Department of Trade and Industry 2013/14 Annual Report to the NCOP

Meeting report

The Director-General issued a formal letter of apology for the absence of the Minister and the Deputy Minister who were abroad.

Mr Shabeer Khan, DTI Chief Financial Officer, presented the economic context for 2014. He started with the global economy in order to evaluate domestic progress in relation to international progress:
January to March 2014 (Q1 2014)
- Global gross domestic product (GDP) growth slowed from an annualised quarter-on-quarter rate of 3.4% in the fourth quarter of 2013 to 2.1% in the first quarter of 2014.This was primarily due to a 2.1% contraction of GDP in the United States (US) and slowing growth in China and the European Union (EU).

April to June 2014 (Q2 2014)
- Global GDP growth likely recovered slightly in the second quarter as the US economy rebounded strongly and grew by 4% on an annualised quarter-on-quarter basis Economic conditions in the EU worsened however with Germany surprisingly contracting

International Monetary Fund (IMF) expects world output growth to rebound in the second quarter of 2014 and firmer in 2015 and 2016.The IMF further projects that imports by advanced economies will increase from 1.4% per annum in 2013 to 4.6% per annum in 2015. Overall, the economic growth outlook remains weak with significant downside risks.

Domestic Economy: The real GDP grew by an annualised quarter-on-quarter rate of 0.6% in the second quarter of 2014. South Africa’s growth performance was led by the tertiary sector, mainly: - Government services, Finance, Real estate, Business services, Transport, Storage, Communication services

Overall, the Manufacturing sector contracted by 2.1% in the second quarter of 2014 due to low production in autos, chemical products, rubber and plastics, glass and non-metallic mineral products. The contraction in Manufacturing was primarily due to the slow pick up in the mining sector after the prolonged strike in the platinum sector.

An overview of imports and exports was given:
- South African exports and imports to the world declined in the second quarter of 2014. Imports declined particularly significantly leading to an improvement in SA’s trade deficit.
- South African exports to Africa increased from R70.2billion to R71.9 billion resulting in a trade surplus of R39.5 billion.
- South African trade with the world and BRICS were affected by poor growth in the EU and the US.
- Demand for commodities and commodity prices remain relatively flat as China’s policymakers attempt to re-balance the economy.
- South Africa trade with Africa consequently remains a priority focus for the dti.

The DTI’s strategic goals for the period under review were to:
- Facilitate transformation of the economy to promote industrial development, investment, competitiveness and employment creation.
- Build mutually beneficial regional and global relations to advance South Africa’s trade, industrial policy and economic development objectives.
- Facilitate broad-based economic participation through targeted interventions to achieve more inclusive growth.
- Create a fair regulatory environment that enables investment, trade and enterprise development in an equitable and socially responsible manner.
- Promote a professional, ethical, dynamic, competitive and customer-focused working environment that ensures effective and efficient service delivery.

Key achievements were noted against planned targets for 2013/14 in each of its five clusters: Industrial development; Trade, Investment and Exports; Broadening participation; Regulation; Administration and co-ordination.

An overview of its incentive schemes was provided showing number of firms/projects supported, potential jobs supported, total disbursement and the provincial spread in broadening participation and manufacturing incentives. These incentive schemes included:
- Enterprise Investment Programme (EIP)
- Manufacturing Investment Programme (MIP)               
- EIP- Aquaculture Development and Enhancement Programme (ADEP)
- Automotive Investment Scheme (AIS)                                       
- Critical Infrastructure Programme (CIP)                
- Manufacturing Competitiveness Enhancement Programme (MCEP)            
- Business Process Services (BPS)            
- Co-operatives Incentive Scheme (CIS)   
- Black Business Supplier Development Programme (BBSDP)          
- New Incubation Support Programme (ISP)    
- Export, Marketing and Investment Assistance (EMIA).            
A summary of achievement of targets for 2013/14 were provided for each scheme.

Challenges were identified as follows:
- Poorer manufacturing performance due to slow global growth and strikes in the mining industry - Industrial sectors supported by dti incentives show growth, while other sectors like plastics, steel and metal fabrication lagging
- Credit fuelled consumption driven demand is running out of steam
- Electricity and water supply shutdowns impacted on manufacturing
- Sharply escalating administered prices where municipal premiums and pricing anomalies within and in between municipalities
- Higher rail freight and port charges
- Need to build partnerships between government and business to secure much greater progress in upstream mining supply chains and downstream beneficiation.

