State of industrial financial & mineral benificiation: Department of Trade and Industry briefings

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Trade and Industry

19 August 2014
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The purpose of the meeting was for the Department of Trade and Industry (DTI) and its entities to brief the Portfolio Committee on the state of industrial financing and whether it was sufficiently accessible and available to bring about the economic growth the country aimed for. The DTI also briefed the committee on mineral beneficiation as it related to the development of value adding beneficiation in support of the domestic manufacturing sector.

There were four presentations. Two were done by the DTI of which the first was on the Incentive Development and Administration Division (IDAD).The second was on upstream and downstream mining linkages. Two funding entities of the DTI, the Industrial Development Corporation (IDC) and the National Empowerment Fund (NEF) also delivered presentation on their work respectively.

The presentation by the DTI on the Incentive Development and Administration Division (IDAD), focussed on its program, divided into five clusters, each focussing on a particular area of interest.

The first was the Broadening Participation Cluster, which had three sub-programs focussed on bringing black entrepreneurs of board in terms of starting small businesses, becoming suppliers and participating in cooperatives.

The second was the Manufacturing Competitiveness Enhancement Programme (MCEP), focussing on making existing businesses more competitive. It  had four sub-programmes amongst which was the Capital Projects Feasibility Program(CPFP), which had as its focus the development by SA companies of businesses abroad but predominantly on the African continent. Under this programme, South African businesses had expanded into Africa into countries like Senegal, Sierra Leone, Ghana, Malawi and Angola amongst others. (See presentation for map). 54 CPFP projects have been approved since 2009/10, to a total value of R289.9 million.

The third was Manufacturing Investment, which included the 12I Tax Allowance Programme which offered tax incentives to investors as well as the Aquaculture Development and Enhancement Programme (ADEP).It had a total of four sub-programmes. MCEP had approved 562 projects to the value of R3.8 million since its inception in May 2012.

The fourth was Services Investment, which consisted of two sub-programmes namely the Film and TV Production Incentive and the Business Processes Services programme.

The fifth was Infrastructure Investment, which had three sub-programmes which included the Critical Infrastructure Programme (CIP) as well as the Special Economic Zone (SEZ) programme. The Critical Infrastructure Programme (CIP) was a cost-sharing cash grant for projects designed to improve critical infrastructure in South Africa.

The presentation by the Industrial Development Corporation (IDC) explained that the IDC funded start-ups, expansions in businesses without a strong financial history, businesses where owners could not provide collateral to the extent required by commercial funders, businesses operating in industries that commercial funders were not comfortable with and large projects where commercial funders wanted to share the risk.

The establishment of the Small enterprise Finance Agency (SEFA) as a subsidiary of IDC, meant that products could be tailored to the needs of SMEs and larger companies, SME development around larger projects being established by IDC could be leveraged by SEFA and the IDC could provide increased access to resources and capacity development to SEFA and its clients.

The IDC had four sectoral focus areas, namely Tourism, Media and motion picture, ICT and Healthcare.

The value of funds disbursed, the principal indicator of actual investment in the economy, stepped up from R20.3 billion to R47.0 billion over the last five years, representing an increase of more than 132%.

IDC financing activities over the past five years facilitated the creation of approximately 108 000 employment opportunities and saving of more than 36 000 jobs. Over the last five years, 44% of funding was for companies with at least 25% black shareholding.

The IDC supported the renewable energy procurement programme, with a quarter of funding over the past five years in green industries.  Downstream manufacturing (predominantly represented in the graph by metals, chemicals, agro-industries, and textiles received 31% of funding.

Many IDC Programmes were especially designed to assist women, youth and people with disabilities, as well as workers to establish businesses or acquire equity in businesses. There were also several instruments to finance Green Economy projects

Constraints and challenges faced by the IDC were the low levels of economic growth locally; low levels of economic growth in traditional trading partners, low level of business confidence, banks rely on historical track record and security for investment decisions and the low level of entrepreneurial activity.

Opportunities listed were the localisation opportunities through government procurement and access to growing markets in the rest of Africa. The IDC’s focus was increasingly on the manufacturing sector in pursuit of its objective of industrial capacity development.

The National Empowerment Fund Presentation started its presentation by sketching the current status of black ownership in the industrial sector  in  South Africa and explaining how far it was from the desired state of affairs.

The current situation was such that, as a legacy of apartheid, BEE equity control on the Johannesburg Stock exchange (JSE)’s average market cap of R11.15 trillion as at 7 March 2014, (for listed companies) stood at 3.9% (R435 billion) for black South Africans. To reach 25% of black control, it required an additional 21.1% worth R2.36 trillion at current estimated market cap.

In 1998, the government of Nelson Mandela established the NEF through the National Empowerment Fund Act No 105 of 1998 and mandated it to grow black economic participation. In 2003, the Broad-Based Black Economic Empowerment Act No 53 of 2003 was passed.

In February 2014, President Jacob Zuma pointed out the development and financing of black industrialists as a priority of government. The NEF was an agency of the DTI and was the only Developmental Finance institution exclusively mandated to grow B-BBEE.

The NEF consisted of seven divisions, each focussed on servicing a particular sector of the market. These were the Pre-Investment Fund, the Mbewu Fund, the Mnotho Fund, the Rural and Community Development Fund, the Women Empowerment Fund, and the Strategic Projects Fund and Post-Investment mentoring and support. The presentation elaborated on each of these (see presentation).

