International Trade Administration Commission (ITAC) on its Impact Assessments & 2013 Annual Report

Meeting report

The Chairperson noted that the International Trade Administration Commission would also present on its impact assessments. The Infrastructure Development Bill had been referred to the Committee and the Minister would be briefing the Committee on the Bill on 13 November 2013.

International Trade Administration Commission (ITAC) on its 2013 Annual Report
The ITAC Chief Commissioner, Mr Siyabulela Tsengiwe, said the year under review saw a rise in applications and approvals by the Commission for tariff support to domestic producers. This was due to the tough global economic conditions and cost pressures. Tariff increases for 2012/13 were recommended on ten products – ranging from pasta and lawnmower blades to wind screens – whereas in the past five years on average, there were three annual product specific tariff increases. There were only two tariff reductions on hydraulic brake fluid and alternators because these products were no longer produced domestically. In addition a number of rebates had been recommended to reduce the cost of production for manufacturers. The rebates included mechanisms for lever-arch files, set top boxes and petroleum bitumen.

The Commission followed a developmental approach to tariff setting for both agricultural and industrial goods. The focus was on increased domestic production, investment, job retention and creation, as well as international competitiveness. During the reporting period, 14 977 import permits and 6 982 export permits were adjudicated and issued. Slide 5 gave an overview of the Commission’s key strategic objectives and the performance areas and services.

During 2012/13 ITAC initiated investigations into the increase of tariff support on wheat, which was now finalised. This saw an increase in the domestic reference price for wheat which meant increased support for wheat farmers. Tariffs were increased for set top boxes and taps and mixers, which were industries that struggled against cheap imports from mostly Asian countries. An investigation into the chicken industry had created much public interest where increased tariff support was recommended for the industry. Slides 7 and 8 gave an overview of the rebates and slide 9 showed tariff reductions of which the Minister of Trade and Industry only approved two out of seven reductions for products.

On 1 January 2013 the Automotive Production and Development Programme (APDP) replaced the Motor Industry Development Programme (MIDP). The APDP was a customs-based programme comprising a tariff component, production incentive (PI), volume assembly allowance (VAA) and automotive investment scheme (AIS). The objective of the APDP was to create an enabling environment for the domestic industry to significantly grow production volumes and local value addition, leading to the creation of additional employment opportunities across the value chain. Whereas the MIDP was export-oriented, the APDP was based on production.

Two anti-dumping investigations were investigated on potato chips against all countries and unframed mirrors from China. Slide 12 showed the anti-dumping investigations carried over from 2011/12. During 2012/13 import permits issued amounted to 14 977 against a target of 13 000. The majority of the permits were for marine resources, mineral fuels and oils, chemicals, rubber and tyres, metals, automotive and mechanical appliances.

ITAC Chief Financial Officer, Mr Zanoxolo Koyana said the Commission adhered to all applicable regulations governing the operations of public entities. Policies were developed to ensure effectiveness of corporate governance strategies in terms of the Public Finance Management Act (PFMA), Treasury Regulations, the Preferential Procurement Policy Framework Act (PPPFA) and the Supply Chain Management (SCM) regulations. ITAC’s internal control measures included risk management and internal audit activities, the relevant risk and audit committees and other internal governance structures. The Audit Committee held four meetings and reported the system of internal control applied by ITAC over financial risk and risk management was effective and transparent. The Audit Committee was satisfied with the content and quality of monthly and quarterly reports and that the internal audit function was operating effectively.

ITAC did not incur any new irregular expenditure during 2012/13 and the irregular expenditure of R193 815 disclosed in its 2012/13 Annual Report related to on-going contracts from 2011/ 12 which required disclosure for payment made on these contracts for their full duration. These contracts were irregular as the criteria for evaluating the service providers were not provided to the Auditor-General as well as instances where less than three quotations were provided. No fruitless and wasteful expenditure was incurred in 2012/13 and the on-going irregular expenditure was condoned and notice was sent to National Treasury and the Auditor-General as required by SCM regulation.

ITAC obtained an unqualified opinion in 2012/ 13 with no material findings on compliance with laws and regulations and predetermined objectives. An Audit Action Plan was developed to address those findings reported only in the Management Report to ensure that they did not escalate to the Audit Report level and the Internal Audit Unit had been given the responsibility of evaluating the Audit Action Plan as part of its audit process to test whether the proposed or implemented actions would address the AG’s findings.