DTI received a financially unqualified audit opinion from the Auditor-General South Africa (AGSA) for the 2013/14 financial year. The financial report and audit outcomes were discussed. The DTI detailed its action plan to remedy the AG's audit findings.

Discussion
The Chairperson congratulated DTI on their unqualified report and the award received. The Chairperson believes that the DG set a good example by providing a written letter of apology for the Minister’s absence. He commends the Minister for managing to keep up to task with all of his responsibilities.

Ms M Dikgale (ANC, Limpopo) thanked the department for the presentation and congratulated them on their AG report. She asked what the department intends to do about mine strikes. Those living near the mines need help.

Mr B Nthebe (ANC, North West) wonders what the volatility of the projected GDP growth is, and if recovery is possible. Manufacturing and agriculture sectors still need development; these two pillars of the economy should contribute immensely to the economy. The economy is still dominated by financialisation. DTI is trying to increase the export base, but he questioned if it is making progress. Trade surplus to the rest of the world has decreased in the last year. He wondered if DTI has made progress towards the Minister of Finance’s medium term budget. Regarding the facilitation for broad-based economic participation and targeted interventions, and asked exactly what these facilitations entail. The sector of trade and enterprise development is highly de-regularised. He asked if the department is moving at the necessary speed, despite their regulation efforts. The Free State, North West, and the Northern Cape are hubs for agricultural sector growth but DTI is not benefiting those localities. These localities do not even know what DTI is trying to do. The interventions must reach new people. The department cannot continue to support only wine production. It has been supported adequately. It must diversify. He welcomed the relationship with Transnet and the 30 000 jobs that it will create. The Committee was in Sekhukhune and did not see the results that align with DTI’s feasibility study. The Committee feels as if the area is not adequately capitalised upon. This contributes to food security and production problems; DTI does domestic export, in which goods are sent to Gauteng before it is sent outside the country. There are more questions but they can be addressed when there is more time.  

Mr Khan responded that the Minister does attend the Inter-Ministerial Committee on the Revitalisation of the Distressed Mining Communities to gather information about the issue and its impact. The DTI is working on the matter. The AG report is based on financial statements, pre-determined objectives, and compliance. If all of the areas are satisfied, the department gets a clean audit. The department is close enough to a clean audit that it is achievable in the 2014/15 financial year. The Deputy Minister is currently leading a task team to encourage black industrialists and an initiative to promote black industrialists in Sekhukhune. There are also incentives put in place for small business, cooperatives, and the Black Business Supplier Development Programme. DTI focuses a lot on bringing marginalised areas into the economy. 

Mr Stephen Hanival, DTI Chief Economist, stressed the need for beneficiation of South Africa’s mineral products in Sekhukhune. More money is made on exporting manufactured products, moving toward manufacturing might relieve some pressure and give way to higher wages. Beneficiation and industrialization are a key focus of DTI. This facilitates higher wages, especially for poor people, and job creation. The global economy is not in a state of rapid recovery, and South Africa is in a risky and volatile state because of this. Concerning information about Germany and China’s economies has come out. Focus must be on industrialization and adding value locally, anything else would be exporting opportunities and resources abroad. Regarding the Department of Mineral Resources, it is important to procure local resources instead of outside resources so not to add to the deficit. South Africa is in a trade surplus with Africa.  In the Europe Union however, there is a fair amount of subsidised production within the EU, so focusing on trade with Africa is more beneficial. DTI wishes to develop the African continent. There are currently two initiatives underway in the Northern Cape: DTI signed a Memorandum of Agreement (MoA) with the Foundation for African Business and Consumer Services (Fabcos) regarding the rollout of a small-scale maize mill model and assisting investors in the broader framework of investing in agro-processing. This includes buying local farming goods to add local value. The Douglas part of the Northern Cape is already underway. About 60% of the project in the Management Competitiveness Enhancement Program (MCEP) goes to the agro-processing sector. There are significant financial resources going into the sector but more can be done regarding cooperatives and black business development. There are initiatives underway to advance the areas that are lacking.

The Chairperson requested that the DTI indicates their interventions in monitoring terms: how it can increase jobs, and how it can increase livelihood in specific areas in regards to agro-processing.