Amongst its achievements was its approval of 549 transactions worth more than R5.4 billion for B-BBEE businesses across the country, disbursing R3.8 billion to 422 of these clients, securing unqualified audits for nine consecutive years and supporting more than 46 000 jobs.

Constraints included a lack of funding for mining exploration, few venture capitalist, private equity and/or Angel Investors in SA, investors and funders had difficulty in agreeing on project valuations, project promoters were unable to raise own equity i.e. lack of required equity and/or collateral, industrial projects had a long-term investment horizon (typically 10 to 30 years), projects faced high financial risks due to implementation delays and cost overruns and low risk appetites. 

Members asked how R40 million could buy a 29% stake in a company worth R2.2 billion. Members also asked for a matrix from all the entities which presented, of all the projects they financed, broken down by province, the amounts spent on the project in Rand, the percentage  of the budget spent on the project, who owned it, as well as who benefitted from the project. Members asked why the IDC did not have offices in the poor areas like Bushbuckridge and Hoedspruit. Members also asked how the DTI and its entities were intervening in the SA film and TV industries and whether there were vigorous plans to recruit new entrants into the textile industry, after the DTI itself played a role in its destabilisation. Members also asked when the 12I Tax incentive Programme would re-open for new projects, after it had closed in April 2014, as it was an important and attractive incentive programme.

The Presentation on Upstream and Downstream Mining Linkages outlined the problem statement in terms of why beneficiation was necessary and what were the obstacles in the way of realising it. It also noted key policy levers as well as plans for the various industries which could facilitate beneficiation, if the necessary structures could be put in place.

The Problem Statement was: how to leverage the comparative advantage from a national resource endowment to build a dynamic industrial economy which secured sustainable development, radical economic transformation and job creation.

There were five key areas which could be considered in the policy space: providing ‘cost +’output from the mines to local mineral processing / beneficiation enterprises, ensuring that processing enterprises (e.g. steel, petro-chemicals)  passed down the benefits of any cost plus inputs to downstream national industry, requirements (usually through licensing) that the mining industry directly invested (or could be taxed) to ensure adequate investment in capital goods and related component manufacturing enterprises, requiring that the mining industry procured in a manner that develops their direct local capital goods suppliers and  requiring the mining industry to invest in resource processing or beneficiation enterprises.

The term ‘beneficiation’ was used to describe some/all these possible measures. Upstream mining and downstream beneficiation and linkages to the manufacturing sectors were critical. 

The presentation sketched the economic background against which the DTI was trying to effect beneficiation. It came down to the fact that the economy was set up in a way which did not benefit the country. Raw materials were exported as raw materials and no value was added. The country then had to import a product, made from the raw material that it exported, paying exorbitant prices. Also logistics like transport costs and port taxes were too expensive, making shipping expensive. SA was importing too much goods and not exporting enough value added goods. In addition policy as it stood was not supportive of beneficiation.

Key policy and project levers in this process of beneficiation were:

•           The Mining Charter developed and adopted by the Department of Mineral Resources (DMR), which spelt out how the mineral resources of the country had to be harnessed in order to economically uplift, the SA populace.

•           Industrial Policy Action Plan (IPAP) – Upstream (Mining, Transport Capital Goods sector) and downstream beneficiation action plans, B-BBEE (aligned with localisation provisions) and Special Economic Zones and other incentives, all policies of the DTI.

•           State Owned Enterprises and shareholder compacts, ports/rail access and expansion conditional on developmental objectives.

•           The Department of Economic Development (DED) and its policies as well as IDC led projects and investment/investment facilitation.

In conclusion, there were significant opportunities in unlocking SA’s comparative advantage to drive industrial development and create jobs. In order to achieve and sustain this country needed a strong primary mining industry that could support new upstream (input) and downstream (output) industries. Concerted combined public-private sector effort was needed to develop competitive industries and harness the collective industrial capabilities of the country. The process needed Enabling, aligned government policies and support measures. The Beneficiation Action Plans had to be integrated into the next IPAP. Implementation required a co-ordinated effort by all relevant role-players in the private and public sector.

Members asked why the DTI had a policy of beneficiation and not fabrication. Members said the Mineral and Petroleum Resources Development Amendment Bill (MPRDA) and the fact that mining companies could be forced to sell raw materials to the state at a reduced price, caused investor uncertainty. Members felt that a pakisa/indaba had to be held, where all role players within the mining industry had to be present, to collectively decide how to proceed on beneficiation.

Members inquired asked how beneficiation was going to happen without electricity.

Meeting report

Introductory Remarks by the Director General

The Director General (DG) of the Department of Trade and Industry (DTI), Mr Lionel October, said if the SA economy was going to grow due to industrialization, government had to do something about the high cost of capital in SA. The cost of capital in SA was amongst the highest in the world in terms of the interest payable on loans. Countries in Europe and Asia had set up development or industrial banks to provide industrialists with cheap concessional loans as start-up and investment capital.  BMW and Mercedes Benz in Germany, as well as Rolls Royce in the UK had been started with loans from industrial banks, and they grew to be household brands internationally. With the economic crisis in the USA, the government bailed out, not only the banks, but also General Motors. SA industries competed with these companies internationally, and these companies had their respective governments’ financial backing behind them. In that context, the SA government had to provide a package of incentives as well as cheap loan finance to the manufacturing sector in SA.

