Appropriation Bill [B6-2015] :Department of Trade and Industry

Standing Committee on Appropriations

27 May 2015
Chairperson: Mr S Mashatile (ANC) and Mr N Gcwabaza (ANC) (Acting)
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Meeting Summary

The Department of Trade and Industry (dti) briefed the Standing Committee on the impact of the Appropriation Bill on its work, setting out its main focus areas, strategic plans, budget and highlighted areas. The Department aimed to contribute to building a dynamic, industrial, globally competitive South African economy that was not only inclusive but could also be sustainable. Particular areas of priority would include revitalising the agriculture and agro-processing value chains as well as resolving the energy challenges, and encouraging private sector investment. In order to be globally competitive, and to create and sustain jobs, South Africa should be concentrating on local beneficiation. Five strategic goals were highlighted: to promote industrial development and competitiveness; to create export markets for value-added products; achieve a broad-based economic participation; fair regulatory environment and a good working environment. The dti worked and collaborated with other departments in the economic cluster and played a catalytic role in growing the economy, particularly chairing the joint efforts on employment. Major achievements here included the procurement programme,where targets had risen to 75% procurement from local companies, with a focus on women and small business, local building of buses and locomotives, beneficiation in Special Economic Zones, and development of an African export market. A tripartite Free Trade Area would be launched shortly and there was a focus on foreign direct investment.

The budget of R9.5 billion comprised a large amount of around 84% on transfers; the Department also made payments to the private sector to stimulate growth in the economy. Dti ran several incentive schemes. It had years of experience and given sufficient resources, it believed that it could demonstrate significant achievements in the film, clothing and automotive industries. The need to not only create but also retain jobs was stressed. Investments in the motor sector were outlined. Dti had supported 2 164 projects with incentives of R7.1 billion. The Department had trimmed its own operations to ensure that more could be put to invigorating the private sector. The Manufacturing Competitiveness Enhancement Programme, set up for five years, would not be funded after 2017, but the dti felt strongly that it should be renewed and continue in view of its capability to industrialise, create jobs and expand investment.

Members asked if the jobs created were direct, or incentive grants, asked where they were created, what kind of support was given to previously disadvantaged, women, youth and the disabled, and wanted to ensure that the core programmes were addressing the most direct challenges. They queried the unfilled posts, and when new posts would be filled, as well as the non-signature of a service level agreement that had resulted in irregular expenditure. Members asked what the dti had done to ensure compliance and how its monitoring was being done. One Member questioned the relevance of an Australian case-study on incentives. Members also asked why bringing businesses into the mainstream took so long, and why there was still so much red tape, and commented that plans were all very well but this Committee would like to see more focus on real achievements. The plans for locomotive-building in South Africa were specifically questioned. Members also asked for explanation of the spending on "households", travel and subsistence. Members also asked for more information on the audit committee, its independence, and whether all entities had audit committees, and a further indication of the risk management. They asked if the Minister and Director-General had signed performance agreements. Several Members expressed the view that the Manufacturing Competitiveness Enhancement Programme should continue, and urged vigorous action on localisation to build industries. They enquired about the criteria for selecting grant beneficiaries and stressed the need to make the incentives readily accessible. 

Meeting report

2015 Appropriation Bill: Department of Trade and Industry briefing

Mr N Gcwabaza (ANC) was appointed as Acting Chairperson until the Chairperson could be with the Committee.

He commented that the Department of Trade and Industry (dti) had been asked to talk to issues relating to the current Appropriations Bill before Parliament and this Committee. The work of the dti in relation to budget, spending and achievement on goals would be discussed and assessed. He made the point that the approval of departmental budgets must be based on a good  understanding of how departments are performing and the point of having the budgetary processes was to ensure that the Standing Committee could look at requests for funding if the need arose. If it was found that a department was not spending fully that would have to be addressed. 

 

Mr Lionel October, Director-General, dti, thanked the Committee for its role in overseeing how the Department would spend its money. He would show that the dti had  a clear plan for growing the economy but that there was a need to diversify and industrialise, and he would particularly stress the need for funding beyond 2017 for one of the key flagship programmes.
 

