Department of Trade and Industry on Manufacturing Competitiveness Enhancement Programme

Meeting report

Opening of the meeting
The Chairperson opened the meeting by welcoming Mr Lionel October, Acting Director General: Department of the Trade and Industry (DTI), and proceeded with the adoption of the agenda, which was proposed and seconded by Mr A Williams (ANC) and Adv A Alberts (FF+).

Presentation by Department
Mr October said the Manufacturing Competitiveness Enhancement Programme (MCEP) was unique. It was in every sense a stimulating package that would last for six years. It was designed to respond to the on-going global financial crisis, which was followed by the Euro zone crisis, resulting in the loss of millions of jobs. The Euro zone was an export market for manufactured goods, which created a problem for local industry. With that in mind, the DTI had gone to the National Treasury to request an emergency package to revive the manufacturing sector so that it could keep going. The National Treasury and Department of Finance had provided funds to the DTI to be used to revive the manufacturing sector for a period of six years. All the money should be spent by March 2018. However, the programme might be implemented again in the future, but officials ought to be responsible for the money allocated, and could not make any commitment beyond 2018. The programme was not designed to assist new companies, but to support existing ones. If they wanted to undertake an investment project or upgrade their machinery, their applications could be accepted. Most assisted companies were big names, but small manufacturing companies were also assisted. The programme assisted companies to deal with the structural challenges and/or cyclical and short-term challenges.

Ms Susan Mangole, Chief Operating Officer: Incentive Administration, DTI, took the Committee through the presentation, focusing primarily on background of the MCEP, eligibility criteria, marketing, the application process and progress, the application status, fund commitments versus disbursements, MCEP approvals, and approved projects and challenges.

She said that the MCEP was a key programme of the Industrial Policy Action Plan (IPAP), aimed at growing the manufacturing sector and sustaining jobs. It facilitated the manufacturing sector to respond to the global crisis and pervasive market and institutional failures such as structural, cyclical and short term challenges. Its objective was to promote and enhance entities’ competitiveness and job creation. The MCEP was centred on two programme components -- production incentives and industrial financing loan facilities. The former was administered by the DTI, whereas the latter was administered by Industrial Development Corporation (IDC). The programme had been launched in June 2012 by the Minister, Dr Rob Davies. It had been widely and nationally marketed. There had been road shows and workshops with the stakeholders and a webpage had been designed so that companies could get more information. From time to time, the DTI had engaged with its stakeholders.

Ms Mangole noted that an entity could, as a starting point, qualify if it was a Level 4 Broad-Based Black Economic Empowerment (B-BBEE) contributor. If not, an entity could submit a plan showing that it would achieve Level 4 B-BBEE within two years. There had been 808 approved applications with a grant value of R5.1 billion since 2012, of which R1.5 billion had been disbursed. On average, 6% of applications were cancelled due to investment decisions by applicants. The total number of applications received was 2 033. 90 applications were processed at each adjudication meeting. Before an application was approved, the DTI conducted an oversight visit to determine the authenticity of the applicant. Once an application was approved, a company was given six months. Within these six months, the company could put in a claim. Before the DTI paid out money, the DTI had to send an inspector and an external assessor to see what the company was doing, and activities in which money could be invested. The focus was on improving the company’s production.

Mr October said that the MCEP was a difficult programme to manage. The DTI bore the responsibility to ensure that the financial package was spent on what it gave financial support for. Accordingly, the DTI had established a pay-out system, where it could first give approval and then money would be paid, for example, when the machines were in actual use and when workers had retained their jobs. There was a big gap between approval and receiving actual money. The gap might be two years. That approach required the DTI to maintain a contingent liability. For example, if the DTI approved R50 million, that amount could be claimed in the following year. So the DTI kept books of its contingent liabilities. For the period of the six years, the DTI had been given a total package of R7.4 billion and the programme was now two and a half years old. It had started slowly in 2012 and thereafter there had been floods of applications. By 2015, the DTI had already committed half of the total package. Usually, a claim was made between six months to two years. Money was indeed paid after verification of the specified requirements. The maximum that a company could apply for was R50 million. However, the DTI intended to reduce that amount to R30 million, subject to discussion with stakeholders. The major problem faced by the DTI was centred on the confusion about the nature of the MCEP. Most applicants understood it to be a social grant, which it was not. It was a short term stimulating package. The DTI had been instructed that by the end 2016, it should not accept the filing of new applications. It should adjudicate on the filed applications. By 2018, the DTI would have allocated all R7.4 billion. Allocating a maximum of R30 million to companies would facilitate the allocation of incentives to many companies.