ITAC had a sound financial position as assets were more than its liabilities. Total assets amounted to R33.2 million and this figure consisted of Cash and Bank at 90%, Fixed Asset at 8% and Account Receivables at 2%. Total liabilities amounted to R11.3 million and this amount consisted of Provisions and Commitments for both Non-Current Liabilities at 37%, Other Current Liabilities at 34%; and Account Payables at 29%. The difference between assets and liabilities, R21.9 million. This amount was a cumulative figure included in the Annual Financial Statements (AFS) and it included various financial years in which approval was granted to ITAC by National Treasury to retain surpluses for ITAC projects meant for its operational effectiveness.

Total revenue amounted to R76.3 million of which 97% was an Economic Development Department (EDD) allocation, while 2% was interest received and 1% related to other revenue. Total expenditure amounted to R74.8 million and 74% of this was for compensation of employees while 26% related to goods and services, depreciation and other expenses. ITAC had a surplus of R1.6 million in 2012/13 and 80% was due to underspending on employee costs due to resignations during the year, which included management and low level staff. Other savings were due to fewer international trips and legal fees of which payment depended on finalisation of the litigation that ITAC was involved in.

Discussion
The Chairperson observed that the Commission did not follow the National Treasury structural guidelines for Annual Reports and the Committee was struggling to find information about Human Resources at ITAC.

Mr Tsengiwe said ITAC had never included HR matters in their Annual Report, but would do so in the future.

The Chairperson said this issue had been raised the previous year when the Committee requested that this information be included. ITAC was the only entity according to the AG that was not following Treasury’s guidelines. She asked where the HR manager was, if the Commission had a Risk Management Unit and requested detailed information on the Audit Committee, because the information in the Annual Report was lacking.

Ms M Mohorosi (ANC) said the report was disabling the Committee and it needed more information on HR related matters. The Commission, according to the presentation, underspent because of resignations from both management and lower level staff, but the Committee could not really structure questions on this, because there was no information provided.

Mr Tsengiwe replied that the Committee had requested a detailed report on HR related matters, but he might have missed that it should have been included in the Annual Report. Such a report would be forwarded to the Committee.

The Chairperson asked if it was not a requirement, because all other entities provided this information in their Annual Reports. She asked who was advising the Commission on HR matters.

Mr Tsengiwe said the Commission had a Senior HR Manager, but all the previous ITAC Annual Reports had not included HR related information.

Mr Koyana said it may have been an oversight from the Commission, but the HR issue was not raised by the AG and neither was it raised in the Management Letter.

The Chairperson said the Audit Report of ITAC was not clean and in fact, the AG had noted that the Commission was the only entity who had repeat findings in their report. Treasury’s guidelines provided a reporting format for entities to ensure that all matters that needed to be addressed were included in the Annual Report, and this was non-negotiable. Full disclosure of information was essential. Justification was not needed; the Commission just needed to comply.

Mr F Beukman (ANC) said the presentation did not really focus on the AG’s report, and the presentation did not provide reasons why the targets were not achieved. The AG indicated that the strategic planning to achieve the targets was not adequate and that indicated leadership issues. He asked who drove that process and what steps were taken to ensure that this did not happen again. Page 69 of the Annual Report showed a massive increase in legal fees (more than 200%), workshops and conferences (more than 100%) and the cost of flowers was R66 000 for the last financial year. He asked for explanations.

Mr Tsengiwe said the Commission only achieved 66% of their set targets and the problem was not about the performance, but the actual targets. The Commission had been using the number of investigations conducted and that number was based on historical data, i.e. estimations. The current strategic plans had been changed to use turnaround times as a more suitable target measure.

The Chairperson said the Commission had therefore deviated from their strategic plan and that related to Mr Beukman’s comment on the importance of strategic planning and leadership.

Mr Tsengiwe said he, the Chief Commissioner, drove the strategic planning processes of ITAC and the Commission followed Treasury’s guidelines for that process in terms of compliance. The choice of targets was an error on his part, because the Commission reacted to applications from industries and the change from the number of applicants to the turnaround time would give a more accurate measure of performance.

