee. Most of them focused on the overall review that was currently under-way, versus the immediate impact that Dr Oriani-Ambrosini's Bill could make. She thought that that was where this Committee needed to decide. It must decide if this Bill could give immediate relief where it was needed, or if it would be better to wait for the broader review. Some of the submissions indicated concern about practical implications should this Bill be accepted, in the sense that the provision of credit might become more strict, and this might affect, in a negative manner, consumers who were currently coping with their credit.

Something else that had been mentioned – especially in the later submissions – was the proposed suspending of interest. This was something else that this Committee needed to consider, but it could do so at a later stage if it found the Bill desirable. It could easily be reworded to 'zero rating' for that period. The Committee needed to decide whether bringing the interest rate down to zero was the most acceptable way of dealing with the problem. In that regard, the submissions could guide the Committee.

However, in the end, it was wholly a policy decision. The DTI's submission was that there would be a regulatory impact assessment. On the other hand, one did not know when that review would come. So the Committee's position was not enviable. However, the submissions did provide some guidance.

She pointed out to Members the issue of constitutionality. The case law quoted by Transaction Capital Group was not a case in point. It was a different issue being addressed there. Two of the submissions proposed that interest rates be reduced. This was exactly what the proposed amendment did. So she did not agree with those submissions that there was a constitutionality issue.  

In short, the biggest question before this Committee was whether to wait for the review or whether it would be beneficial to proceed now or whether proceeding now would affect the review. It was therefore up to the Committee to decide whether the greater good could be done now with this Bill or whether greater good could be achieved by waiting for the review.

The Chairperson noted three things to which she should draw the attention of the Committee. Firstly, what was the purpose of the National Credit Act? Why were there problems? What was the core problem that might be there? There were many reasons why people found themselves in debt. One reason was that some people were not willing to reduce their lifestyle. By contrast, the Japanese were such big savers that they were now being encouraged to spend, whereas South Africans were at the other extreme. There was now the issue of the small operator or small trader, which DTI had brought to the fore. Their issues were important because such small and medium enterprises (SMEs) provided immediate employment to whoever was conducting them. Did the Bill address that issue as well?

There were also the glaring issues about which one read in the media. It had often been the abuse of the actual legislation which existed, which was the problem, rather than the legislation itself or the absence of legislation.

One of the important issues was the policy issue, which Members had heard was important. Would the reduction of interest aid the recovery of the debtor?

She said that Adv Van der Merwe had asked when the Committee could actually expect anything from the Department. The Committee had it in writing that it could expect a response in April or May. 

Ms Saroj Naidoo, DTI Parliamentary Liaison Officer replied that the Department intended to take the review to Cabinet in April, and would ask Cabinet's approval to publish the policy and the bill for public comment. The latter process should be completed in June.

The Chairperson said that it would be a simple exercise for the Committee now. It had to take a decision on the desirability of this Bill. It could take this decision the following day, after giving chance to all parties to consult with their principals. This was an exercise of many firsts. It was very important that the Committee conducted its procedure correctly so that the Committee was not faulted. However, she wanted to ask Dr Oriani-Ambrosini to give his final comment this morning.  

Mr L Mphahlele (PAC) had already consulted. He asked, if the Committee were to proceed with this Bill, how many people would benefit by obtaining relief.

Dr Oriani-Ambrosini regretted that there was some confusion on the part of the DTI. Its concern, correctly, was about small business. It made reference to the fact that, in terms of the Act, businesses that were below a threshold identified by the Minister in the regulations were exempted from various Chapters, while those which were small and were not, were nonetheless protected. Dr Oriani-Ambrosini, however, pointed out that the problem was in respect of other chapters of the Act, from which businesses were not exempted. This included the incidental credit agreement. He conceded the DTI's point, but said that if one excluded all the businesses from incidental credit agreements which were not for a consumer transaction, but were for a business transaction, then also small businesses would be excluded. This was a new angle, because the DTI had originally said that the DTI did not support these amendments because this matter was already covered by the Act. He pointed out that it was evident that this was not the case. The DTI’s point was worth listening to. If one excluded all the business-to-business transactions, then also the small ones would be excluded. This was a point for the Committee to consider. He gave practical examples. The other point was that the DTI implied that it was not the Committee's job. It was for the DTI to consult. However, Dr Oriani-Ambrosini argued that it was Parliament's job to consult. It was not the prerogative of the Executive to be the only one to consult. On the time frame, he stood by his earlier statement that he did not expect the Department's own bill to be passed by the end of the present Parliament. The Committee could deliberate on and approve this private Member’s Bill, or it could reject it. Also the Committee could delay its deliberations, as it had done on many bills. It could wait until June, and it nothing was forthcoming from the Department, it could proceed with this private Member’s Bill, which, he pointed out, was now a Committee Bill. This would also be a new way and a noble way for Parliament to 'crack its whip: if you don't act, we act.' From the submissions, it was apparent that everyone agreed that there were problems with the National Credit Act. Possibly about a quarter of a million people were under credit review or about to go under credit review and might therefore benefit from relief. However, it was difficult to say how many of those would qualify as this would be for the debt counsellors and magistrates to determine. However, the number was likely to be a vote catcher. He did not think that people got into debt as a way of making money, so he rejected the idea that this amendment might encourage people to get into debt. Insolvency was different. At times people did make a business out of insolvency. He did not think it necessary to be concerned about this specific issue.  