DTI Presentation on Incentives

Ms Susan Mangole, Acting DDG at the DTI presented on the Incentive Development and Administration Division (IDAD). Its mission and function was to facilitate the development of sustainable, competitive enterprises through the provision of funding mechanisms that supported national priorities.

Its program was divided into five clusters, each focussing on a particular area of interest.

The first cluster was the Broadening Participation Cluster, which had three sub-programs focussed on bringing black entrepreneurs of board in terms of starting small businesses, becoming suppliers and participating in cooperatives.

The second cluster was the Manufacturing Competitiveness Enhancement Programme (MCEP), focussing on making existing businesses more competitive. It  had four sub-programmes amongst which was the Capital Projects Feasibility Program(CPFP), which had as its focus the development by SA companies of businesses abroad but predominantly on the African continent.

The third cluster was Manufacturing Investment, which included the 12I Tax Allowance Programme which offered tax incentives to investors as well as the Aquaculture Development and Enhancement Programme (ADEP).It had a total of four sub-programmes. MCEP had approved 562 projects to the value of R3.8 million since its inception in May 2012.

The fourth cluster was Services Investment, which consisted of two sub-programmes namely the Film and TV Production Incentive and the Business Processes Services programme.

The fifth cluster was Infrastructure Investment, which had three sub-programmes which included the Critical Infrastructure Programme (CIP) as well as the Special Economic Zone (SEZ) programme.

The presentation further outlined the eligibility criteria to participate in any of the sub-programmes  as well as how many projects were approved under each sub-programme as well as the amount of funds invested(see presentation).

Under the Capital Projects Feasibility Program (CPFP) South African businesses had expanded into Africa, supplying infrastructure development, goods and other services to the continent. To date this programme had assisted entrepreneurs to start business in numerous African countries like Senegal, Sierra Leone, Ghana , Malawi and Angola amongst others. (See presentation for map). 54 CPFP projects have been approved since 2009/10, to a total value of R289.9 million.

Another important sub-program was the 12I Programme which extended tax allowances for investment in assets and training to encourage investment in manufacturing and the use of new technology. To determine eligibility, the point scoring calculation was based on upgrading technology (innovative process, cleaner production and energy efficiency), business linkages, the procurement of goods / services from SMMEs, the creation of direct employment, skills development, locating in an IDZ (in the case of a new project).

The Film and TV sub-programme was one within which there was much activity, as SA had a rapidly developing film industry. (See presentation for details)

The Critical Infrastructure Programme (CIP) was a cost-sharing cash grant for projects designed to improve critical infrastructure in South Africa. The grant was made available to the applicant upon the completion of the infrastructure project concerned. Infrastructure for which funds were required is deemed to be ‘critical’ if the investment would not operate optimally or take place without the said infrastructure.

Closing Remarks by the DG

Mr October said where the DTI did intervene decisively; it either revived existing industries or created entirely new industries. In the automotive industry, SA was currently manufacturing trucks and busses again. Where there was no film industry 20 years ago, currently there was a burgeoning film industry with accompanying services and business processes. The reason why the structure of the SA economy had not changed significantly as yet, was the fact that the programmes of the DTI was still niche programmes; it had not touched the core of the country’s industrial economy, which was the steel, engineering, metal and capital goods sector. Historically, the manufacturing industry developed around the mining industry. The industrial heartland of Gauteng, the East Rand/Ekhuruleni area had developed as a direct result of supplying equipment to the mining industry. That sector had to be targeted. The industry employed 400 000 people. If the mining industry could be revived in SA, it would need equipment which could be designed and built in SA and not imported from elsewhere. This would enable effective beneficiation.  

Industrial Development Corporation (IDC) Presentation

Mr Geoffrey Qhena, IDC CEO, presented on the role of the IDC in providing finance to grow the SA economy. The presentation located the IDC within the SA economy, in terms of its biographical details, position, balanced between NGO funding and commercial finance, as well as listing all the other development finance institutions active in SA.

The IDC funded start-ups, expansions in businesses without a strong financial history, businesses where owners could  not provide collateral to the extent required by commercial funders, businesses operating in industries that commercial funders were not comfortable with,  and large projects where commercial funders wanted  to share the risk.

The establishment of the Small enterprise Finance Agency (SEFA) as a subsidiary of IDC, meant that products could be tailored to the needs of SMEs and larger companies,  SME development around larger projects being established by IDC could be leveraged by SEFA and the  IDC could provide increased access to resources and capacity development  to SEFA and its clients.

IDC Focus Areas

The IDC had four sectoral focus areas, namely Tourism, Media and motion picture, ICT and Healthcare.

The value of funds disbursed, the principal indicator of actual investment in the economy, stepped up from R20.3 billion to R47.0 billion over the last five years, representing an increaseof more than 132%.

IDC financing activities over the past five years facilitated the creation of approximately 108 000 employment opportunities and saving of more than 36 000 jobs. Not included in these figures were 11 000 income-generating opportunities for people engaged in recycling activities.

IDC moved towards funding expansionary empowerment from 2010 onwards. Over the last five years, 44% of funding was for companies with at least 25% black shareholding.

The Northern Cape has benefited from a large share of IDC funding over the past five years. This included funding for renewable energy projects as well as mining and minerals beneficiation projects.  Given Gauteng’s prominence as a hub for economic activity, the province continues to attract a large portion of IDC funding, intensified by IDC’s acquisition of Scaw Metals.