Mr Koyana said the irregular expenditure mentioned in the AG report was historical (2011/12) and there was no new irregular expenditure in 2012/13. The Commission was told the AG did not know whether to raise leadership issues since there was no new irregular expenditure issues.

The Chairperson said the issue was raised with the Committee because ITAC had not improved the situation and nothing had changed. If an institution did not give convincing information after raising the matter in the Management Letter, it would stay on the Audit Report. The Commission should sit down with the AG if they did not understand the audit findings. The AG noted in the audit report that the Commission worked outside of their strategic plan and this had been commented on for the past three years and although this year had been an improvement, they could do better. ITAC was a focussed institution and through proper planning ITAC would be able to make projections and estimations and the pronouncements from the various Ministers could lead the Commission to make better projections that could help clear the AG’s negative comments.

Mr Tsengiwe said the Commission would take the advice into consideration.

Mr Tsengiwe said the nature of the Commission’s work was such that each and every investigation entailed a value chain where there were different opposing interests. Those opposing the increased tariffs in the chicken industry not only went to Parliament to oppose the increase, they also went to court. Powerful business interests were affected by the investigations and the environment, which was litigious, warranted estimations for legal costs.

Mr Koyana agreed and said the estimation was provided by the legal department based on the current cases ITAC was involved in. The flowers contract would be coming to an end in early 2014, and was mostly to send flowers to employees in hospital and for the upkeep of plants and flowers in the office. Some of its employees travel overseas as well as locally and these costs were included in the conference and workshop expenses.

Mr Beukman referred to the legal costs and asked if none of the legal issues could be handled in-house.

Mr Tsengiwe replied that the legal unit of the Commission comprised of two people, a senior and middle manager. They advised the Commission on the legal dimensions of the work. The Commission outsourced for court representation, but the legal unit did the preliminary work preceding litigation.

The Chairperson referred to the Annual Report and said there was a separate item for local and international travel expenses and these should not be included in workshop and conference expenses.

Mr Koyana apologised for the oversight.

In reply to Chairperson asking what the fraud prevention and investigation expense was for, Mr Koyana explained it was a fraud hotline monitored by Deloitte. The Chairperson asked if this hotline was worth it and Mr Koyana said it was because no fraud allegations had been made.

The Chairperson asked why this monitoring was not done by the Internal Audit Committee.

Mr Koyana replied the Internal Audit Committee monitored the hotline independently.

The Chairperson asked why two independent bodies was monitoring the hotline.

Mr Koyana said the Internal Audit Committee was not 100% independent as it reported to the Chief Commissioner. The Head of the Internal Audit was only one person, and the rest of the Committee was co-sourced.

The Chairperson asked what prohibited the Commission from employing more people.

Mr Koyana replied that it was a structural issue that had to be revised and approved before the Commission could employ more people.

The Chairperson said the organisational structure had just been revised the previous financial year.

Mr Tsengiwe said the review was not about expanding, because that had to be approved by the Department. The review was done within the allocated personnel budget to give clarification on ITAC positions and narrowing it down into clear job descriptions.

The Chairperson said the Committee requested the organisational structure because it was understood that the Commission was realigning to deliver better services. The Committee had not yet received the organisational structure.

Mr Tsengiwe said that it was an internal ITAC exercise.

Ms D Tsotsetsi (ANC) said the credibility of the ITAC Internal Audit Committee was in question and requested a profile of the audit committee, as well as an organogram of the organisation. Contracting a service provider without terms of reference or a service level agreement was unacceptable.

The Chairperson said the internal audit committee was in the Annual Report and consisted of five members: two chartered accountants, a certified internal auditor, a lawyer and Mr Tsengiwe as an ex officio member.

The Chairperson asked if the audit committee members attended the audit committee meetings to account.

Mr Koyana said the audit committee members attended the audit committee meetings, they were responsible for drafting the agenda of the meeting and they played a secretariat role.

The Chairperson requested the reports and recommendations of the internal audit committee.

Mr Koyana agreed.

Mr K Mubu (DA) said the import permits issued were fewer than the targets set for the financial year and asked clarification. He asked the Commission to provide a breakdown of the resignations of management and lower level staff, what the impact was of management resignations on the Commission’s ability to deliver on its mandate. He asked about the retention rate of management and if the Commission used consultants.

