International Trade Administration Commission, Competition Tribunal & Competition Commission 2015 Strategic Plans

Meeting report

International Trade Administration Commission of South Africa (ITAC) presentation
Mr Siyabulela Tsengiwe, ITAC Chief Commissioner, said the global and domestic economic conditions within which ITAC executed its mandate continued to present challenges. South African firms were under increasing cost pressures, global market distortions and relatively weak global demand resulting in continued approaches for support. ITAC support had to be complemented by measures addressing competitiveness constraints and the promotion of exports. Tariffs alone would not be the long-term solution. Tariff increases had generally seen an upward trend to a peak in 2012/13. There was now a slight downward trend. Although the global economy was recovering it was not yet robust, which had a negative effect in weakening demand for exports. Hence addressing domestic challenges like input costs and improving efficiencies was a priority.

The policy direction of ITAC remained the same. ITAC’s strategy highlighted relevant “jobs drivers” like infrastructure; agriculture; mining; green goods and manufacturing. It would be measuring the outcomes of its interventions and putting more emphasis on trade monitoring.

ITAC would propose amendments to strengthen the law for increased efficiency and effectiveness. The SA Customs Union (SACU) customs agreement of 2002 remained a challenge.

Minerals beneficiation has been identified as one of the areas where jobs will be created and this will require an alignment of ITAC’s export control measures to give support to beneficiation.

ITAC has strengthened its export control measures on scrap metal through the introduction of a price preference system to promote investment and employment opportunities in the domestic metals beneficiation and fabrication industries following a policy directive by the Minister of Economic Development. The focus would be on ensuring its effective administration and managing litigation.

Since its inception ITAC had been in court 24 times, of which 16 cases were awarded in its favour. In December 2014 alone it was in court four times. This followed on the increased action taken by ITAC over the past three years.

Dr Moses Obinyeluaku, Chief Economist, said the Commission has begun to gauge the performance of the beneficiaries of its instruments against the policy objectives set out in the New Growth Path (NGP) and IPAP. A total of six impact assessments were carried out in agro-processing, aeroplane parts, textiles, tower and lattice masts and aluminium extrusions.

In the agro-processing sector, ITAC increased customs duty on uncooked pasta from 30 per cent to 40 per cent in January 2013. The key findings were that the share of exports to production increased from 1.7% to 2.9%. Export volumes grew from an average of 270 312kg to 424 754kg. Had it not been for the tariff support, the decline in country’s total exports of pasta in the second and fourth quarters of 2013 would likely have been worse. One company planned investments of R160 million in new machinery and equipment, which is expected to create additional 100 jobs and expand capacity by 2016 while another company planned the rollout of new technology in machinery and equipment and to increase its shifts from three to four as it sought to grow its output and employment seeking to increase its export base in Botswana, Zambia and Zimbabwe.

A rebate of duty on components and materials specified in permits for use in the manufacture, processing, finishing, equipping or packing of goods exclusively for export. Aerosud Aviation, a manufacturer and exporter of light aluminium and composite parts for passenger aeroplanes, has been the sole user of the rebate for the past five years. The estimated customs duties rebated and saved by Aerosud was about R16.9m per year on average. The key findings were that exports increased almost four times from 100 513kg in 2009 to 400 208kg in 2010, an average growth rate of 44%. Aerosud’s exports accounted for 43% of South Africa’s total exports of light aluminium and composite parts for passenger aeroplanes in 2013. To improve on the current performance the IDChas acquired a 26% equity stake in Aerosud’s commercial aviation manufacturing business. Government has initiated the Centurion Aerospace Village (CAV) in 2009 as a way of clustering of high-tech new manufacturing enterprises in this sector. An MOU between Aerosud and the Department of Trade and Industry (dti) was effectively in place. However, there were delays in implementation.

In the textiles sector, ITAC conducted a sunset review and maintained the anti-dumping duties on acrylic blankets originating in or imported from the People’s Republic of China (PRC) and Turkey in 2010 and these duties were maintained. The key findings were that the industry had invested an additional R8 million in machinery and equipment upgrades. The continued large volumes of cheap imports from China of knitted polyester blankets has neutralised other potential gains. To improve on the current performance the industry has indicated that should the anti-dumping duties be re-adjusted to include all finished blankets made of polyester, it would increase its capacity and double the current production and employment. ITAC was currently assessing the situation.