IDC supported the renewable energy procurement programme, with a quarter of funding over the past five years in green industries.  Mining and large beneficiation projects’ capital intensive nature also requires large investments.  Downstream manufacturing (predominantly represented in the graph by metals, chemicals, agro-industries, and textiles received 31% of funding.

Funding Process relies on intensive due diligence process to test sustainability of the investment. (See presentation for process).

Funding instruments offered by IDC include debt (loans), equity (a share in the company), quasi-equity, guarantees, trade finance, bridging finance and venture capital.

The presentation outlined the different funding schemes which existed within the IDC, many of whom were especially designed to assist women, youth and people with disabilities, as well as workers to establish businesses or acquire equity in businesses. There are also several instruments to finance Green Economy projects. (See presentation). The terms and condition to qualify for IDC finance were also explained in the presentation.

Constraints and Challenges

Constraints and challenges faced by the IDC were the low levels of economic growth locally, low levels of economic growth in traditional trading partners, low level of business confidence, banks rely on historical track record and security for investment decisions and the low level of entrepreneurial activity.

Particular challenges related to start ups were a lack of access to capital, the owner may not have had the opportunity to build up sufficient capital for sufficient equity contribution, the lack of track record, limited security, access to markets, owners did not have long-standing relationships in business that facilitate access to markets, capacity and skills, new businesses had a high rate of failure, often due to a lack of management experience and skills.

Opportunities

Opportunities were the localisation opportunities through government procurement and access to growing markets in the rest of Africa. Localisation opportunities through government procurement provided many opportunities for entrepreneurs over a range of sectors, for example energy, knowledge and water and sanitation.

The IDC’s focus was increasingly on the manufacturing sector in pursuit of its objective of industrial capacity development. The   IDC pursued developmental outcomes in support of transformation and inclusive growth.

National Empowerment Fund Presentation

Ms Philisiwe Mthethwa, CEO, NEF, made the presentation to the Committee. The presentation outlined the mission and mandate of the NEF, its functions and achievements, as well as the different funding options it offered, it explained some of the technical aspects of administering the fund as well as its constraints and challenges.

The current situation was such that, as a legacy of apartheid, BEE equity control on the JSE’s average market cap of R11.15 trillion as at 7 March 2014, (for listed companies) stood at 3.9% (R435 billion) for black South Africans. To reach 25% of black control, it required an additional 21.1% worth R2.36 trillion at current estimated market cap.

In 1998, the government of Nelson Mandela established the NEF through the National Empowerment Fund Act No 105 of 1998 and mandated it to grow black economic participation. In 2003, the Broad-Based Black Economic Empowerment Act No 53 of 2003 was passed.

In February 2014, President Jacob Zuma pointed out the development and financing of black industrialists as a priority of government. The NEF was an agency of the DTI and was the only Developmental Finance institution exclusively mandated to grow B-BBEE.

The NEF consisted of seven divisions, each focussed on servicing a particular sector of the market. These were the Pre-Investment Fund, the Mbewu Fund, the Mnotho Fund, the Rural and Community Development Fund, the Women Empowerment Fund, and the Strategic Projects Fund and Post-Investment mentoring and support. The presentation elaborated on each of these (see presentation).

Amongst its achievements was its approval of 549 transactions worth more than R5.4 billion for B-BBEE businesses across the country, disbursing R3.8 billion to 422 of these clients, securing unqualified audits for nine consecutive years and supporting more than 46 000 jobs.

Constraints included a lack of funding for mining exploration, few venture capitalist, private equity and/or Angel Investors in SA, investors and funders had difficulty in agreeing on project valuations, project promoters were unable to raise own equity i.e. lack of required equity and/or collateral, industrial projects had a long-term investment horizon (typically 10 to 30 years), projects faced high financial risks due to implementation delays and cost overruns and low risk appetites. 

Discussion

Mr G Hill-Lewis (DA) said the presentation referred to the NEF taking a 29% equity share stake in a company for R40 million. These figures would value the company at R120 million. The NEF valued the company at R2.2 billion. What was the reason for this discrepancy?

Ms Mthethwa replied that 29% was R40 million in the original budget and the total project was currently worth R2.2 billion. When the NEF entered the project very early on in its development, it lowered the cost of acquiring equity in the project. The NEF started working with this project at its infancy. When a shareholder entered at financial close stage, the equity stake was priced at market value.

Mr Hill-Lewis said he understood Ms Mthethwa’s explanation of how the NEF got 29% for R40 million, but the 29% stake owned by the NEF had to be worth about R600 million currently. Could the NEF liquidate its share and invest the money in new projects?

Mr B Mkongi (ANC) asked the DTI regarding the administering of incentives. The DTI spoke about the broadening of participation. He wanted the details about how far implementation had progressed as well as whether this process was challenged by a lack of incentives.

Mr Hill-Lewis referred to the DTI presentation and said the 12I incentive programme was closed for new projects since 30 April 2014.  He asked when it would open for new projects again, as it was an attractive and important incentive.

Mr October replied that the 12I Incentive Scheme was proceeding very well. It would end at the end of 2015. The DTI was engaging with Treasury with the aim of extending the period for this scheme. Ms Magole would also explain the Enterprise Incentive Programme.

Ms Mangole added that information from 2010-20 April 2014 on the website, referred to all the projects that had been approved. The project was still up and running. On the website it listed all projects the DTI had supported from 2010-2020. The projects were published on the website of the DTI with the date of approval. The programme would still run until December 2015, but as the DG had explained, the DTI was engaging National Treasury (NT) to agree to fund the programme for an additional two years beyond its currently standing lifespan. If NT agreed, the programme would run until December 2017.