The Chairperson did not think that this Committee had ever deliberately delayed the processing of legislation, as to do so would create its own impediments to what Parliament was constitutionally required to do. 

Beneficiation in South Africa: perspective of German-South African industry
The Chairperson noted that the motor industry was just a case in point where such beneficiation had been extremely effective.

Mr Andreas Künne, Minister: Economic and Global Issues, German Embassy, Pretoria, appreciated the accessibility of the South African Parliament and was glad that the South African Parliament and the German Parliament [Der Deutscher Bundestag] shared this transparency. There were not many parliaments in the world which would be as accessible.

His presentation was based on extensive discussion with German industry in South Africa. All these companies had been here in South Africa for such a long time that they were just as South African as they were German. This differentiation between South African and German industry was somewhat artificial. He had drawn very heavily on the input from experts in the industry, and he had even obtained some of the slides from industry. Each of the representatives to whom he had talked would be more than ready to come to Parliament.

The issues that the industry was facing went far beyond beneficiation, which was why he did not limit himself strictly to beneficiation in the strict sense.

Structure
He gave a brief review of the present structure, with a focus on issues connected to the larger automotive and aviation sector. He reviewed catalytic converters, automotive production, tyre production, and chrome chemicals. At the end he briefly touched upon what policy options might be on the table with the core messages of dialogue and flexibility.

Automotive: Catalytic Converters
Catalytic Converters globally consumed more than half of platinum group metals (PGM) production. They were by far the biggest factor in the PGM game. The potential had not been used to its full, particularly not in South Africa, because particle filters (Diesel) used a similar technology and needed a similar base set of materials. Moreover, the catalytic converter industry was also the foundation for fuel cell manufacturing.

Catalytic Converters /SA Interest Group
Locally there were more than ten catalytic converter producers. The industry beneficiated 15%of South African PGMs and achieved more than 90% of all beneficiation of PGMs that took place in South Africa. There was great potential to increase the first percentage towards the second. Less well known was that the industry took 40%of SA domestic steel production, and provided 5 000 direct jobs (mainly highly skilled). Its export revenue was more than R20 billion per annum.

Catalytic Converters Issues
There was, however, a receding market share (2008: >14%of global; today: <10% and falling). There were some companies here which had to lay off personnel. One of the main reasons for this was that the time to make the converters was too long (26 weeks). South Africa had a capacity to produce 24 million catalytic converters every year, but this capacity was not being fully used. Only 16 million converters were produced last year.

Why? A lack of skilled labour for a very complex production process. Moreover, the car industry was overly reliant on the European market, and it was not easy to enter growing markets such as China as they were protected.
(Slide 5)

Catalytic Converters: Interventions
He advocated a comprehensive approach rather than subsidies. The entry into new market segments should be supported. This meant entering the heavy Diesel market as well. There was also an excellent initiative in fuel cell production, for example, the Hydrogen SA Initiative. He advised Members to have more dialogue with the industry in this field, in particular with the Catalytic Converters Interest Group, which was not confined to German firms. The most complex intervention and the one with the biggest potential would be to bring more parts of the supply chain to South Africa. He emphasised that this required dialogue with industry. He noted that market access to the EU and to the USA was easier than to the rest of the world.

Automotive Production Localisation
Car manufacturers wanted to source as much as possible locally (transport and tariff advantages). He gave the example of Bayerische Motoren Werke AG (BMW). It was crucial to make a business case and have availability of technology.

Automotive Production: the Mercedes-Benz South Africa (MBSA) perspective
Production of the new C Class would begin in East London in 2014. The company was probably the most expert in localisation.