Mr October noted that the dti aimed to achieve “a dynamic industrial, globally competitive South African economy, characterised by inclusive growth and development, decent employment and equity, built on the full potential of all citizens”. The goal was to build an economy which would provide employment for the bulk of the population as well as one which could generate the resources to lead to prosperity. He highlighted the word "industrial", stating that the country, in exporting raw materials, was exporting jobs, and that South Africa needed to export manufactured goods instead, meaning it must be competitive globally. This implied the need for inclusive growth, involving the majority of the population participating in the mainstream of the economy. He said this could help solve the issues of poverty and inequality, guided by the National Development Plan (NDP). The dti’s own Annual Performance Plan was linked to the NDP.

The dti had identified nine priorities in the economic cluster, in order to be able to deal with the challenges in the economy, which in turn would allow for greater job creation. He highlighted resolving the energy challenge as a key priority. Another was to revitalise the agriculture and agro-processing value chain. He said the agricultural sector is very important because it is very labour-intensive and adding value on agricultural products would have an impact on rural areas. The third key priority was that of adding value to the raw materials, and this meant that South Africa had to industrialise instead of helping other countries do so. He gave an example of iron ore, which was being exported to China and processed, then sold back to South Africa as steel.

The strategic goals were divided into five areas, namely: to promote industrial development and competitiveness; to create export markets for value-added products; achieve a broad-based economic participation; fair regulatory environment and a good working environment. He said the dti budget and structure were also fully-aligned, in the same order, with these goals.

The dti also works and collaborates with all the other economic departments, and dti chairs the joint efforts on Outcome 4 - a programme that deals with employment. This showed that dti was playing a role as a catalyst to help the economy to grow. He said one of the ways it could create jobs was by using the government’s buying power or procurement programme. For example he mentioned the R4 billion tender issued for anti-retroviral treatment, where dti made the decision on what proportion would be requested from local companies and co-producers. He also added the example of the common transport resources used in the country, such as Areyeng and MyCiti buses in Cape Town and emphasised that these buses must be built in the country from now on, to boost the local bus industry. He said the dti would usually work to develop programmes, and other departments would implement, to ensure a successful collaborative effort.

 

Mr October outlined the main strategic priorities for 2015-2020. Dti would be proclaiming three Special Economic Zones (SEZs). It would be working to beneficiate minerals like platinum, iron, steel and titanium. The third priority was increasing the localisation target to 75%, for production of goods and services locally. To achieve Outcome 11, he said the dti was focusing on the establishment of an export council to develop an African-export market. The dti was negotiating a free-trade area (FTA) on the African continent; this had been a work in progress for three years. He said in the next two weeks the tripartite FTA would be launched as a massive market for the continent. The other big programme the dti had been working on was Foreign Direct Investment (FDI).

Moving to the appropriations, Mr October noted that the dti had a budget of R9.5 billion. The bulk of the budget went to incentive development and administration, which took up R5  795  639 and industrial development, which was allocated R1  973  534. He said 80% of the budget went to the private sector to stimulate growth in the economy. He also highlighted the transfers and subsidies that take up R8  083   878, or 84% of budget.

Mr October then briefly explained the incentives packages that the dti provided to stabilise employment and create jobs. It ran several incentive schemes, and generally the clients would get 20% incentive whilst they put in the other 80% themselves. He emphasised again that the bulk of the dti budget does not stay in government but rather moves to the private sector, which makes up 80% of the economy, because of its ability to stimulate growth in that sector.

The Committee would obviously want to know whether the dti is ready to implement and fulfil the mandate, and to this question he said that  dti had several years of experience and, given the resources, it would be able to implement successfully. The dti had demonstrated this in automobiles, film, and clothing industries. In order for it to have a significant impact on the economy there was a need for additional resources for industrialisation.

For 2013/14 there had been 20  000 new jobs created and 106   000 jobs retained; this was important because it was all too easy to lose jobs if the programmes were not carefully crafted. The target in the automobile industry was set to produce 600  000 vehicles by the year 2020 and the overall target of one  million cars. There had recently been more investment apart from the BMWs, Toyotas and Mercedes Benz range, with Chinese investments such as the FAW, Iveco and Hyundai, showing appetite from new investors. He emphasised again that both creation and sustaining of jobs was important. The dti supported 83 films and TV productions last year and facilitated R3.4 billion of exports. In total there were 2  164 projects supported under the incentives project, which equated to R7.1 billion.

 

To conclude, Mr October said the dti would soon have 98% to 99% of its budget fully allocated. He said there were more requests that it would like to fund; the demand was high. There was, increasingly, more effort to "cut the fat" away from the Department's own operations, and focus on using the bulk of the budget towards invigorating the private sector.