Mr Tapiwa Samanga, DTI Chief Director: Capital Equipment and Allied Services, added that for the fiscal challenge and economic growth to be balanced; it is important to continue to invest in the economy for it to flow to industry so that opportunities can be created and the economy can thrive in all sectors. Incentives for productive jobs in previously marginalized areas and for other purposes need to be continually created. DTI is searching for investment in industry from anyone who will support them because funding is needed to perpetuate this cycle. There are schemes that support cooperatives, new black businesses, and the incubator support programme in place for assisting new entries into the economy. The three pillars of incubation are: training, providing an available market to enter, and establishing standards (such as certification). These break down barriers. A market that can support new jobs is necessary. DTI continues to search for more opportunities for expansion, including big industry, to create jobs.

Mr M Khawula (IFP, KwaZulu Natal) remarked that the presentation indicates that since 2012 there has been a decrease in jobs and a trade deficit in the world; this is problematic. This Committee accounts for job loss. The Committee is responsible for ensuring that there is growth in the economy and industries so that people get jobs. He would like to know if the interventions will help this.

Mr L Suka (ANC, Eastern Cape) appreciated this conversation with DTI and the department’s continual online updates are commendable. However, the rural areas have educated people who cannot enter the mainstream. DTI should provide this entrance because they open opportunities at all levels. Radio stations could be used to do so. Communication and information are the keys to power and innovation is necessary. There is a challenge between the international and local communities, especially in the rural areas. The turnaround strategy for addressing the AG concerns should be more specific, such as leadership and controls. The strides that have been made are noteworthy and every year the department improves. The capacity of the department may not be enough to monitor all the opportunities that have been created. Monitoring is key to maintaining the work done on the ground. In Port Elizabeth much progress has been made. DTI might want to visit the municipality of Kouga. In the Northern Cape municipalities, most solar projects are not well received and the locals have no information. The level of arrogance and communication regarding the approach to local projects by government should be addressed. Communications must be increased. He has been to Kouga and local support must be increased. These communities are struggling. The unemployment rate should remain in the single digits.

Mr W Farber (DA, Northern Cape) said that DTI is regularly active and it is indicated in the good reports that the Committee receives. He questioned whether or not the Cape Town shoe store referred to in the presentation, is actually where it claims to be so that he could visit it. This Committee is about provinces and not political parties. During the Provincial Week in the Northern Cape, people claimed that they are not seeing Transnet’s promises manifesting. He requested information on Transnet’s progress. He also requested information on DTI’s involvement in the economic development corridor of the Northern Cape, by the tip of Namibia, with minerals. It will launch in the next few months. He believes that participation in this would help the western part of the Northern Cape become a bigger economic hub of the country.

Mr Khan replied that in regard to communication, there is a lot in the regional areas. “Taking DTI to the People” was a previous initiative and the new slogan is “Taking DTI to the Factory”. Sometimes the uptake in the provinces is low. Different DTI incentives have been advertised in different languages in the rural areas. He welcomes Members giving specific examples of projects that need help. Regarding clothing and textiles, 800 jobs were saved in the House of Monatic. Regarding, the deficit, the global economy impacts the South African economy directly. All of South Africa can do is to invest in its own economy because it will lead to growth eventually. The turnaround strategy has been led by the Minister and DG before it was reported to the Executive Board. IT is taken seriously. Monitoring is important because a lot of money is invested in these programmes. DTI works with the provinces and the Department of Economic Development to put boards in place for monitoring purposes. Going forward, all programmes will be done in collaboration with the provinces. There will be oversight. DTI would like to receive any information regarding the Northern Cape Economic Corridor via email if possible so DTI can assist and develop in any way possible.

Mr Hanival added that the vacancies is about equipping the right people with the right skills. In the tabled annual report the vacancy rate went from 9.4% to 6.9%. The turnover rate was reduced to 5.6% and the retention rate is 94.4%. All figures should be taken into consideration. 

