Industrial Policy, Industrial Policy Action Plan 2013/14: Status report by Department of Trade & Industry

Meeting report

Industrial Policy, Industrial Policy Action Plan 2013/14: Status report by Department of Trade & Industry
Mr Garth Strachan, Deputy Director General, Department of Trade and Industry, took the Committee through the presentation on the Industrial Policy and the Industrial Policy Action Plan (IPAP) for 2013/14, focussing on context and backgrounds, the details of the IPAP, constraints and opportunities and key themes that the Department of Trade and Industry (dti or the Department) was following.

He briefed the Committee on the global historical context of industrialisation since  World War II, focussing on common strategies, and developing country successes, and then turned to explain the evolution of the South African economy as from the apartheid era. During the apartheid era, the economy was characterised by deep racial structural problems. These structural problems remained largely intact and in some cases grew worse. The South African economy was still moving at a slow pace. Between 1993 and 2014, quarterly GDP exceeded 5% in only 16 of the 84 quarters, and the primary source of the GDP growth was the commodity super-cycle - which he explained as the concept that as China industrialised, commodity prices boomed - as well as credit fuelled consumption. However, post-apartheid consumption led to a growth path. He stressed that there was strong nexus between the nature of the South African economy and industrialisation. The nexus was based on the manufacturing industry, which was central to growth and job creation, and contributed largely to the GDP. The agricultural industry was equally critical but its contribution was declining. The mining sector was identified as a critical source of demand for manufacture, and yet there was correlation between resources-based value addition and job creation.

Mr Strachan then outlined the inter-locking cross-cutting and sector specific policies that were included in the IPAP.  These were:
- Macro-economic policies,  which supported more competitive and stable real exchange and interest rates
- Industrial financing: channelled to more labour-intensive and value-added sector
- Leveraging procurement: to raise domestic production and employment in a range sectors
- Developmental trade policies: included tariffs and standards deployed in a selective and strategic manner
- Competition and regulation policies: competitive input costs for productive investments and affordable goods and services for poor and working-class households
- Skills, technology and innovation policies:better aligned to sectorial priorities
- Sector strategies: these policies would be deployed in general to more ambitious sector strategies, as set out in the detailed "Cross-cutting and Sector Key Action Plans" (KAPs).

Mr Strachan noted the underlying principles and outcomes (see attached document for full details). He stated that the IPAP was aligned with the vision of the National Development Plan (NDP) and was the key growth driver on the New Growth Path (NGP). He believed that the industrial policy worked. It could enhance work.

Mr Strachan said that the IPAP was, however, faced by constraints and threats that hindered its progress. Identified constraints included:
- the protracted recession and decreased demand for South African exports in its traditional export markets of the United States (US) and Euro Zone, including difficulties associated with changing South African export paradigm
- a weakened domestic demand as the credit-fuelled boom of 2005-2007 had continued to prove unsustainable
- financial market failure and lack of investment in productive sectors
- monopolistic pricing of privately owned key intermediate inputs into the manufacturing sector, especially steel and plastics
- continuing currency volatility

He said that the threats included:
- electricity supply problems and sharply escalating and bunched up administered prices – most notably double digit electricity prices increases
- weaknesses in intra-governmental coordination
- regulatory ‘red tape’ burdens across government
- continuing high port charges and freight and logistics inefficiencies for export of value added goods
- continuing skills deficits and mismatches across the economy – an especially critical problem for  new growth sector
- labour relations volatility, which was the biggest domestic economic shock.

Mr Strachan explained the IPAP transversal focus areas. These included public procurement, competition policy, development trade policy, incentive and industrial financing, innovation and technology, regional integration and special economic zones (see attachment).

Mr Strachan went to explain the IPAP sectoral focus areas of interventions, divided in two clusters.

Cluster One focussed on:

• Agro-processing
• Forestry, timber, paper, pulp and furniture
• Boatbuilding
• Business process services
• Cultural and creative industries, such as crafts, music and films
• Clothing, textile, footwear and leather
• Automotive products, components, medium/heavy commercial vehicles
• Metals fabrications, capital and rail transport equipment
• Plastics, chemicals, cosmetics, pharmaceuticals

Cluster Two focussed on:

• Green and energy serving industry
• Advanced Manufacturing, i.e. advanced material, aerospace and defence, electro-technical, white goods
• Nuclear
• Downstream mineral beneficiation
• Upstream oil and gas service and equipment

Mr Strachan explained the immediate opportunities emanating from these areas of focus, in respect of industrial policy, infrastructure development, regional integration and BRICS.

He noted the key themes for IPAP 2015. They were:  infrastructure-driven industrialisation, resource-driven industrialisation, advanced manufacturing-driven industrialisation, localisation of public procurement, growing market on the African continent, and regional industrial integration, and Operation Phakisa.

Mr Strachan concluded by referring the Committee to some important selected readings (see attached presentation)

Discussion

The Chairperson welcomed the reference to the readings and commented that they were useful.

Mr G Hill-Lewis (DA) welcomed both presentation and readings. He expressed his concern about localisation of public procurement, stating that municipalities were not adhering to the strategies outlined, and that most of the governments’ cars were not locally produced. It was not the first time that he had raised this issue; he previously raised this issue during a beneficiation discussion in 2014.