Ms M Tsopo (ANC) said the DTI told the committee about the Capital Studies Feasibility Programme (CSFP). How did it benefit the other countries? The presentation stated that R289.9 million had been spent on this programme. Did it benefit SA as well, or only the other countries?

The DG replied that CSFP funded SA companies which wanted to undertake investments abroad, but mainly on the African continent, for example if a company wanted concession to build an airport, it would have to do a feasibility study. The other country benefitted because it gained infrastructure, but SA benefitted as well, because it exported materials and machinery. It was a win-win situation.

Mr D McPherson (DA) said he was aware that the IDC and NEF were in discussion with a facility to raise funding. Could the entities give an update on this process?

Mr Hill-Lewis asked the IDC how it raised funds. Did it raise funds internationally from the banks or the bond market? If it raised from the bonds market, was it able to securitise some of its assets on the international market?

Mr Qhena replied that the IDC raised funding, both locally and internationally. International funding was predominantly procured from development finance institutions. Previously, the IDC used to use syndicated loans, but currently not anymore. Some of them were still running their course, but the IDC had not procured any new syndicated loans recently. These loans were both from development and commercial entities. For the first time in the history of the IDC, or the first time in 30 years, in 2013, the IDC issued a domestic bond of R1.5 billion, which was three times over-subscribed and the IDC achieved good pricing. This would be used locally. The local financial institutions had participated in the syndications in the past, but they were currently participating in the domestic bond. The IDC had a number of bilateral agreements with development banks, like the African Development Bank and the China Development Bank. The attraction of the development institutions was that they gave long tenure loans, some up to 10 years.

Mr Qhena added that the IDC had not done securitization. It was not necessary yet, but could be looked at, if necessary. It was complicated and the IDC preferred to keep it simple. It tried to obtain money from cheap sources for example the Unemployed Insurance Fund (UIF) as it provided money borrowed at a very low interest rate. It also borrowed R 5 billion from the Public Investment Commission for the Green Projects, for the same reason. While the DTI was fighting for capitalisation, the IDC was leveraging some of these avenues to raise funds.

Mr McPherson said the reason why black industrialists failed to take root in the SA economy was that financing for this sector was always poor. The funding entities received inadequate support from government. He gave the following examples:

·         In 2004, President Mbeki in a State of the Nation Address (SONA) speech promised R10 billion over five years to the NEF. It never materialized.

·         In December 2000, a Cabinet memorandum was adopted which stated that state-owned enterprises would provide equity allocations through transfers to the NEF. This consisted of 5% of Telkom, 10% of ACSA and 10% of SAFCOL.  The transfers never took place.

Government could not say it supported the development of black industrialists, but then did not fund the institutions which were supposed to bring it about. The committee had to ask hard questions and ask why government only paid lip service to developing black industrialists, but did not capitalise the institutions, like the NEF, which were trying hard to bring it about. This matter needed a long hard discussion. The committee commended the work of the NEF.

Ms Mthethwa replied that she would like to follow up on the equity allocations which were supposed to be transferred to the NEF. Even if all the others were lost, she would like to know what happened to the NEF’s promised 5% stake in TELKOM, or which institution it was given to instead.

Ms Mthethwa added that since its inception, the NEF only received a R2 billion allocation. The rest of the monies which circulated through the books of the NEF were internally generated. This was the first time in nine years the NEF approached the fiscus to request more funding.

Mr Qhena added that the mandate was much broader than recapitalising the NEF.  There was a process in progress looking at how to best merge the two entities. In the past the IDC helped to build capacity for SEFA. Task teams were busy with this process and the entities would report on it in due course.

Mr October agreed with Mr McPherson that the biggest impediment to black industrialization was the lack of cheap concessional funding. The DTI was constantly fighting for a greater share of the allocation for industrialisation and black industrialists in particular

The Chairperson said she wanted to clarify the situation. This was the fifth term of government. Mr McPherson’s remark referred to previous administrations, 10 – 14 years back. Every administration had certain priorities. One had to look up the priorities for 2009 to see whether developing black industrialists were one of the priorities of that administration. This was the first administration which prioritised black manufacturing activities. She was not going to go back into the archives. Members had to situate their questions within the appropriate context.

Mr Mkongi said when the DG opened the interaction, he spoke about SA’s competitive disadvantage in the form of the high cost of capital and the lack of cheap concessional loans. On the 19th April 2012, there was a DTI conference on Trade and Investment. One of the issues noted was that countries within BRICS and in Africa were far more aggressive with introducing incentives for beneficiation as well as protecting their internal manufacturing industries. What had the DTI done in this regard in the two years since this conference?

Mr October replied and said, if truth be told, for the first 15 years, SA withdrew support from the manufacturing sector. Before 2009 there was no support from government for black industrialist in any meaningful way. Since 2009, the DTI budget had doubled and the NEF also received substantial money. The department asked the committee’s support in this regard. There could be no industrialization without decent funding. If the DTI wanted to exact significant change, it would have to work on the core of the industrial sector which was the metal and steel engineering, capital equipment sector. This had the potential to create huge numbers of jobs, but it had to be funded. SA companies were world-class. It exported the most sophisticated equipment, so the potential was there, but the sector had to be financed.

Mr Mkongi asked how the DTI was intervening in the local film and TV industry. One often saw foreign film crews busy in the Cape Town city streets. What were the impact of this on local film and TV production as well as the marketing of SA as a film location?