Ms Sarah Choane, DTI Deputy Director-General: Group Systems and Support Services Division, assured the Committee that trade must be considered in the context of the global economic crisis. In 2007 and 2008 South Africa’s trade balance was significantly better; however, sector performance must be taken into consideration. About 60% of the trade in 2007/08 was mineral products and it was not based on manufactured exports. If the commodity prices go down, like during the crisis, a trade deficit occurs. This indicates that because the volatility of the exchange rate and over-evaluation are problematic to this export base South Africa should raise the manufactured export rate. The exchange rate must be stable and competitive for a sustainable manufacturing export base. The chicken sector must be competitive import business. There are challenges regarding subsidized areas, inadequate tariffs, and procurement. The government’s budget for procurement is R1 trillion and it has promised that the government will attempt to procure 70-75% of local producers or manufacturers. Overall, the private sector seems to agree to a similar standard. Imports by the private sector lend to this deficit. Initiatives such as DTI’s “Buy Back South Africa” initiative have begun to decrease these imports. If these agreements are not followed through with, the exchange rate and trade balance cannot remain strong. South Africa has a current account deficit and fiscal deficit, making it very vulnerable. These areas mentioned receive direct attention from DTI; however, more engagement from the Provinces’, departments’, and private sector’s roles should be had regarding local procurement.

Ms Reshme Pillay, DTI Director: Strategic Planning and Performance Monitoring, attributed the trade imbalance to the export of raw materials and import of higher quality materials. DTI is trying to diversify export markets. Two interventions are in place for diversification. An African trade market which includes 620 million people and R1.2 trillion GDP in the making would create a continental trading market to provide access to the entire continent. Secondly, South Africa is a service-based market and there are agreements in the works to open the market for tourism, energy, financial and communication services to create jobs. BRICS trades in commodities. Value-added products traded within BRICS must be increased. These initiatives deal directly with decreasing the negative trade balance.

Ms Samanga added that incentive schemes that deal with small enterprise work will move to the Small Business Development Department. This includes cooperatives as well as aspects of the black business and supplier development programmes. This allows the department to focus on new market entry and supporting black industrialists.

Mr J Londt (DA, Western Cape) remarked that the movie, “The Long Walk to Freedom” was a good movie, but asked what the international earnings were. He asked what research was done before giving R350 million to the Cuba Economic Assistance Agreement. He asked what benefits will come from this agreement because that is a lot of money. He wondered what the department is doing to make sure that the cooperatives in the country are being monitored. DTI must check the projects and not simply ask municipalities to monitor them. South Africa does not need to fall behind in manufacturing, and things such as the “Red Tape” Bill hinder manufacturing. Colleagues are taking this issue up in the National Assembly; there are more platforms for that discussion. Runners were being paid to speed up the registration process in the Companies and Intellectual Property Commission. This is bribery and officials are involved. Bribery can become part of an organization’s culture.

Dr Y Vawda (EFF, Mpumalanga) asked what role DTI has in socio-economic responsibilities. Is there a role, and if so, why not? Dependence on overseas markets must be reduced - this must be South Africa’s biggest concern. Only 10 million of 15 million people have access to personal motor vehicles for example. If people got decent pay they could afford motor vehicles. This would allow for a local motor vehicle manufacturer and less reliance on foreign markets. Building a market here in South Africa is critical and it should reflect in DTI’s work as well. The purpose and details of African Growth and Opportunity Act (AGOA) need to be explained. He also asked what the challenges to trading with Africa were and if the Committee could help. He asked why South Africa was third, not first, in trading with Mozambique. He inquired as to the costs of programmes and incentives versus outcomes so that the Committee is better informed, especially regarding job creation. Performance monitoring processes for the incentive schemes also need more detail. Regarding the AG report, he asked how the irregular expenses, leadership, oversight concerns were being addressed. He inquired if DTI has the capacity for these challenges. The issue of capital transfer and capital transfer tax impacts DTI because there is a lot of capital outflow from South Africa. He asked what DTI plans to do about minimizing tax evasion. He is sure that praise for the Minister is a product of the entire department; he congratulated them as a whole.

Mr Nthebe agreed with the Chief Economist that tariffs have played a critical role. Improvements can be made. He asked what is being done on market penetration. Labor brokering is being done.  Foreign Direct Investment (FDI) should bring about job creation, infrastructure development, and economic development. In the Northern Cape, Spain is conducting solar energy work and not creating jobs. Spain hires manufacturers do small things for them. FDI must create a conducive investment environment. The incubator programme has helped the precious metal sector but more can be done.