He said that in the Manufacturing Competitive Enhancement Programme, the dti had spent R1.4 billion to stimulate the manufacturing , and this was scheduled to end in 2017/18. He said if the target was to industrialise the economy, create jobs and expand investment, this programme needed to continue.

 

Discussion

Dr C Madlopha (ANC) thanked the dti for the presentation, which had helped the Committee to understand exactly what the Department was doing, and its areas of success and failure. She asked if the 22 000 jobs that had been created were direct jobs or incentive grants that had been given to different sectors. She wanted to check what jobs were created, based on the incentives, especially for the majority of unemployed youth of South Africa. She also wanted more information on support to the previously disadvantaged, specifically asking about the kind of support the dti was providing to small businesses that were still disadvantaged. She asked the dti to indicate the percentage figures for the numbers of businesses owned by women, youth and people with disabilities whom the dti was actively supporting. She wanted these figures to demonstrate that the core programmes were really speaking to the challenges the department was facing.

She noted that in the 2013/14 report there were 118 vacant posts that were unfilled and she wanted to know the reason for this, given that the President's Office had asked every sector to focus on job creation. She said these vacant posts led to the under-expenditure of the Department, which was a concern. Furthermore, the dti had created 34 new posts which also contributed to the under-expenditure because they were not filled. She asked what the difficulty was in transferring grants to the relevant institutions because it also contributed to under-expenditure. Dr Madlopha said the committee’s main issues were around the under-expenditure. She highlighted also that the non-payment of service providers was one of the reasons, simply because the service-level agreement was not signed. She wanted to know who was responsible for that, the reasons the agreement was not signed and what actions had been taken against those responsible. She asked how it was possible to sanction a service provider without an agreement being in place and thus held to account. Finally, she noted that the Auditor-General had highlighted certain recommendations to the Department, and she asked for a progress report that would indicate the Department's focus on those issues.

Ms R Nyalungu (ANC) wanted to check what measures had been put in place to make sure the entities within the dti were complying with the expenditure regulations. She asked where the factory for manufacture of locomotives would be, so that the Committee could oversee it and check what was required, as also where the engineers would be sourced. She wondered if any youth would be trained in other countries.

Ms S Shope-Sithole (ANC) asked what the procedure and criteria were to qualify for the incentives. She asked why Mr October had used an Australian case-study and questioned its relevance to South Africa.

 

Mr M Figg (DA) firstly asked for an explanation as to why bringing businesses into the mainstream took so long and involved so much red-tape, especially for small businesses. He noted the 9-point plan, but was concerned that there was more mention, through a host of presentations, of planning and goals, but far less focus on the achievements made to date. He wanted to know where the dti was coming from, and where it was going, highlighting some recent statistics that suggested slow progress. He questioned the rationale behind the 75% localisation target. He commented that there was a need to ensure that the money that had been spent on buses already would result in buses that were actually on the road, and asked when this was likely to happen. In relation to the locomotives, he recalled a comment that all  locomotives came from overseas, and therefore requested clarity on that issue. He wanted to know how exactly the dti was planning to involve historically disadvantaged South Africans, (HDIs), and small enterprises (SMMEs), commenting that this was where the need arose, and asked what percentage of HDI employment was expected by the SMMEs.

Mr Figg asked how much of the FDI of R50 billion had been spent to date, and wanted to ensure that there was not underspending in this area.

He commented that slide 17 showed an allocation to "Households" and wanted an explanation on that. He questioned if, on slide 23, the amount shown for travel and subsistence was a real amount because it should not have cost a substantial amount of money.

Mr October firstly addressed the issue of the 22  000 jobs created, and told the Committee that there were programmes that had been allocated for young people, which included the call centres and business process outsourcing. Dti would invite companies to set up call centres. The one in Durban employed 1  500 people and the dti put in an incentive, to ensure that 80% must be young people. Running alongside that was the Monyetla Programme with companies such as Telkom, Lufthansa and Amazon that trained the young people to work in these centres. He said Barclays Global started training people in Tshwane, for example, and that the industry had created 80  000 jobs over 10 years.

With regard to small businesses and women, he referred to the Black Business Supplier Development Programme (BBSDP) which assisted small companies with purchasing their basic equipment via grants. The other programme was the Cooperative Incentive Scheme, where dti gave a small grant again for purchasing equipment, although the management of those programmes and all the women's empowerment programmes were now being handled by the Department of Small Business Development (DSBD).