Mr October replied that South Africans had to understand that, if this country was going to develop, it would need the mix of foreign direct investment (FDI) and stimulation of local investment. Both was needed, and it was not an either/or situation. When it came to the film industry, the concession was given to foreign film companies on condition that the film was made in SA, so even if the film was foreign, or foreign owned, it was still made in SA. Local capacity was developed in the process. South Africa had an advanced computer animation industry, because foreign companies came to make their films in SA. All the DTI had to ensure whenever there was FDI, was that the production had to happen in SA. Currently, in the film industry, the DTI targeted local production, in other words, SA made and owned films. SA could only do that if it had good partnerships with foreign film companies. They brought technology, capital and access to foreign markets, which the local industry then benefitted from. SA had to understand that one needed the combination of foreign and local to secure growth. South Africans tended to turn anti-foreign very quickly. What they were doing was to send mixed signals to possible investors, and stopping the inflow of capital, technology and markets into the SA economy. The DTI was building a SA film industry and was developing incentives specifically for black film makers to enter the industry.

Mr Qhena added that the IDC also participated in developing the film industry. He wanted to support the point the DG made regarding the need and the space for both foreign film as well as local film production in SA. For example, the IDC funded the new film studios at Faure. As a result, the country could host foreign film crews using these facilities. Other service industries benefited as well, because the crews spent time in Cape Town, they lived in hotels, rented cars and bought goods.  An area that needed further development, which the IDC was working on, was the post production process. The skills were still in short supply.

Ms Mangole added that, of the 82 films which were funded during the previous FY, 64 were purely South African, 10 were co-productions and eight were foreign. The majority of films funded by the DTI, for all the years it funded films, were SA productions.

Ms Tsopo said there were projects in the FS which were owned by people from Gauteng. What were the benefits to the people from the FS, especially in Bothaville?

Ms Mthethwa explained how projects happened. An entrepreneur came with a concept for a manufacturing plant.  The entrepreneur could be from anywhere in the country. Feasibility studies were done and when the project had developed to a stage of near realization, one had to decide on where to locate the plant. The NEF persuaded investors to set up projects in the areas which were economically most depressed. The project still belonged to the same entrepreneur, which might not be from the area where the project was going to be set up. This was how entrepreneurs from Gauteng could own and run projects in the FS. If Members could identify entrepreneurs in their own areas, who had similar ideas as the original entrepreneur, the project could be set up in their area. What was good about the project in Bothaville was that 10% of equity value was given to women-empowered enterprises from all over the country. The first prise was that it was job creation for the people of the immediately surrounding areas.

Ms S Shope-Sithole (ANC) asked what prevented the IDC and NEF from opening offices in the poorest rural areas like Bushbuckridge and Hoedspruit.

Mr Qwena replied that there were 20 offices countrywide. It was not practical to be everywhere. The closest office to Bushbuckridge was in Nelspruit. What the IDC did was to use provincial offices. There were also outreach programs in the form of road shows where information was spread about the IDC and what it was doing.

Mr Mkongi said the textile industry in SA had been destabilized and the DTI had played a role in that process. Were there vigorous plans to create new entrants?

Mr Qhena replied that he would be cautious to say the textile had recovered fully. It still had challenges and some of these were legacy challenges. The IDC had R2.4 billion invested in the textile industry, some of it historical. Some projects were doing well, others not. The DTI had different interventions it implemented to keep the projects afloat.

He added that there were opportunities for new players in the textile industry, because there had to be niches.  The incentives the DTI offered helped. The IDC engaged with retailers, because the manufacturers needed outlets. The DTI’s incentives also helped with the layout and modernization. The DTI was collaborating with the players in the industry. There were niches, for example some designers were making money. Industrial textiles were also an area of possibility. Not all projects were working well, but there was a lot of progress.

Ms Tsopo proposed that in future presentations by the IDC and NEF had to include an annexure with a breakdown of the projects per province. It had to include a breakdown of how money was spent on the respective provinces in percentages and Rand values. The committee did oversight and had to know who benefited from these projects. The Committee also wanted to see whether programmes which were claimed to be national, were really distributed throughout the country and that all the provinces benefitted equally. The committee also wanted to know exactly who the beneficiaries were. Even if 16 000 jobs were created, if 90% of the employees came from outside the area, there was no benefit to the area where it was situated. There was a trend to employ local people in menial jobs for very little wages.

Mr October replied to Ms Tsopo that a provincial breakdown of DTI projects could be provided

Mr Qhena replied that the IDC had more than 1000 projects which it funded and it would provide the provincial breakdown requested.

Ms Mthethwa replied that the portfolio split was as follows in terms of geographical spread. KZN - R151 million, WC – R122 million, Gauteng – R180 million, Mpumalanga – R11.6 million, FS – R46.6 million, Limpopo – R5.8 million, NW – R40.8 million in terms of the NEF’s SPF portfolio. If one looked at the R3.7 billion that had been invested in the total investment portfolio of the NEF, 49% went to Gauteng, 9% to the EC, 8% to the WC, 1% to the NW, 1% to the NC,3% to Mpumalanga, 5% to Limpopo, 20% to KZN and 1% to the FS.

The Chairperson reiterated that an annexure was needed with information containing all beneficiaries, broken down by city, province. Which percentages were spent in which provinces and what the monetary value was, the year the project was started in, as well as how long it ran, or the spread for example 2010-2014. This applied to the NEF and all other funding entities.