Mr October noted that the administrative challenges of the MCEP included manual processing of applications and claims, incomplete applications submitted to the TDI -- which resulted in processing delays -- non-compliance with B-BBEE requirements, and applicants submitting plans that were not adequate. Proposed responses to these challenges included automation of key processes to improve the turnaround and response times to applicants, more engagement with potential applicants on MCEP eligibility and procedures, and quicker responses to non-compliant applicants.

Discussion
Mr Williams asked whether employment equity and labour rights were set out among the criteria that ought to be complied with by the applicants. He said that short-term incentives should not be used by the state if they supported labour exploitation. Did the DTI investigate what was happening on the ground before the approval of an application? Had it looked at the massive retrenchment of workers? How did the DTI split the money among the provinces?

Mr D Macpherson (DA) agreed with Mr October that the short-term stimulating package should also aim at retaining and sustaining jobs. He commented that automotive sector was not a sector that employed many workers, but rather the manufacturing sector. Based on criteria provided in the presentation for an application to be approved, nothing had changed except adding value to the manufacturing sector. Supporting reasons remained the same.  He expressed his concern about the timeline of the MCEP and about the communication between the DTI and applicants, because a year could elapse without hearing an acknowledgment of the receipt of an application. He sought clarity on whether the National Treasury could increase the stimulating package, and suggested that the committee dealing with the adjudication of applications should increase its meetings in order to clear the backlog.

Mr M Kalako (ANC) expressed appreciation that the MCEP was working well to sustain the South African economy, and commented that a clear cut-off date was necessary, given that the economy could not depend on state support -- companies should recover and get on their own feet. He sought clarity on why Gauteng and the Western Cape were the main beneficiaries of the programme, and why other provinces could not share the benefits of the programme equally. Was it due to a lack of skills or infrastructure?

Mr N Koornhof (ANC) sought clarity on which sector that was leading in filing the applications. How did the DTI intend to reduce the R50 million commitment to R30 million, when it was clear that some companies were receiving more than R50 million?

Mr G Hill-Lewis (DA) supported Mr Macpherson on the issue of communication. He said he had  proof where an applicant had made an application of the short term stimulating package, but had received an acknowledgment of the receipt of his application only after 15 months. It was also a struggle to get the DTI on the phone to respond to applicants’ inquiries. He had received a number of complaints. He said that some applicants had also told him that applications would be approved, provided that the company would have “high impacts.” He sought clarity on what “high impacts” meant and how the DTI could objectively assess whether a company would have high impacts or not. How did the DTI actually do the adjudication process? He expressed his concern about the delay in adjudications and payments.

Mr Alberts sought clarity on how the DTI decided on eligible applicants with regard to industries included or excluded, and whether there had been any study on a macro scale on the South African economy as whole, looking at how issues of cyclical and short-term challenges could be responded to. Except for level 4 B-BBEE, were applications being rejected on the basis that an applicant could not create jobs?

The Chairperson sought clarity on how the DTI decided to adjudicate 90 cases per adjudication meeting.

Response
With regard to the conditions of eligibility, Mr October responded that companies first had to meet the B-BBEE requirements. Although it was a “must” that all companies had to comply with the labour laws, the DTI’s focus was to revitalise the manufacturing sector -- for example, the agro-processing sector. Most imports of agro-processing machinery came from the European Union. The problem was not on the supply side, but on the demand side. Currently, South Africa was experiencing a massive turnaround of products on the continent. It was expected that exports should reach double digits in the GDP for the agro-processing industry. That would, in turn, be good for labour as well. If it was profitable, the industry could pay its workers decent wages.

With regard to the creation of jobs, Mr October agreed with Mr Macpherson that the automotive industry was not a major job creator. However, from manufacturing to retail, the sector employed a massive number of over 100 000 workers.