South Africa, Germany, China and USA compared
(See figures and percentages, Slide 9)

South Africa, Germany, China and USA compared
Comparisons in respect of inner high pressure forming (IHU), aluminium/magnesium high pressure casting, carbon fibre technology, blow moulding with insert parts, etc. See Scorecard, Slides 10-11.

Automotive: MBSA Perspective /Raw Materials
In order to fulfil future requirements on carbon dioxide (CO 2) emissions, the weight of the new generation car had to be reduced. The availability of the right raw materials with competitive pricing was therefore essential for the automotive production. (See graph, slide 12)

Automotive MBSA Perspective /Productivity & labour cost: labour cost of development - productivity comparison
Figures included South African Rand (ZAR)/hour Skill Level 3 Qualified rate and ZAR/Cost of one production hour for Car Trim Sewing and comparisons of Moldavia, Czech Republic, Slovenia, Mexico, China, and Germany. (See Bar graph, Slide 13)

Mr Künne pointed out that in recent years the leather trim for all the cars manufactured in South Africa was no longer sourced locally, but rather in Moldavia, in Eastern Europe. The raw material was here in South Africa in abundance but a 54% decrease in productivity over the past five years had pushed that part of the industry out of the market. To sew a leather head rest was a relatively complicated production process and took very nimble hands, and was now done at a much higher rate of productivity in Moldavia.  

Automotive Production: new approaches
The car manufacturers were doing much on their own without government prodding or support.

Steel: MBSA was in discussions with ArcelorMittal South Africa. It had been prepared to manufacture material for unexposed sheets; however, these were the lesser volumes too small for ArcelorMittal to produce. MBSA was now investigating the possibility of combining volumes with other original equipment manufacturers (OEMs).

Aluminium: the MBSA and the Aluminium Federation of South Africa (AFSA) had had its first meeting on specifications for sheet metal. The next step was a formula for a combined OEM data sheet, and to initiate a project and establish a task team within the OEM Council. (Slide 14)

Automotive Production Conclusion
Production and sales volumes: Regions with high production and sales volumes had priority with regard to investments. With low sales volumes in the domestic market, South African car production relied on exports.

Technology and skills: New production technologies were available outside South Africa first. Local production volumes were too low for certain production technologies to be viable. Skills development needed to allow widely spread operation of high-tech production technologies.

Raw materials: Light-weighting in car production was indispensable. The necessary raw material must be available at competitive pricing. Not all raw materials were locally available, with monopoly pricing being the crucial handicap for most available raw materials in South Africa.

Productivity and labour cost: The cost for labour in South Africa had increased faster than productivity. This led to a disadvantage in competition with other regions. (Slide 15)

Tyre Production: Continental Tyre South Africa
One of four tyre manufacturers in South Africa. It was located in the Port Elizabeth (PE) region. It was strongly committed to sourcing locally. (Slide 16)

Tyre Production: Continental Tyre South Africa
Global vs Local (See Bar chart, Slide 17)

Tyre Production Material Type /Quantity
(See Bar chart, Slide 18)

Tyre production Localisation
Availability of technology; economies of scale? Biggest potential was reclaimed rubber/yarns and fabrics. However, the framework needed to be in place. A recuperation system needed to be built up in consultation with industry.

Mr Künne pointed out that it was necessary fully to understand the requirements of recycling.

Chrome Chemicals from Chrome Ore To Cars (and aeroplanes)
The LANXESS example: a German high-tech company with a strong Brazil, Russia, India, China, and south Africa group of countries (BRICS) focus, and some 1 400 employees in South Africa. It had a chrome ore mine close to Rustenburg. It had several production facilities in KwaZulu-Natal (KZN), South Africa. It had the world's most modern chrome chemical plan in Newcastle, KZN. It produced from chrome ore specialised chrome chemicals for automotive, aviation and other industries.

Mr Künne pointed out that LANXESS was the perfect example of no government intervention. LANXESS was divested. It had not a single day of strike action in 2012. All staff members were on permanent contracts and this had paid off with very low absenteeism. The company was trying to make the process as efficient as possible. All this was without government support programmes.

Chrome Chemicals from Chrome Ore to Cars (and aeroplanes): Complete value chain in South Africa
Beneficiation from A to Z. Without government support programmes it had identified the right niche.