ITAC created a rebate item in April 2010 on woven fabrics aimed to enable the home textile industry to retain and create jobs, recapture the domestic market, increase its investment and competitiveness, as well as stimulate production down the value chain. The key findings were that the provision of rebate support, together with the availability of machines through the production incentive programme of the dti enabled the industry to do what it has never done before, replace imports with locally made products. It has resulted in the production of items covered by rebate overtaking the total production of other items. To improve on the current performance a more coordinated sectoral policy was required. The re-establishment and establishment of more competitive local milling factories could assist in addressing the rising input costs and growing production costs.

The closure of a cast house in Richards Bay deprived extruders of a competitive source of billet resulting in an increase in the manufacturing costs of extrusions. The extrusion sector was one of the most critical sectors in the economy. An additional 1 500 jobs created in the manufacturing of extrusions yields 30 000 more jobs downstream. In light of this, ITAC increased customs duty on aluminium extrusions from 0 to 5 per cent in March 2011. Only one major firm Hulamin Extrusions was assessed. The key findings were the duty has not helped to curb the exponential growth of Chinese imports. In 2012 China produced 50% of the world’s total production in the aluminium extrusion market. This undermined the firm’s ability to progress in the areas of domestic investment, employment, value addition and competitiveness. To improve on the current performance, the re-establishment of local billet production remains critical for the survival of this sector. In the absence of this, the firm will have to create greater remelt capacity to deal with the growing imported input costs. Meanwhile, the Commission is currently considering two applications for tariff increases from the firm.

In December 2010, ITAC increased the customs duty on towers and lattice masts for telegraph lines and electric power lines from 0 to 15 per cent duty. Only one major firm, TRICOM, was assessed due to data limitations. The firm’s focus was on the international market particularly Africa. The key findings were that the support gave the firm a form of protection, which it needed in the current face of uncompetitive export pricing with China, India and Turkey. The loss in export share of production was partly offset by the provision of the tariff support, as the firm switched from depending on exports to focusing on the local market. The firm was able to retain 50 per cent of jobs following the recovery in domestic production. To improve on the current performance ITAC was considering that China received a 9 per cent rebate on exports per tonne (or US$99). TRICOM was undercut by more than 70 per cent (or US$709) and therefore could not compete effectively in the international market despite the recent weakening of the rand. The firm intended to source other markets for exports.

The success of most industries/firms revealed how co-operation between government institutions could help promote industrialisation in South Africa: ITAC support alone was not sufficient to turn an industry/firm around. Synergy amongst government institutions was needed to implement industrialisation strategies.
Economies of scale also become more and more important. African regional economic integration was therefore particularly vital in order to create larger markets for the domestic firms.

Discussion
Mr S Marais (DA) asked what cooperation there was with the SA Bureau of Standards (SABS) on setting standards on imported goods. He asked for elaboration about the stopping of chicken imports from America being a threat to AGOA as compared to the protection of the country’s own poultry industry.

Mr P Atkinson (DA) asked why AGOA was not mentioned as one of the different international trade agreements South Africa had. He wanted more information on Aerosud and the Centurion Aviation Village.

Mr S Tleane (ANC) said the support Aerosud received had allowed for significant savings by the company and created 33 jobs over five years. Did this meet ITAC’s expectations? Despite assistance and rebates Tricom had only saved 50% of its staff and was not competitive. What did ITAC think could be done? Tricom was the only company which responded to the ITAC survey. Was there interaction with industry to get a thorough investigation?

Ms D Rantho (ANC) asked how many trade fraud cases ITAC had and how many were won in connection with the import of metals where companies imported without using the existing laws.

Mr Tsengiwe said ITAC was not involved in SABS criteria for standards. They did get involved where products fell under import control. Where products had to be safe and meet environmental standards they investigated together with the SABS. Illegal and fraudulent trade fell outside its ambit and lay with SARS.

Regarding the chicken dispute, he said ITAC had imposed anti-dumping duties for the past ten years.

AGOA was not a bilateral or a multilateral treaty it was a unilateral treaty of the USA.

On the, Centurion Aerospace Village, Dr Obinyeluaku said that it had discussed the matter with Aerosud. It then checked with dti on what was causing the delay and was told that the chief director responsible had left the dti and the matter was reassigned to someone else.

He acknowledged that the creation of only 33 jobs was a low total, but the point was to show the success of the initiative and to take that performance further and the tough economic times the country was in had to be considered.

Regarding Tricom, he said the company was struggling because their market was in Africa and the African market needed to integrate through a harmonised industrial policy.