The issues raised with regard to the timeline and communication were noted. Given that the MECP was a new programme, the DTI had been obliged to create new rules and apply new bureaucracy, and it had to change the culture of the adjudication. Application and adjudication traditionally took three months. Due to delays, the DTI had been communicating with applicants and stakeholders to explain the application and adjudication state of affairs. It had sought to ensure that it had integrity in dealing with a stimulating package of R7 billion. For this reason, the DTI had separated the group dealing with applications from that dealing with adjudications. Adjudication was more professionalized, and was done by the private sector. The DTI had developed two systems -- production incentives and financial loans. In other countries, such as the United Kingdom and Germany, the state provided financial loans. In South Africa, because of the high cost of capital, it also provided the Industrial Financing Loan Facility, which could be used for new investments. If one set up a plant, one could be given a grant of between 20% and 30% of the investment in assistance. The recipient did not have to pay back the grant, unless it had been provided as a loan. The DTI had given the IDC R1 billion that could be administered in the form of loans, at a 4% interest rate. The money had been given to the IDC because the DTI was not allowed to operate as a bank.

The good thing about the programme was that the money/grants was given for the expansion or upgrading of existing production. This was why it was so important to choose potential companies that were profitable, or for whose products the demand would grow. The main purpose of the scheme was job retention, not creating jobs.

The approval and payments were deducted from the total amount of R7 billion. The reduction was going fast, so the adjudication committee had started slowing down the process. It had adequately communicated with the concerned applicants.

With regard to deciding on eligible industries, Mr October said that those industries that had access to other schemes -- such as the automotive and textile industries -- were excluded. Because all industries might need to use the programme, he had suggested that the DTI might move to strategic sectors. However, it was the manufacturers who determined where the market would be. Agro-processing was viewed as a growing industry, and was in both urban and peri-urban areas.

Ms Mangole said that the DTI was working towards improving its communications. If a person applied, a reference number was allocated to the applicant for use in future communications. It could not be argued that a person had not received an acknowledgement of receipt of an application. Due to budgetary constraints, the DTI had informed its clients and stakeholders that there would be delays and that it would be difficult to honour the claims within reasonable times. First of all, the full package of R7.4 billion could be allocated only in the first two years. The money was allocated in accordance with the financial year budget.

Discussion
Mr Williams reiterated that an absence by the state of checking whether the applicant companies complied with the labour laws, implied promotion of the exploitation of workers.

Mr Hill-Lewis objected. He said that the B-BBEE comprised the requirements of fair labour practices, including compliance with the Employment Equity Act. He also objected to the contention raised by Ms Mongole with regard to acknowledgement of the receipt of applications, and repeated that he had a letter to prove his own arguments. He raised further concern about the unnecessary delays.

Mr Macpherson sought clarity on what happened between the approval of applications and the payment of the grants.

With regards to labour laws, Mr October said that the DTI did not make labour law compliance one of the factors for approval of an application. The issue of complying with labour laws could be looked at when the economy was revived and on a good track. The main focus was on revitalising the companies.

He said that when an application was approved, contingent liability arose, given that the payment could not take place immediately after approval. It could take less six months. For such a period, the money remained in the budget, which had to reflect the contingent liability as well.

Mr Hill-Lewis sought clarity on whether the contingent liability money was kept in the bank.

Mr October confirmed this.

Mr Shabeer Khan, Chief Financial Officer, DTI, explained that the National Treasury budget system was a cash-based system. Whatever was allocated to the DTI, this was what the DTI could allocate to the programme. The DTI had received three allocations, and considered applications in accordance with the money allocated to it by the National Treasury. The DTI took precautions in adjudicating and awarding the grants, because both the economy and fiscal circumstances could change at any time.

Ms Mangole said that R1.5 billion had been disbursed by the DTI. That excluded R1 billion that had been transferred to the IDC. The total disbursement had therefore been R2.5 billion.

Ms Shareen Osman, Chief Director: Strategic Partnerships and Customer Care, DTI, clarified the issue of communications. She said that there would always be a lag between applications and payment because when the programme was launched, the entities had been given 12 months to submit their claims. After this period, the guideline was changed and entities were given six months. The entities that were approved that time and that had contracts with DTI, were still bound by the 12 months period. The DTI, at a later stage, had introduced an electronic application system. Once an application was acknowledged, a reference number was allocated to the applicant for the applicant to follow up on the application. She agreed that prior to introduction of the electronic system, the communications were bad.