Policy Options
Skills: Comprehensive support to industry
Technology: support for industry-oriented research in dialogue with industry, for example, magnesium.
Productivity: incentive schemes
Identify and support niches (reclaimed rubber, etc)
PGM applications beyond catalytic converters
Raw materials: Monopoly pricing
Trade agreements: Level playing field

Mr Künne said that policy was beyond the scope of a diplomat so he preferred to speak of policy options. Manufacturing was a complex process. These skills were a public good. The quality and the depth of the technology and research in South Africa were really breathtaking in several fields, for example in titanium and laser technology. There were so many pockets of excellence in South Africa, which should target some of the incentive schemes at the motor industry, and hold discussion with that industry. Monopoly pricing was the crucial issue from the perspective of industry and it was a factor that played a role in the current imbalance.

Policy Options Support Clusters
The secrets of German success in manufacturing were vocational training and clusters in confined geographical area with maximum of expertise. South African examples were given.

Mr Künne emphasised that the clusters and vocational training system in German industry were the secrets of its success in manufacturing. A cluster of expertise was in the making in South Africa. The renewable energy sector had developed at breathtaking speed. Germany was supporting with public funds the establishment of a Research Chair in Concentrating Solar Power (CSP) at Stellenbosch University. There was also a public private partnership to set up a training centre for wind turbine engineers at the Cape Peninsula University of Technology. There were similar clusters in Nelson Mandela Bay. These clusters deserved every support. Such support must not be one-dimensional. Having an industrial development zone (IDZ) like the one at East London, which Mercedes-Benz reported worked exceedingly well was very important. A negative factor, however, was having a municipality charging much more for electricity than Eskom, yet without 100% reliability.

Conclusion
Mr Künne said that he was speaking in a private capacity. He expressed his deepest thanks for the opportunity to meet the Committee. The German Chamber of Commerce was willing to come to Parliament.

Discussion
The Chairperson thanked for focusing on the issues as requested and in particular on the value and supply chain and some of the challenges faced by South Africa in achieving an optimum level in that regard.

Dr James was going to add to what Mr Künne was going to say about clusters. One of the interesting clusters that had emerged in the Western Cape was the medical devices sector. The biomedical engineering department at the University of Cape Town had existed for a long time. One had seen the growth in the making of stents, for example, with the global supply. There were all manner of pockets of excellence. One of the biggest problems in creating such clusters with synergy were the barriers between the universities, in some cases, and the private sector. The private sector spent more on Research and Development (R & D) than the public, tertiary sector. He noted that Mr Künne had said that there were labour skill problems. This meant that there was a problem of supply of the right level of expertise and that it was misdirected. What was happening at present at universities and colleges was a very bad match between supply and demand. How could one remedy that? The second observation had to do with the fact that vocational training in South Africa had a very low status. It was part of our history. There was a streaming process in schools, which determined that some pupils were not smart enough and should therefore enter vocational training. It had left a cultural legacy that was extraordinary. Every student wanted to go university. Nobody, from choice, wanted to go into vocational training. Part of the trick was to make vocation training a high status option.

Mr Hill-Lewis asked why exactly it took 26 weeks to get to market. This related to South Africa's losing competitiveness and market share because of the time that it took for the catalytic converters to get to market. Secondly, Mr Künne had suggested that ArcelorMittal South Africa was not prepared to make the exposed sheets. Did Mr Künne have any more details why this company refused to make exposed sheets? Was it a liability issue?

Mr B Radebe (ANC) appreciated Mr Künne's extensive input. It was surprising that it took 26 weeks to get to market, as there was all the platinum and other materials here in South Africa, yet it took so many weeks. How did Germany expedite getting the finished product to market? This was why Members wanted a study tour, so that they could learn from the German example and help to perfect South Africa's system. When the Committee had called for the state-owned entities (SOEs) to re-skill their labour force, he had thought that the SOEs were doing it the right way. Transnet was training about 2 000 artisans per annum, when it needed only about 600 per annum. How many artisans would be needed per annum on average? He asked this question with a view to encouraging other SOEs and achieving economies of scale. The South African workforce was highly unionised. However, the European Union (EU) workforce was also highly unionised. What made such a huge difference? He observed that the EU workforce was willing to compromise and was even prepared to take salary cuts if necessary. How did Germany arrive at that situation?

The Chairperson said that Mr Künne had highlighted a problem of low productivity in the making of car headrests and car trim and the need for nimble fingers to do the more intricate work. What about other aspects? Was there low productivity in other situations where there was no need for nimble fingers?

Mr Künne replied that in Germany more than 70% of R & D funding came from the private sector. This was relatively healthy. Enough money went into basic research and there was a mechanism that enabled universities to accept third party funds. For decades it was impossible, basically for political reasons and the belief that universities had to be completely independent. He personally did not believe that, if a university received funding from Volkswagen, its independence was compromised. Universities had now been liberated and were now free to accept third party funds. There were a very few strings attached, and in this combination of efforts one would reach the best results. One was close to what the industry needed, and one would still train the people in the universally in the skills needed for an academic or industrial career.