ITAC had sent data templates to all companies not only Tricom and had held workshops and analysed the responses. He suspected smaller firms did not have systems in place to configure the information that was required and populate the template.

Regarding transfer pricing, Mr I Pikanini (ANC) said there were tasks that were supposed to be done by SARS and it was now not being done by ITAC because ITAC said that it should be done by SARS. SARS was understaffed to deal with all the areas of work and it was important that a lack of systems in firms did not end up with money being unaccounted for. He said the issue was not being dealt with satisfactorily.

Mr Tleane said there were contradictions and a lack of synergy in SADC/SACU. How was ITAC assisting in the harmonisation of regional trade.

Mr M Cele (ANC) asked what the reason was for the number of tariff applications beginning to decline following its peak in the previous financial year. What was ITAC’s contribution on job creation? What were the new court cases ITAC was facing?

Ms E Coleman (ANC) asked if the Chief Economist’s Office was fully established and what were the challenges and milestones of the Office.

Dr Obinyeluaku said the office was not fully established and still lacking capacity. The SA Trade Report and a number of other reports were produced.

Regarding Tricom, he said the question to first ask was why SACU was not working and to harmonise industrial policies of Africa. African markets were porous and allowed China and Turkey to take advantage. Africa needed to come together as Africans and protect their market.

Mr Tsengiwe said the matter of transfer pricing fell outside the scope of ITAC and in comparison to SARS, ITAC was an extremely small organisation so it needed to be very selective in what it did. It did onsite verification but did not have the human resource capacity to even control its own import and export regulations.

The reason for the slight decrease in tariff applications was because of the limitations of tariff applications in the future as the tariffs were at their boundaries or very close to it. The agro- processing market was struggling against EU imports for this reason.

The SACU agreement provided for the creation of institutions of SACU which would be involved in the joint setting of tariffs. SACU had a common external tariff and the responsibility for that was always the responsibility of South Africa. In the absence of ITAC equivalents in SACU countries, the Council of Ministers mandated ITAC to continue the investigations on behalf of SACU. Each member state was supposed to have an ITAC type body and these bodies would make recommendations to the SACU Tariff Board and then presented to a SACU Council of Ministers, who meet once a quarter, for ratification. He said that once these institutions were operational he feared there would be delays and gridlock. Currently ITAC made recommendations to the Minister of Trade and industry. He believed the new SACU model was not suitable. Currently nothing was happening.

Of the new court cases, two related to the export of scrap metal. One case was by SA Metal and the other by a company based in Durban. A case was brought by Shoprite regarding seafoods and AMIE had challenged the anti-dumping duties on chicken cuts from the EU. The Retailers Association’s request for a decrease in tariff duties was rejected.

Regarding ITAC’s contribution to jobs drivers, he said it was covered on p8 of the strategy plan regarding infrastructure and sourcing of products and agro processing tariff support and the restriction of scrap metal exports to promote beneficiation in these areas and in minerals.

Ms Coleman asked why the office of the chief economist was not capacitated.

Mr Tsengiwe there was a challenge regarding organisational development. There had been increased risks because of the increased workload caused by the growth in tariff applications and it had made a submission in this regard to the Department.

Ms Coleman said submissions had been made to the Department in previous years. What reasons were given by Department to their request? What impact would the absence of a deputy commissioner have on your work?

Mr Tsengiwe said ITAC had several engagements with the Department and the previous DG. The Department had not yet given a reply. The post of deputy commissioner was vacant for some time. The chief economist post was different from that of the deputy commissioner and there was a need to beef up the back office. He said the submission to the department had two elements. One was a job evaluation in terms of the existing structure and secondly it had identified specific gaps in its organogram and proposed a review of the organisational structure. The last word from the previous DG was that the matter had been submitted to the Minister.

Competition Tribunal presentation
Ms Coleman asked where the presentation on the financial reports were as the Tribunal had indicated that it had challenges.

Ms Lerato Motaung, Head of Registry, said Mr Norman Manoim, the Tribunal Commissioner, tendered his apologies for his absence as he had to attend a conference.

Ms Rietsie Badenhorst, Head of Case Management, said the Tribunal’s case load fluctuated but had increased over the period 2010 to 2015. Large merger cases increased from 52 to 98 and consent order cases, mainly in construction industry, increased from 5 to 43 over the period. Total cases rose from 82 to 175 over the period.