The Chairperson said that the response that had been given with regard to communication should be placed on record, because the issue had been raised by Mr Hill-Lewis, who had left to attend to another important commitment.

Mr B Mkongi (ANC) welcomed the responses from the DTI, and sought clarity on whether the programme would continue or not. This was an issue that should be addressed by Parliament. The Department had talked about Euro zone crisis and global financial crisis, and how companies should be profitable at times like those. However it had not mentioned whether there had been a study that showed whether some companies were struggling due to bad business decision-making. Was it foreseeable that companies would stand on their own feet? He supported the DTI argument that the companies could not rely on state incentives to run their own businesses. However, in granting these incentives, the determinant factors should be the creation of jobs and the potential of adding value to a particular industry. The issue of B-BBEE should be taken seriously. The companies should not be given stimulating incentives because they had black managers at the top of the organisation, but who could not take any decisions on the companies’ daily business. That approach would hinder real and desired social transformation.

Mr Alberts sought clarity on how the situation of granting stimulating incentives was unfolding and what unintended consequences could arise.

Mr Macpherson reiterated that competitiveness and exports were the key factors in the creation of employment. More revenue would result in the creation of more jobs, and vice versa. He also felt that the issue of complying with labour laws could be left to labour inspectors. He sought clarity on the clearance of the backlog in applications.

Mr Williams felt that jobs should not just be created by any means necessary, but rather decent jobs that met prescribed and dignified working conditions. It was awkward that the DTI could grant money that would further exploit workers in the hope of boosting the economy.

Response
Mr October stressed that the programme was aimed at retaining and sustaining jobs, but not creating jobs. The DTI was considering expanding the programme to include other sectors that were not covered by the programme. He reiterated that there was a cut-off date for the revitalisation of the entities. It was not an on-going programme. In the first two years, economic analysts had announced that South Africa was doing well economically. However, it had not achieved the desired success.

He agreed with Mr Mkongi that some business people had made wrong decisions. An example was a UK automotive company that had decided to become a financial credit company, and had thus failed. The MCED money was therefore for companies that had shown prospects of success and would retain and/or sustain jobs. However, strategic companies would be targeted in the future. Strategic sectors were used in South Korea and Japan. The key factor that they took into account was an ability to export. If a company could export, there was more likelihood that it could compete. The competitiveness criteria would be used.

Mr October said that about R20 million had been allocated to small, medium and micro enterprises (SMMEs). 


Ms Mangole said that the applications backlog would be cleared by May 2015.

The Chairperson welcomed clarity from the DTI with regard to job retention and sustainability. She was glad to hear that the DTI was not supporting retrenchment. However the DTI should also ensure that companies complied with the labour laws. She requested Mr October to send the Committee the factors that were taken into consideration in approving applications. She reminded the DTI that the companies should also meet the requirements imposed by the National Credit Act, 2005 and that competitiveness should be a key factor.

Mr Mkongi suggested that the Chairperson should liaise with the Minister of the DTI to unpack what “competitiveness” denoted.

The Chairperson agreed.

Mr October drew the Committee’s attention to the fact that a company had to be capable of exporting when it could produce. In future, competitiveness would be the major criteria. There was a programme driven by Trade and Investment South Africa (TISA) that was responsible for increasing export capacity and supporting direct investment flows.

The Chairperson said that the Committee should invite exporters to come to advise it on the challenges they faced. She thanked Mr October and his team for their time.

Communication from MEC Belinda Scott
The Chairperson informed the Committee that Ms Belinda Scott, MEC for Finance, KwaZulu-Natal, would be meeting the Committee on Friday, but that there had been a communication breakdown between her secretary and the Committee’s secretary. As such, she would not be able to attend the meeting. She very concerned with how things were turning out. She had received information that Ms Scott had suspended the KZN Gaming and Betting Board, but she was not aware of why the Board had been suspended. The issue of gambling was a major problem in the country.

Mr McPherson commented that if MEC Scott was not coming on Friday, the Committee should conclude that she was ignoring it. The issue of legislating on online gambling was an urgent matter to be considered.

Mr Mkongi agreed with Mr Macpherson. He said that the issue of gambling was becoming a national challenge. He was worried about the amount of time being taken for discussion of the subject.

The Chairperson agreed. She said that there was a need to look into every matter concerning gambling, including horse-racing.

The meeting was adjourned.