The Free State and Northern Cape had been neglected by government generally. She was deployed to Sedibeng and Sebokeng townships in Gauteng, but these places were absent from the GPS. If it wasn’t on the GPS, it was off the radar and unreachable.

She doubted whether the entities and DTI were aware how besieged Members were at their constituency offices to provide answers. She requested that all the information requested be given in a matrix. The DTI and entities gave the committee a taste of what it was doing. The committee needed more comprehensive information on what these entities were doing. The committee secretary had to program the DTI and funding entities again for a more in-depth information session.

She was glad when Ms Mthethwa was appointed in this position, because she was energetic. Now the committee had a better understanding of what the NEF was doing and was impressed with its work. It wanted responses to the questions. The committee secretary had to accommodate the NEF and ICD in the committee programme for future sessions.

Mr Mkongi made a firm proposal that the Committee had to develop structured support for the request of the DTI for cheap concessional funding for selected strategic sectors. It had to be articulated through Parliament and the National Assembly. He also proposed that Parliament had to discuss the importance of FDI in order to clear up the confusion around it, and to prevent the country from sending mixed signals to potential investors.

DTI Presentation on Upstream and Downstream Mining Linkages

Introductory Remarks by the Director General

The DG said mines in South Africa extracted raw materials from 3000ft underground. It used sophisticated equipment, which could be created in SA. Why, with SA’s abundance of minerals, beneficiation was never done? The reason for the failure was that there was an absence of interventions by the state in industry.

An international example was Koch Industries, which was the second largest company in the USA. It could export crude oil, but the US government put a ban on the exportation of crude oil, forcing Koch Industries to refine the oil before exporting it. This created an oil refining industry in the USA.  In contrast, Nigeria exported crude oil, without adding value to it by refining it.

There were precedents in South African history as well. When Gen. Smuts started ISCOR in the 1920’s, he gave it the rights to all the iron ore in the country. When SASOL was started, it was given access to coal deposits. If industries could get the raw materials at discount prices, industries could grow.  

DTI Presentation

Mr Garth Strachan, DDG at the DTI made the presentation. The presentation outlined the problem statement in terms of why beneficiation was necessary and what were the obstacles in the way of realising it. It also noted key policy levers as well as plans for the various industries which could facilitate beneficiation, if the necessary structures could be put in place.

Problem Statement

The problem faced was how to leverage the comparative advantage from a national resource endowment to build a dynamic industrial economy which secured sustainable development, radical economic transformation and job creation.

Focus Areas

There were five key areas which could be considered in the policy space: providing ‘cost +’output from the mines to local mineral processing / beneficiation enterprises, ensuring that processing enterprises (e.g. steel, petro-chemicals)  passed down the benefits of any cost plus inputs to downstream national industry, requirements (usually through licensing) that the mining industry directly invested (or could be taxed) to ensure adequate investment in capital goods and related component manufacturing enterprises, requiring that the mining industry procured in a manner that develops their direct local capital goods suppliers and  requiring the mining industry to invest in resource processing or beneficiation enterprises.

The unique SA English term ‘beneficiation’ was used to describe some/all these possible measures.

Upstream mining and downstream beneficiation and linkages to the manufacturing sectors was critical (which should not be equated with further mega capital and energy intensive investment projects.).

The presentation sketched the economic background against which the DTI was trying to effect beneficiation. It came down to the fact that the economy was set up in a way which did not benefit the country. Raw materials were exported as raw materials and no value was added. The country then had to import a product, made from the raw material that it exported, paying exorbitant prices. Also logistics like transport costs and port taxes were too expensive, making shipping expensive. SA was importing too much goods and not exporting enough value added goods. In addition policy as it stood was not supportive of beneficiation. The presentation included a graph showing the trade balance from 2000 to 2013 and it was in rapid decline.

The key policy and project levers in this process of beneficiation were:

·         The Mining Charter developed and adopted by the Department of Mineral Resources (DMR), which spelt out how the mineral resources of the country had to be harnessed in order to economically uplift the SA populace.

·         Industrial Policy Action Plan (IPAP) – Upstream (Mining, Transport Capital Goods sector) and downstream beneficiation action plans, B-BBEE (aligned with localisation provisions) and Special Economic Zones and other incentives, all policies of the DTI

·         State Owned Enterprises and shareholder compacts, ports/rail access and expansion conditional on developmental objectives. Rail and port tarriffs

·         The Department of Economic Development (DED) and its policies as well as IDC led projects and  investment/investment facilitation

·         Competition Commission

The DTI initiated a Mineral Value Chain Study in Jan 2013 to develop key interventions to advance beneficiation in SA steered by the DTI, DMR, DST, IDC, TNPA. The aim was to develop strategies and proposals to advance Upstream (Mining and transport and capital equipment) and forward beneficiation across 5 priority value chains namely iron-ore and steel, polymers, titanium, platinum group metals and upstream mining inputs. Work was also underway on oil and gas.

In conclusion, there were significant opportunities in unlocking SA’s comparative advantage to drive industrial development and create jobs. In order to achieve and sustain this country needed a strong primary mining industry that could support new upstream (input) and downstream (output) industries. Concerted combined public-private sector effort was needed to develop competitive industries and harness the collective industrial capabilities of the country. The process needed Enabling, aligned government policies and support measures. The Beneficiation Action Plans had to be integrated into the next IPAP. Implementation required a co-ordinated effort by all relevant role-players in the private and public sector.