He said that he was "frustrated" by the dti that seemed to "overlook the hanging fruits" and thus talked continuously about issues of red tape - something that should be simple to resolve, and whilst making reference to this as a challenge, the dti failed to say exactly how it intended to address that challenge.  Red tape was just presented as part and parcel of the general constraints.

Mr Hill-Lewis said that he was presently reading an intriguing book entitled“Producing Prosperity: Why America Needs a Manufacturing Renaissance,” which detailed some incredible stories of countries’ successes in raising their economy. He suggested that Mr Strachan should read it too.

Mr A Williams (ANC) referred to slide 22 of the presentation and appreciated the fact that IPAP was isolating value-added sectors with high employment and growth. However, he expressed his concern about the creation and sustainability of jobs, given that Mr Strachan had listed labour relations issues as one of the threats to the South African economy, and sought clarity on how the present labour laws were seen as threats. He commented that the dti should not merely concentrate on creation of jobs but it should focus on ensuring that any jobs that were created were decent. No one needed another "Marikana fiasco". To avoid that, both this Committee and the dti should engage with the Department of Labour and other concerned stakeholders. They should not restrict themselves to dealing with business, but also take into consideration labour matters.

Adv A Alberts (FF+) welcomed the presentation and sought clarity on five aspects that he thought needed further elaboration. These were:

- policy uncertainty with regard to property ownership
- whether the dti was liaising with the Departments of Basic Education and Higher Education and how it was planning to deal with skills shortage related issues
- whether it was addressing the problem of how people with skills could be absorbed in the economy, and whether there was a possibility of employing people in higher/critical employment
- what were the sectoral interventions with regard to aerospace and defence or the plans for those sectors
- what constituted the key spill-over’ sectors.

Mr D Macpherson (DA) welcomed the presentation. He commented that the South African economy was in serious trouble. The reality was that South Africa could prosper, but the dti, in its presentation, did not provide a picture of how South Africa could get to that point. The South African contributions to GDP provided a picture of the economic sectors, which included government services as well. The presentation was, however, silent on how jobs could be created. It simply indicated that jobs were declining. The economy would grow if there was stability in the labour workforce, in pricing, in electricity and water, and in interest rights. He identified instability of these aspects as patterns that were disturbing IPAP.

Mr Macpherson further commented that the government was inefficient when it came to dealing with the skills deficit, although this was a relatively unsophisticated issue that could be resolved in a simple way. He cited an example of company that was not given, on time, a certificate to do business - something that should be simple to resolve. He also asked for comment on the intergovernmental relationships and what measures had been taken to resolve any issues there.

Mr B Mkongi (ANC) also welcomed the presentation and stated that he was particularly interested in reading one of the suggested readings entitled Industrial Policy in a Harsh Climate: the case of South Africa, written by Nimrod Zalk. He commented that, given the continuing currency volatility, coupled with the deteriorating conditions of the workers, the economy would be threatened by labour chaos. Although there were hikes in the prices of products, the salaries of the workers remained constant, and this was bound to lead to strikes. Referring to slide 20 (inter-locking cross-cutting and sector specific policies), he said that it would like to see more detail on the constraints and threats of each policy, and the opportunities that these policies could present to South Africans. He described these policies as "the life and death of the IPAP". If the dti could not succeed in achieving them, the IPAP would die. 

Mr Strachan spoke firstly to the issue of localisation. When the dti talked to the National Association of Automobile Manufacturers of South Africa (NAAMSA), it was totally opposed to designation of local automotive procurement. In the process of designation, the dti sought to comply with the World Trade Organisation (WTO) rules. The dti had to do extensive research in order to evaluate what would be the positive and negative impacts of public procurement. Designation required more work and more engagement with the identified sector to be designated.

Speaking to the comment on red tape, Mr Strachan said it was not so that red tape could be "easily" addressed. Red tape existed in both formal and informal sectors. There might be huge red tape in, for instance, the Cape Town informal sector. Red tape was an issue that should be resolved politically, through inter-ministerial and inter-departmental meetings. The Office of the President had found it desirable to set up a task team that would look into all the issues of red tape and provide recommendations to the President. The task team would be engaging with business sectors. He referred to the regulations related to dumping toxic waste or removing rubble, and commented that they fell within the Department of Environmental Affairs. He commented that he was not at the moment in possession of any further information about the functioning of this task team.

Mr M Kalaku (ANC) welcomed the presentation and commented that he believed the IPAP was on the right path, but there were various issues that were needed to be looked into and corrected, in order to move the IPAP even further forward, with better pace. He thought that the dti and the Committee should agree that there were still issues of red tape that were frustrating the growth of business, and that these issues needed urgent attention.

Mr Kalaku commented that, in regard to the skills shortage, he was happy with what Mr Strachan presented to the Committee, in relation to training of people by the dti to gain skills, but commented that this was not sufficient since the training should be cross-cutting across all departments.