Mr Tsengiwe replied that the targets were set by calculating the average permits issued for the past three years and estimating targets for the following years and it was not a perfect science. The applications for permits came from the industries, and the Commission struggled to have an accurate estimate. Although the Commission made a commitment to provide a HR related report, they had no serious staffing issues with a vacancy rate of around 5% and a relatively good retention rate. The area was specialised and technical that offered on the job training for new recruits. The vacancies related to trained employees seeking better opportunities and that was a challenge that was being addressed by partnering with the Department of Economic Development.

Mr Koyana explained that ITAC used consultants for the upgrade of the Commission’s intranet, the upkeep of the accounting system, Deloitte monitored the fraud hotline, and the Commission contracted ICAS, which specialised in employee wellness issues. The Internal Audit Committee was also outsourced due to limited resources.

Ms D Tsotetsi (ANC) asked how the Commission evaluated the effectiveness of the Audit Committee if there was not set criteria to evaluate service providers.

Mr Koyana said there was criteria provided by National Treasury that was adhered to, as well as guidelines by the Institute of Internal Auditors (IAA) and the Audit Committee members would access the information and would submit based on those guidelines and the assessment was based on those guidelines provided.

The Chairperson asked that the minutes of the Audit Committee meetings for the financial year including the recommendations be submitted to the Committee.

Mr Koyana agreed.

Mr Z Ntuli (ANC) asked about the impact of the instruments, that is, if the Commission had the capacity to measure the impact of decisions. For example, was the results of the tariff increases evident. He referred to the 2% generated revenue and asked who else was giving the Commission money.

Mr Tsengiwe said there would be a presentation on the impact assessment of the Commission.

Mr Koyana said there were funds in the bank which generated 2% interest and other money generated was when the Commission sold tender documents, which was a small amount. The major revenue contribution came from the Department. The Commission did not have major revenue generating activities.

In reply to Mr Ntuli asking what the 2% amounted to, Mr Koyana said roughly R2 million.

Mr Beukman asked for a breakdown of the performance bonuses as the Annual Report only provided a ballpark figure.

The Chairperson said the breakdown of bonuses should be provided in writing as well as the performance report on HR issues.

The Chairperson asked for a picture of what transpired related to the recommendation to the Department of Trade and Industry (DTI) about the chicken industry and the implications to Small, Medium and Micro Enterprises (SMMEs). From the media reports it seemed the DTI was concerned that the focus was just on one country, but it seemed that other countries, outside of Brazil, were also exporting chickens to South Africa. She asked, through ITAC investigations, what was transpiring in this market. The sunset review could only be done after five years and the Chairperson asked if the local market could request such a review within five years or if the five year rule was policy or legislatively related.

Mr Tsengiwe said the Commission made a recommendation to the Trade and Industry Minister to marginally increase the tariffs on five chicken meat types. The biggest challenge with regards to chicken meat imports was the boneless cuts. Another challenge was that the recommended tariff protection did not include imports from the European Union (EU) because there was a separate bilateral agreement with the EU, but an anti-dumping investigation had been initiated which targeted specific countries. The initial anti-dumping investigation was done against imports from Brazil, but the Minister advised that instead of having a measure against one country, the import tariffs of other countries should also be investigated so that a wider range of countries could be covered from which there were imports.

The Chairperson asked which EU countries the Commission was investigating with regards to anti-dumping and the status of those investigations.

Mr Tsengiwe replied that the anti-dumping investigations had been initiated and was in the preliminary stage where if injury to domestic producers was confirmed, the South African Revenue Service (SARS) would be asked to impose a provisional payment. The current anti-dumping investigations were against the Netherlands, Britain and Germany.

Ms D Chili (ANC) asked how long chicken should stay frozen and how healthy was that for the consumer.

Mr X Mabasa (ANC) said he went to a supermarket to buy meat and enquired about the freshest meat available. He was shown a box, and enquired about the expiry date to which he was told that once the customers left, the expiry dates on the meat products were changed. He asked if there were any mechanisms in place to address such issues.

The Chairperson said such enquiries should be addressed to Consumer Affairs and the health Inspection sectors.