Closing Remarks by the Director General

The DG said in conclusion, it painted a bit of a depressing picture, the fact that 100 years, including the last 20 under the democratic ANC government had been lost without applying beneficiation. Combined, SA and Zimbabwe owned 90% of the world’s platinum. SA had vast technological as well as human resources which could be utilized, if partnered with the mining sector, to pass on the benefit of the natural mineral wealth to the SA population. A discount of 5%-6% in the selling price to the world would make a huge difference. The potential was there. Government had to make critical but harsh decisions, and face the consequences in order to bring it about.

The Chairperson said beneficiation could also be called value addition. She asked where the Grinrod Rail Company was situated, which Mr Strachan referred to. She thought it would benefit the Committee to pay the company a visit.

Discussion

Mr Hill-Lewis asked how beneficiation was going to happen without electricity. Government was paying BHP Billiton to switch their smelters off in order to save electricity.

Mr Strachan agreed with Mr Hill-Lewis that electricity was a pre-condition for beneficiation. Infrastructure had to be in place before one could talk about anything else.

Mr Hill-Lewis said when one looked at the production costs of metals, raw materials was a minor part of the cost. Labour and energy were bigger expenses. Why the obsession with raw materials?

Mr Strachan replied that discounted mineral prices were critical, because in the case of the diamond and platinum industries, the raw material constituted 90% of the price. The margins on platinum were hair thin. This was why a 5% discount would make a huge difference. South Africans had to get their heads around this debate. This industry was vulnerable to commodity shocks. The national currency was tied to the commodity. If the commodity price fell, the country’s economy went into a recession. SA did not have a diversified economy. Minister Radebe had proposed a ‘pakisa’ on this matter. All the role players had to get together in a room to thrash out this matter.

There were no incentives for overseas countries to buy from SA, if the price was as high as elsewhere in the world. The markets were all abroad. There was no comparative advantage. Minerals did not belong to Anglo American. It belonged to the SA nation.

Kuumba exported 60 million tons of iron ore per year. The department was asking for 5% of production. Kuumba made 42% profits per year. The issue of discounts on raw mineral materials was not irrelevant. The DTI was not obsessed. This was a tool used throughout the world as well as historically in South Africa. Iscor was given access to iron ore deposits. It was not a DTI obsession.

Mr Strachan added that SA had huge reserves of iron ore. It was importing steel from Sweden, Italy and Spain. Why? It was not an obsession. SA had the highest port costs in the world. The cost of rail and freight transport was too high. The country could not ignore a critical cost which it could change to its own advantage. Other countries could and did change it. The DG was right; platinum was the most significant cost.

Mr Hill-Lewis said Members could not assume that companies had to invest in SA mines. Companies had a choice in terms of where in the world they wanted to own mines. BHP Billiton announced recently that it was moving its focus elsewhere. The ‘cost +’ meant lower revenue for the mining company. Why would a mining company invest in SA if it could get higher revenues elsewhere? Mining was in decline in SA.

Mr Hill-Lewis asked what government was going to do about the Mineral and Petroleum Resources Development Amendment Bill (MPRDA). There was uncertainty and investors had to be part of the discussion.

Mr Mkongi countered by saying that maybe Parliament needed to close this discussion. The DTI had policies, although there were loopholes. One was raised, namely the Mining Charter promoting localization and beneficiation. There was no uncertainty. The debate had to be concluded.

Mr Hill-Lewis insisted that there was policy uncertainty. Nobody could explain the Mine Gate Price (MGP).  This impacted on the investment climate. If the Mine Gate Price was equal to ‘cost + X’, nobody at this stage knew what ‘X’ was going to be. This caused policy uncertainty.

Mr Hill-Lewis added that the input costs in the mineral industry had to be considered holistically. Factors like a reliable electricity supply from ESKOM, its cost, and other input costs also had to be looked at. Instead the DTI focused on price control, about which much was written in the business press, sowing uncertainty amongst investors in the sector.

Mr Tsopo said the Mining Charter highlighted the plan of action. She asked when the DTI was going to engage with the Department of Mineral Resources.

Mr Mkongi referred to critical policy intervention. He wanted the DTI to provide the ideas. Was there a strategy to get the discount on raw materials from mining companies? Had it been tabled and what had been the reaction. These matters had to be treated practically rather than ideologically.

Ms Shope-Sithole said the DTI did not like the word fabrication. The department beneficiated, but did not fabricate.

Mr Strachan replied that the biggest oil rig in the world was lying in the Cape Town Harbour to be refurbished, cleaned and repaired. Similar oil rigs could be built in Koega, Richardsbay and Saldanha Bay.

Ms Tsopo said she did not see other role players apart from government. There was a serious challenge in terms of public and private sector collaboration.

Mr Mkongi said that the opposing positions were moving closer together. A pakisa/indaba had to be arranged to deal with the matters raised. A policy had to be developed, based on inputs by all stakeholders, to determine the way forward.

The DG agreed with Mr Mkongi that a pakisa/indaba had to be held to talk through and create clarity on the matters concerned.

Mr Hill-Lewis said there was a clause in the MPRDA which would protect mining houses, if the Bill was passed as it stood, from having to give discounts on raw minerals.  Miners were the biggest champions of that clause. The country, as a country had to agree on this issue.

The Chairperson said the DTI was hosting a colloquium on beneficiation in the near future.

The meeting was adjourned.

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