MsSamanga agreed that the benefits of the incentives are not properly outlined but it will improve for the next presentation. Management of incentives is generally based on payment after agreed upon milestones are achieved. The incentive regime targets various “pressure points”, or areas that need incentives, in the market that need jobs created. Investment in new technology is also required. Work that has migrated to small enterprises and cooperatives has issues with business mortality rates. There was now a tribunal for members to solve relationship problems in order to reduce the mortality rate of the cooperatives. The sector specific support programme exposes the beneficiaries to internal and other markets to help with market penetration. The government must create an internal demand with support from the private sector and local procurement. Incentive programmes accept applicants based on agreed outcomes. Next time the DTI will outline: incentives, “pressure points” that incentives are intended to reach, and the monitoring of incentive payments.

Mr Pillay clarified that R350 million was not necessarily given to Cuba, it is about sourcing products in South Africa. It is part of South Africa’s economic agreement with Cuba; it includes seeds and agricultural products. It benefits South Africa. AGOA is a unilateral market access scheme by the United States that provides access to 30 African countries. It expires in 2015 and DTI is lobbying for a 15-year extension. In the United States, it is being discussed that some African countries should not be beneficiaries of AGOA, including South Africa. The department is lobbying to be included in AGOA. Key sectors that benefit from AGOA include the auto sector. The economic agreement with the European Union gives better access for EU products, and some constituents in the US feel that any third party agreements cannot disadvantage the US. South Africa and the United States are negotiating to keep South Africa in AGOA, but it will come at a price. 

A DTI official reassured the Committee that for renewable resources procurement there are localization targets. Transnet agreed that 60% stays in South Africa, and then it trickles down to the local areas. Challenges involve the volumes in each area and certification. It may not be feasible for there to be programmes in every area. Suppliers must be certified because insurance must be issued. Suppliers in South Africa have become global suppliers. How to filter down the benefits of the designations to each and every area is still problematic. IT is a new initiative and industry. It is not viable to have factories in every area. The level of localization goes up in every round. DTI is now on round four. It is likely that it will filter down to every area in South Africa.

Ms Ronell Pillay, DTI Deputy Director: Strategic Planning and Performance Monitoring, added that inclusive growth has forced DTI to revision Black Economic Empowerment (BEE). BEE is closely aligned with growing the economy and industrialization. There is now more emphasis put on enterprise, local businesses, private sector involvement, and supplier development. Development of skills has also been a welcome addition. BEE now has passive shareholding and active participation. There is a responsibility to develop South African communities. Cooperatives are big and small, not all have moved to the Department of Small Business Development. The Cooperatives Act has been amended to include a provision for a Cooperative Development Agency that focuses on capacity building while working with the provinces. The tribunal has been mentioned and the approach to collaborations with the Department of Small Business Development has been commended. All of the Ministers are required to produce reports regarding each province. It would be beneficial to note these reports when asking specific provincial questions and tracking improvements.

A DTI official wished to expand on the FDI conversation. FDI must be looked at for what it is. A foreign company may introduce new technology and working practices. The “Spanish invasion” solar project could be avoided with designations. In Africa there are many examples of FDI where countries such as China do not employ locals; there is very little backward integration. DTI must insist that there are designations, working practices, local procurement, employment, and new technology. The Department of Performance Monitoring and Evaluation (DPME) has a national multi-year monitoring plan. DTI’s Business Process Services Incentive has already been evaluated. In all of these cases the results go to the DG Economic Cluster, the Cabinet Committee, and full Cabinet. There is a lot of discussion regarding the cost and benefits of these incentive programmes. The final reports of DPME will be made available. Some people disagree whether or not the capital flow exchange controls are too strong or not strong enough. The goal is to control large flows of capital from the country. A capital transfer tax may not be viable. Further liberalization of the current capital control regimes may not have a positive impact. Assessment of the actual impact should be prioritized over the pressure to conform to international standards; the rationale must be analyzed. There is an established channel to assess where DTI prioritises and assists where cooperatives face challenges. Perhaps the DTI Parliamentary Liaison Officer can put the cooperatives that the Committee is concerned about in touch with the agro-processing office at DTI for assistance.

Mr Khan thanked the Committee for allowing DTI to present and the DTI team for their input. Overall, DTI is aware of the economy’s challenges. DTI is competent and is attempting to achieve what needs to be achieved in this government.

The Chairperson remarked that many provincial and municipality leaders could benefit from interacting with national government. If DTI is serious about growing the economy, they must engage with these people. Not enough is being done on inter-governmental relations, DTI included. The Chairperson invited DTI to explore how to be better involved. Further questions can be raised at a later date.

The previous meeting’s minutes were adopted.

Meeting adjourned.