Mr Kalaku commented, on the issue of localisation, that the government should be apologetic if failed in its mandate, and if indeed, as asserted by Mr Hill-Lewis, municipalities were non-compliant with public procurement policy. On this issue, he expressed fears that the public procurement policy would remain on paper only and not be effectively applied. The onus was on the state to ensure the policy was implemented, enforced and complied with. Non-compliance would affect the economy severely because the state would not be taken seriously by private sector. Though there might be resistance to adhere to it, the public sector had no choice but to comply with it because the policy was aligned with the NDP.

Speaking to the issue of skills development, Mr Kalaku said that these were matters that fell within the scope of the Sector Education and Training Authorities (SETAs). Though a lot of money was invested in them, SETAs lacked proper coordination. The state or departments should emphasise the need for proper coordination of SETAs in each sector, for the production of young workers that could enter the labour market and meet market demands. Graduates had degrees but they lacked skills.

Mr Strachan noted that last year the dti had kept a close watch on President Obama's stance on issues related to reviving manufacturing. He would indeed like to read the book to which Mr Hill-Lewis had referred. The IPAP group was talking to the National Economic Development and Labour Council (NEDLAC) every year. Although there was such engagement, the question of decent jobs remained a challenge and it was accepted as critical.

Mr Strachan said that it would be more appropriate for the executive to answer questions related to private property. With regard to development of skills, he accepted that there should a well-structured coordination. He said that the dti was not represented in the SETAs. The dti, however, had a good relationship with PHAKISA Labour Consultants in relation to placement of skilled people in the marine industry. PHAKISA was a skills delivery unit which worked closely with companies. Through its consultation processes, PHAKISA could determine what were its clients’ needs, the scope and nature of skills shortages and could point to a set of employees that needed further training.

Mr Strachan said that there was also remarkable progress with regard to the Centurion Aerospace Village (CAV), that there would be appointment of a CEO in the near future and the CAV Board would be strengthened to ensure that that the institution was well-run.

With regard to the comment on decent jobs, Mr Strachan noted that jobs in economic sectors were declining because they were operating in a hostile environment arising out of the past structural practices, coupled with the unintended consequences of industrialisation and globalisation.

Mr Strachan wanted to clarify that the dti had never stated that it believed that the exchange rate was too low; instead the problem was the volatility of currency. This volatility was affecting mostly those companies that invested in importation and/or exportation. The dti repeatedly said that investment rates were too high, but these were not like industrial financing rates. The dti compared rates with competitive countries that had been in the investment market for more than ten years. The dti needed an industrialisation funding policy. That could lead to more favourable situation in investment.

Mr Strachan said that the dti accepted that there was inefficiency in the government in regard to trade, and that there was a need for better inter-governmental coordination. With regard to the import of goods that carried high risks to health, there were compulsory requirements to be met. If one wanted to export a product that ought to carry component specifications consistent with a certain jurisdiction, it must be accepted that South African ones were more generous. He went on to state that the inter-governmental policy coherence and integration was more problematic. However, issues related to that policy could be addressed by the Minister.

He highlighted, in answer to a question from Mr Mkongi, that the readings he had cited could be retrieved from the dti website.

Mr Strachan agreed with Mr Kalaku on the enforcement and monitoring of the Public Procurement Policy, but pointed out that it was impossible to enforce and impose upon the private sector, as private companies could not be compelled to buy locally.

The Chairperson sought clarity on why local government was apparently not complying with the Public Procurement Policy, asking whether these institutions were not designated, and, if so, then why there was still non-compliance. She had great difficulty in understanding how one of the spheres of the government was not respecting the State laws or was not working with other branches of government for implementation of laws. She requested that the response from the dti on those points be conveyed in writing.

The Chairperson then referred to slide 31 (underlying principles and outcomes in terms of procurement), and said that the IPAP would not get anywhere if the issues related to localisation were not addressed. She would appreciate a list of designated and non-designated areas being sent to the Committee.

The Chairperson sought clarity on why the dti was not actively engaging with SETAs and thus advising SETAs on the kind of skills that were needed. The dti should find a way of closing that gap, as well as gaps in placement of graduates.

Mr Macpherson sought clarity on why local vehicle manufacturers were opposed to localisation.

Mr Strachan responded that the Broad Black Based Economic Empowerment policy required investors to score points on certain aspects, but there were issues around coherence of policies and programmes across departments and spheres of government. If the state wanted localisation to succeed, these policies and programmes needed to be looked at so that they would also support localisation. There was a lack of commitment to do that at present, or there was a lack of capacity to design tenders in a way that would secure localisation at municipal level. There had to be a change of attitude and mind-set of the state departments. In the United States, the policy on localisation was clear, and if an entity did not buy locally, it would be in trouble. A similar approach should be taken in South Africa.

The Chairperson stated that the issue of public procurement – or localisation – policy in relation to local government was a central matter that the Committee should focus on, in order to get to the nub of the problem.

African Growth and Opportunity Act (AGOA)
The Chairperson noted that there were discussions around the future of the AGOA, and one Member was opposed to the sealing of the deal, and it would be discussed in the next meeting. She urged Members to note the importance of the AGOA to South Africa.

Minutes of previous meeting
The Committee adopted the minutes of a previous meeting.

The meeting was adjourned.