Mr Tsengiwe said health safety standards was outside the Commission’s scope and could be referred to the Department of Agriculture, Forestry and Fisheries, which currently dealt with the issue of brining where chickens were injected with salty water which the industry maintained preserved the flavour of the meat. It was said the level of the brine was quite high in South Africa and therefore it could not export chicken, because other countries did not brine chicken. The Department of Agriculture, Forestry and Fisheries was currently revising the regulations for the brining of chickens.

Ms Tsotetsi said ITAC had scheduled eight meetings with the World Trade Organisation (WTO) as a target but only two were attended. Would there not have been more information available on these questions if more meetings had been attended.

Mr Tsengiwe replied the meetings depended on WTO activity and there was little activity so the projected eight meetings could not be realised.

Ms Chili asked if ITAC had any other partnerships other than the money received from the Department.

Mr Tsengiwe replied that the Commission had no such partnerships.

Mr Ntuli asked ITAC to take the Committee through the proposed establishment of a customs duty court.

Mr Tsengiwe said the Commission had made a submission, jointly with SARS, to the Department of Justice for a specialised court that would handle international trade related cases. There was no positive feedback, and given the number of cases that would go through such a court, ITAC decided that it was not justifiable and ITAC cases were being heard in ordinary court.

Mr Ntuli asked why the proposal was made to the Department of Justice and not to EDD.

Mr Tsengiwe said at the time the project was initiated, ITAC was still under the DTI and had not yet been transferred to EDD and the Department of Justice would have been the relevant department.

Contribution to growth, employment and equity through ITAC interventions
ITAC Chief Economist, Dr Moses Obinyeluaku, said whether or not ITAC’s instruments had made a positive impact depended on the extent to which the support had resulted in increased domestic manufacturing, investment, employment, value addition and competitiveness after support compared to pre-support. To date, a total of seven impact assessments had been carried out on home textiles, tower and lattice masts, aluminium extrusions and televisions

In each case, before finalising the report, the Commission conducted an exploratory discussion of the findings with the relevant firm on how to realise better performance in subsequent years

In April 2010, ITAC amended the rebate on certain fabrics used in the manufacture of linens, interior blinds, mattress and articles of bedding to support the home textiles sector in increasing cost competitiveness without lowering their profit margins and replaced imports with domestic production.

Volpes, located in Port Elizabeth, was a manufacturer and consumer (supply to its outlets) of its products. On average real total investment increased by an additional R1 million following an improvement in sales, owing to the opening of more outlets since the rebate facility was created. The provision of the rebate enabled Volpes to create an additional 27 direct jobs and 38 indirect jobs since 2010. In order to reduce the importation of more finished goods and increase local manufacturing, the importance of the production incentive programme offered by the DTI was discussed with Volpes and the firm was currently in the process of applying for the production incentive.

Sheraton Textiles, located in Cape Town, after the creation of the rebate facility, saw this firm cease the importation of finished goods, making domestic production almost equal to total production. Real total investment had more than doubled since the provision of the support. To retain and grow sales, the firm had devised a new production strategy, introducing a brand name regarding its products sold to retailers.

In October 2009, ITAC amended the rebate to support the television industry. Vektronix, located in East London – one of the first four television plants in South Africa. With the rebate amendment, the firm commenced the local manufacture of flat-panel televisions (LCD and plasma). The firm created 87 additional direct jobs during 2010-2012 and this rose to 150 jobs in July 2013 with a further 43 indirect jobs. To improve on the current performance, additional investment and job creation was expected through the most recent introduction of import duties and rebate for set-top boxes in December 2012.

In December 2010, ITAC increased the general rate of customs duty on towers and lattice masts for telegraph lines and electric power lines.

Babcock, located in Johannesburg, had been the driving force behind more than 70% of Eskom’s high voltage transmission line infrastructure in South Africa. Had it not been for the support, the unanticipated delays in Eskom projects would have adversely affected the towers and lattice masts section of the firm, if not closed it down completely. With the advent of additional transmission line work from Eskom anticipated in early 2014, the firm was expected to achieve growth of 10% in output.

To improve South Africa’s competitiveness, sector specific competitiveness enhancement programmes should be developed. The success of Vektronix had revealed how cooperation between government institutions could help promote industrialisation in South Africa. After ITAC laid the foundation through the provision of the rebate support, the Industrial Development Corporation (IDC), in complement, provided the firm with a loan, and both measures subsequently contributed to its achievements.