Mr Künne thought that the attitude in Germany to vocational training was something that had developed over centuries. As a trained historian, he had looked at the social stratification in cities before industrialisation. He observed that the artisans, especially the master artisans were very high up in the social scale. There were the city aristocrats and right below them the artisans. This was centuries old, and it could not be reproduced from scratch. It did not work in the United States of America (USA) either. What did work was to pay the artisans well. A master artisan at a BMW factory in Germany would take home about €5 000 a month. Somebody running his or her own welding operation in Germany and employing bout ten welders and doing small industrial welding would be making very good money. One was basically trained as an apprentice and ten one would become a master after the required number of years of experience, and then one would be making very good money, as a result of which people would automatically respect one. He acknowledged that this was an oversimplification.

Industry needed to play a large role. It was difficult even for Volkswagen to find people for the low skilled jobs. Volkswagen accepted only people with a maths and science senior school matriculation (matric) certificate. There was a relatively low degree of automation in the Volkswagen factory in Port Elizabeth (PE) at present. It was difficult to find the correctly skilled personnel. This was where the most glaring mismatches occurred – at the lower end of the qualification scale, where those with matric found it difficult to obtain jobs at Volkswagen, even those jobs that required only a low level of skills.

As to the question of 26 weeks to market, Mr Künne noted that the value chain for the converters was very complex. There were the platinum mines, the substrate suppliers, the chemical suppliers, and the stainless steel suppliers. The wash code requires tremendous chemical input. The expertise required for the chemical processes was not available in South Africa. South Africa had the mines, the fabricators, the smelter and stainless steel. However, South Africa predominantly imported the substrates. There was a roughly even balance between locally sourced chemicals and those imported. The coaters were found mostly outside South Africa. The canners needed the castings, the support mats, the heat-shields, the pressings, and the manipulated tubing. Unless one had all these in a relatively close geographic area, one had a very complex supply chain. The way to go would be to give support to enabling the manufacture of as many of all these parts as possible to be carried out in South Africa in a viable manner. He suggested, unofficially, that this would be much better than giving out subsidies to the industry.

On productivity, Mr Künne could speak only about Germany. After the Second World War the economic miracle happened and the wealth was distributed in one direction towards those who were making that economic miracle possible, but workers’ wages were low. From the beginning of the 1960s to the beginning of the 1970s, the unions were catching up, and there were intense confrontation between unions and business. This was a necessary historical development. Wages were indeed growing faster than productivity and inflation, but that was necessary at that point in Germany's historical development, in order to get a fair wage. However, he conceded that a fair wage was almost an impossible concept. Yet one could reach a point where those who were working could be satisfied with what they were paid. In order to reach that point, these confrontations were necessary. Then international competition became so intense that productivity became the decisive factor. The unions were playing a game as one observed in other countries where they were fighting as toughly as they could for wage increases for their members, but they did not consider the masses who were outside the unions or who were unemployed. So there were wage increases for the organised but not for the unorganised or the unemployed. Then there was the oil crisis and this was the only time that government intervened in wage negotiations. In the middle of the 1970s there was the concerted action where business, unions and government sat around the table and brought up all the issues. The exclusion of those outside the unions and the unemployed was discussed. This led to a point from which wage increases and productivity were coupled. Over the past three or four decades a degree of trust between the unions and the private sector had been built up.

On the skills issue, the productivity of a man working in the car assembly must be increased, and it was a continuous process. It must be increased on a daily basis, with a reduction in the number of accidents and absenteeism, and an acceleration of the pace at which workers were completing these complex stages of production. This productivity could be improved when there were programmes designed specifically to achieve this in a certain environment, but it was necessary to have a skills set to begin with. So if an employer had to take on somebody who was insufficiently qualified, but had to take him because 'he was the least of all evils’ then it would take longer for the productivity to increase in the way that one required.

Mr Künne thought that the reason for ArcelorMittal South Africa’s reluctance was that the specification for the exposed sheets for the cars was 'very serious for security reasons'. It would require an investment that this company was not prepared to undertake, as it would not be worth it for the company, both from the viewpoint of production facilities and labour and skills. The company could not make a business case for such a project.

The Chairperson thanked Mr Künne for his effectively focused and well-prepared presentation, which had greatly assisted Members, as they had been unable to make their study visit to Germany.
 
The meeting was adjourned.