Ms Motaung said the challenges facing the Tribunal were office space because staff had doubled but the space had remained the same; funding which in the third year would be a challenge and the appointment of Tribunal members. The Tribunal continued to consult with the Department on these issues.

Discussion
Mr Marais asked to what extent was the Tribunal’s strategy was in line with a developmental state agenda. He said he knew that the Tribunal could not budget for a deficit. How had this impacted on its planning and what did Treasury pledge to assist.

Mr Tleane said that on several occasions the Tribunal indicated a lack of office space as a challenge. What were the funding needs of the Tribunal? He wanted a report from the Tribunal at their next meeting with the Committee on the lack of space as the matter could not be discussed indefinitely.

Ms C Matsimbi (ANC) asked how they were going to fund the Tribunal members' posts.

Ms Motaung said there were discussions with the current DG and they were waiting for a response on the office space question.

She confirmed that they were not allowed to budget for a deficit and said Mr Manoim would respond to all the other questions raised.

Ms Coleman said the Tribunal knew this was the period that strategic plans were presented to Parliament yet had scheduled a conference ahead of Parliament. The head of the body had to appear before Parliament because they were presenting their strategic plans. While she had agreed to the Commissioner’s absence for the meeting, in future she would not be agreeing to his absence. Another date would have to be set for them to present their strategic plan.

Competition Commission presentation
Adv Oliver Josie, Deputy Commissioner, said the Commission has developed a new, 15-year vision and mission, Vision 2030, which took into account SA’s socio-economic context. The strategic plan for 2015-2020 served as a five-year milestone towards the vision. The Commission’s strategic focus was on addressing abuse of dominance, especially in manufacturing input products, to allow for growth in manufacturing downstream industries which had been identified jobs drivers. The strategic focus was also on dismantling cartels to level the economic playing field and to reduce barriers to entry. It continued its enforcement and prosecution of firms in priority economic sectors, including telecoms, banking, intermediate industrial inputs and infrastructure services. The Commission faced a lot of legal challenges sometimes designed to delay the Commission. There had been significant public interest in merger issues beyond concerns regarding unemployment.

Mr Thomas Kgokolo, CFO, said the Commission was reviewing its IT and knowledge management systems as well as the human resource requirements of the organisation. He noted there was a large jump in operational costs.

Discussion
Mr Atkinson asked what the Commission were intending to do regarding the healthcare investigation.

Mr Marais asked if the Commission foresaw that the healthcare investigation would finish or whether it would continue. Could the Commission elaborate on further investigations into the construction industry. To what extent did it regard itself as being in alignment with a developmental state agenda.

Regarding SME promotion and advocacy workshops, Ms Matsimbi asked if the Commission’s plan included spaza workshops and how would it roll it out. She said that each year office space was noted as a challenge. What plan was there to address it.

Adv Josie said the healthcare investigation project was the Commission’s biggest project. Private healthcare costs were very high. Given the stakes were high for firms in the industry, the Commission had adopted an external panel for this enquiry into the legal and economic aspects. The project had various stages. It had received 67 comprehensive submissions of which one was over 8 000 pages long. The next stage would be holding public enquiries for the public to state their case regarding prices. Early indications were that there was a lot of public interest. The enquiry would take time to finalise and take longer than anticipated and might go into the next financial year. There had been a number of legal challenges to the enquiry to date.

Regarding the construction investigations, he said that in 2013 there had been investigations in which the payment of admission of guilt fines was a fast track plan for companies in the industry. This was the second phase where the Commission followed up on companies who did not admit guilt.

Regarding the budget of the healthcare investigation, Mr Kgokolo said that due to court delays R20m had not been spent so the budget would not be affected in the current financial year.

Ms Khanyisa Qobo, Head Strategy and Planning, said the Commission focused on SMEs as an impact area that had been identified. It did training and awareness programs with small business chambers where dedicated people went to the provinces and met with SME groups. Initiative want to undertake this year was an enquiry in the supermarket retail sector. It wanted to explore the dynamics of the market and its impact on spaza shops. The Commission would report in full by the end of the financial year.

Ms Wendy Ndlovu, Manager in the Office of the Commissioner, said it would examine all dynamics around competition in retail areas and elements of competition especially in the townships between locals and foreigners.

Regarding advocacy, in its work with unions was aiming to conscientising unions on their role regarding SMEs. Their work on abuse of dominance cases also affected SMEs as the Commission sought to unblock barriers to entry in priority or key areas so that SMEs enjoyed greater participation in the economy..