 

Mr October explained the issue of the vacant posts. The dti employs over 1  300 people and the vacancy rate had been lowered significantly, and was now close to a 7% vacancy rate. He attributed a large part of that rate to public servants moving out of that Department and on to other higher level jobs. The new posts were created in response to the new priorities that the dti kept developing and which required new personnel.

Mr October explained that the irregular expenditure related to not receiving quotations. The dti had now instituted a rigorous system to cut down on the irregular technical expenditure.

Mr October addressed the question on agencies by saying that the dti set up a specialised Agency Management Unit to oversee all the agencies. The dti also delegated members of the audit committee to consider each of the agencies and monitor them more closely.

He explained that there were two programmes running in relation to the locomotives. The industry was run down because locomotives were not built for 30 years, and this was now being addressed; the Transnet programme was meantime said to be up and running.

Mr October noted the comment on red tape and the economy. In 2008/9 there was a massive drop in GDP, which resulted in a loss of a million jobs, but there has been a great recovery over the years since then. He said this came in the form of FDI, and around R60 billion came into the country in 2014. Also, in 2014, the economy created 200  000 jobs and over a five year period a further million jobs will be created; there was presently job creation although it was not as fast as it used to be, matching the unemployment rate. The jobs were not making a significant enough dent into the unemployment in black townships or youth.

He agreed that red-tape presented a major challenge for small businesses. There were systems that were put in place to address this. For example, the dti signed an agreement for small businesses to be able to register in one day as opposed to the 12 days previously stated.
 

Mr Alfred Tau, Head: Regional and Spatial Economic Development, dti, added to Mr October's comments on small business support and described some of the other programmes targeted at small businesses. A programme on incubation was run, together with private sector established companies, where the partners would set up centres to support small businesses. The programme called Workplace Challenge was about supporting productivity improvement in small businesses systematically using their own production systems to create more jobs. Another programme called Itukise focused on placements of youth and young graduates in jobs for training and mentorship. He also mentioned that there were many other programmes on which the dti was working.

Mrs M Mabitje-Thompson, Deputy Director General: Industrial, dti, responded to the question on failure to pay grant, saying that this might happen where the dti had pre-agreed with a particular entity what must be achieved before disbursing the money; it may not be handed over if certain pre-agreed issues had not been dealt with. Agreements were made against an agreement that entities would achieve certain milestones and they also had a responsibility to ensure value for money for the state. However,  in recent years the dti had come very close to achieving the targets, in full, for disbursing, including supporting companies to buy equipment, for example.

She pointed out that the achievements were listed on slide 20, but pointed out that achievements always showed a time-lag. She also shared information on the  Munyetla Programme where the dti had partnered with the Department of Higher Education and Training, getting companies to train youth for a period of no less than a year, and preparing them to be "work-ready" to gain long-term employment. About 3  000 students still needed to get through the programme, and that was a yearly figure.

She noted that the dti had created just over 20  000 jobs and projected going beyond 6  500 applications. She addressed the comparison to the automotive sector in Australia and said in some instances the investments in grants was the difference between the location of the investment. Thus, support for the locomotive industry in Australia had ended, and the investment had then moved elsewhere, and this example was cited because it was felt that it presented some lessons to South Africa. Loss of funding would mean a major loss of jobs in the auto sector. Speaking to the questions around ownership for women and the disabled, she said that ordinarily, in the key performance indicators, the dti would be looking for quality of jobs being created which led to multipliers. She said the dti could create direct jobs and that agro-processing was a major beneficiary. In order to qualify for the incentives, small businesses had lower requirements than medium to large size businesses would have to show, with the former merely needing to show that they had been operational or selling. When they needed to expand, the dti would fund the purchase of the machinery.

Mr October noted that sometimes the dti would not make full payment in one financial year, to ensure that the money was actually being used for real production. Money was not just handed over up front. Machinery must firstly be installed, so there were some delays in payment, or it was made over a period, leveraging the investments to ensure that there was proper value for money.
 