Discussion
Mr Ntuli asked why these assessment were not included in the Annual Report, and why the presentation was not forwarded to the Committee prior to the meeting.

Mr Tsengiwe said it had not been the intention of the Commission to do a presentation on the impact assessment, but he approached the Chairperson before the meeting started and asked, since this issue had come up before, if they could present the preliminary findings to the Committee. The plan was to continue with the impact assessments and in due course prepare a more comprehensive report for the Committee.

Mr Mubu said the interventions by ITAC were encouraging and asked if these initiatives were part of the distress fund. He asked if the textile interventions would be sustainable in light of the Chinese hold on the market and what brand of television did Vektronix manufacture.

Mr Tsengiwe replied it was not part of the distress fund and Dr Obinyeluaku said the sustainability depended on the weaker and volatile Rand, but the key factor was the establishment of local manufacturers which could assist in stemming the growing production costs. Chinese models usually came with no branding or design and if Chinese imports were to be challenged a brand needed to be introduced. Vektronix manufactured Samsung televisions.

Mr Tsengiwe said once ITAC had given support, for instance increasing a tariff on chicken, for that subsector to make a turnaround and become globally competitive. The tariff support should be complemented by competitiveness improvement measures such as feed costs or electricity costs. If the competitiveness constraints were not addressed, the tariff increase might stabilise the industry, but that subsector would not be able to go to a higher level.

Mr S Mohai (ANC) referred to the need “to harmonise the industrial policy” and asked ITAC to clarify this need.

Dr Obinyeluaku said if a South African company exported its product to Mozambique or Tanzania, it would be very difficult for that product to sell because it would be relatively expensive compared to Chinese imports. If the industrial policy was harmonised it would be much easier for a country to accept exports from South Africa because that product created a job opportunity within the Continent. The harmonisation should be focused within the African Continent.

In  reply to Ms Chili asking if the companies featured were foreign or domestic companies, Dr Obinyeluaka said that all the companies featured were domestic companies.

Mr Ntuli asked if the Commission could address the question about their capacity to measure their results. He referred to a tomato company which the Committee visited in Limpopo with a briefing from the Department that the tariffs would be increased to protect the company. There was no awareness of how the jobs of the people would be protected and there were issues surrounding the company’s Broad-Based Black Economic Empowerment (B-BBEE) compliance. He asked how the decision was taken to impose tariffs if the company was not B-BBEE compliant.

Mr Tsengiwe said ITAC had capacity constraints when it came to monitoring and evaluation of instruments, which was headed by the Chief Economist.

Ms Rika Theart, ITAC Senior Manager: Tariff Investigations, said the tomato factory in Limpopo lodged an application for tariff support stating they were not able to compete in terms of prices. During deliberations with the relevant departments to establish the value chain, it became apparent there was a second company in Cape Town that was in the early stages of developing a tomato paste plant and was experiencing similar price related challenges. The Commission decided to increase the rate of duty, after which it would be revised and a rebate provision was also created to curb adverse effects of the increased tariff. Currently the Limpopo plant was not producing, because they could not acquire funding through IDC based on their B-BBEE status. The sector would need to be investigated, because there were other issues that needed to be addressed in conjunction with the tariff support.

EDD Chief Director, Mr Duma Nkosi, said the intervention by ITAC of the Limpopo tomato company created opportunities, but the main challenge of the company was due diligence. There were also issues related to leadership, equipment and financing.

Mr Beukes asked if compared to the successes of the employment opportunities created by the IDC, was this mode of support outdated.

Mr Tsengiwe replied that with the unemployment challenges faced, both modes of support were needed. Post 1994 had seen a significant reduction in tariffs and compared to other developing countries, ITAC tariffs were relatively low. Meetings with firms struggling to compete against low cost imports especially from Asian countries made it clear that tariff support was a necessity.

Mr Ntuli was the Acting Chairperson for this section of the meeting as the Chairperson had excused herself. He thanked ITAC for its presentation and asked it to provide the Committee with a written report on the requested information.

Adoption of Committee Minutes
The Committee adopted the minutes of the 29 and 30 October 2013.

The meeting was adjourned.