Ms Qobo said the Commission’s goals and targets were aligned and they were governed by the Act which articulated the developmental aspects so it could not veer away from it.

She said the plan engaged with the National Development Plan (NDP), the NGP, IPAP and worked within the macroeconomic context of the country.

Regarding office space, Mr Kgokolo said the Commission had identified a building next to the dti to use. It was busy with an assessment of how much staff the building could accommodate and would compare this with the Commission’s organisational structure requirements.

Ms Rantho said the Commission had to be specific regarding their SME work in the provinces when reporting back. She said not spending R20m could not be described as a savings.

Regarding abuse of dominance, Ms Coleman asked if the Commission had the capacity to take on dominant firms. How did it collaborate to deal with this issue? Could it foresee challenges that would result in litigation? Two of the values in their strategic goals value one and seven appeared to be similar, could they not be merged into one.

Mr Pikanini asked how the Commission aligned expenditure estimates to human resources.

Ms Coleman asked when the Committee could expect an amendment bill.

Mr Cele asked why the budget planning ended in 2017/18.

Adv Josie said the Commission wanted to align its vision with the 2030 vision as the Commission was 15 years old and felt it appropriate to do a 15 year vision, but strategically it had planned for a five year period.

On abuse of dominance and its market effects, he said that this was normal and challenging worldwide as the Commission needed to prove harm and also its effect on the market.

On human resources for these types of cases, he said the Commission had the capabilities and did employ economists and law and sometimes outsourced for particular skills.

He said that one area of law that needed amendment was section 8c on abuse of dominance because a first time offender was not penalised.

On collaboration, he said that it engaged with partners on best practices and on improving knowhow especially for abuse of dominance cases. They also engaged with experts from universities around the world.

Regarding market enquiries, he said it had given the Commission additional enforcement tools. The Commission could now delve into markets it believed was distorted to investigate it. The Commission was looking into the LPG gas market. It would be targeting market enquiries on a yearly basis.

Mr Kgokolo said the Commission had decided to link the Auditor General’s report to its strategic plan and use it to monitor themselves.

On the plans only going up to 2017/18, he said that when this year’s numbers were finalised, it would then build the plans further to 2020.

He said they were doing a review of the organisation structure. job grading would be part of this review and would inform the numbers required for the budget.

He said that the R20m was not spent because when the tender was awarded there had been a challenge against the award and consequently spending on work was delayed. Money was thus committed but not spent in the current financial year.

Regarding the vision of the Commission, Ms Qobo said the Commission had held 21 workshops with staff. When asked about the adequacy of the Commission, the staff wanted to move beyond the current vision to a more detailed vision at a granular level. The Commission could not measure on five year basis so it used the 15 year level as many cases stayed for longer than five years and some for over a decade.

Regarding amendments, Ms Ndlovu said the strategic plan did touch on existing amendments and when it would be passed into law. A phased approach was adopted to take into account the Commission’s capacity to implement. There was an exercise to identify other areas of the Act that would unblock any challenges to their investigations and prosecution. A factor in the loss of court cases was the interpretation of the existing law regarding standards required to prove contravention. Precedent was not very clear both to the Commission and to firms. A lot of the Commission's work therefore takes into account what happens in other jurisdictions as there was not yet a wealth of case precedents locally. The amendments would seek to address the thresholds for abuse of dominance. It was looking to work to introduce the balance of the amendments and any new additions in the third quarter.

Regarding values mentioned in the strategic plan, Adv Josie said that when the values were developed, value one and seven were taken directly from section 20 of the Act. However it did not mean that in practice it did not collaborate with stakeholders.

Regarding the KPMG contract, Ms Coleman asked why the Department stopped using KPMG.

Adv Josie said there was nothing secret surrounding the awarding of the tender to KPMG as it had been subject to the high court where Netcare had challenged the use of KPMG. This had delayed the use of KPMG to do the Commission’s work.

Ms Coleman asked if the court ordered the Commission to stop working with KPMG.

Adv Josie said that while the contract with KPMG was held in abeyance, the work continued through other service providers while they awaited the outcome of the court case.

Ms Ndlovu said the Netcare application was an interdict pending resolution of the issue. Netcare and KPMG agreed to a process between themselves so the Commission’s work was hijacked by that issue. A third party looked at the issue so the Commission’s hands were tied and it also did not want to compromise the integrity of the enquiry and so adopted a cautious approach.

The meeting was adjourned.