Ms Jodie Scholtz, Group Chief Financial Officer, dti, addressed the question of posts created and the challenges on transferring grants to entities. The main challenge was that posts were approved by an external authority, but discussion would happen at executive level to look at how these posts could be filled. Some of the delays were attributed to the administrative processes. The challenges in transferring some of the grants to entities included the problem of companies dealing in foreign currencies that fluctuated constantly. The dti also required original invoices, and sometimes these might only be produced in December, giving rise to a practical problem. Action plans were required, which necessitated a lot of planning, meeting and consulting, ultimately leading to delays in signing the shareholders' contract. Now, there were processes to get this signed prior to 31 March, the new financial year. She also amplified that any irregular expenditure would have to be reported upon quarterly, and if anything was picked up it would be addressed. Finally, she spoke about E-training which was an electronically-offered course where people could be trained in various modules, based on their availability.

 

Mr Shabeer Khan, Chief Financial Officer, dti, mainly addressed the Auditor General’s report and said the major issue the dti had, in the audit report, which was unqualified, was a comment on non-compliance to a supply chain management regulation. He said a plan of action had already been put in place and was shared with the Committee, and that there were checklists for officials put in place to deal with compliance. A number of financial advisors were in place to deal with the sectors. He said there were quite a lot of interventions planned and being implemented at this time. Mr Khan said, in relation to the "households" payment, that although the dti had a large budget, it must be remembered that most of it comprised transfers and actually a small amount was put to households. There had been a large budget cut since the 2013/14 year, which had impacted on the numbers because several programmes had to be trimmed. The service level agreements were put in place at pivotal points, to protect both parties.


Ms Shope-Sithole  was interested in the many entities of the dti. She said the business of this Committee was to "trace the journey of the rands and cents" and therefore she wanted to see the report of the Auditor General on the entities. Secondly, she asked if dti, as the parent department, was happy with the audit and risk arrangements in the entities. She asked if all the committees had audit representatives, and asked how independent the audits were.

Mr A McLaughlin (DA) referred to slide 16 and 17 and asked that the "administration" allocations shown twice be explained. He wanted to know exactly how much was taken up by administration  in each. He thought that the dti should be focusing a lot if its energy on international trade but noticed that the figure shown for this was low. He would have liked to have seen, on slide 17, a split between public corporations and private enterprises, rather than them being grouped under one title.

 

Dr Madlopha asked if the Director General and Minister had signed the performance contract. She noted that if there was irregular expenditure, there was provision for deviations, but asked what the consequences would be if someone failed to do that, which linked back again to the question of the performance contract. She asked what the monitoring mechanisms were when the dti made transfers to the different institutions. She was worried that there was no active mechanism to prevent mistakes in the future. She asked for an explanation on the statement that there would be no budget allocated to manufacturing and job creation in 2018, but this was surely the core business of the dti.

Ms M Manana (ANC) asked if the Department had the capacity to do full monitoring. She asked whether the Department planned on creating jobs in the area of Dimbaza.

The Chairperson also raised an issue on slide 25, which indicated no funding to support manufacturing after 2017, and said this must be attended to, because it was critical for growing the economy and creating jobs. He wanted to also have a sense of the dti’s thinking on funding the Black Industrialist Programme. He said that the biggest programmes with incentives should be linked to employment targets, even with the automotive industry. With more incentives, the dti could say the number of jobs that it expected to be created, in order for companies to contribute to their targets. Lastly, on localisation, he believed that the dti should be more vigorous because it should not take twenty years to rebuild an industry. He said the demand was so high that the country should be re-mobilising and building a major viable industry that created jobs.

 

Mr October agreed that agencies had been a big challenge but the dti had set up a fully-fledged agency management unit to monitor the agencies. He also said the Minister and the Auditor-General met quarterly to assess all the reports and monitor. He confirmed that each of the entities had independent audit committees and the Group CFO had been asked to sit on the audit council to monitor. On the question on international trade allocation, he said the dti distinguished between what was given to the division, and the incentives were listed separately. In terms of monitoring and assessing, he said the dti had an independent inspectorate which visited the various companies, before paying out anything. There were also mid-term reviews where all the programmes were assessed at the halfway point.

He spoke to the link between public and private sectors and said there were a number of schemes that were run by public corporations for the dti, such as the clothing and textile industry. He also said that both the Minister and Director General would sign performance agreements every year. He agreed that it would be necessary to follow the formal deviation processes in respect of the supply chain management issues. It was necessary also to ensure that the right person signed for the training.

Mr October then addressed the Manufacturing Competitiveness Enhancement Programme, explaining that this was established when the economy ran into difficulties in 2012. It was only set up as a five-year programme which was why its funding was only set until 2017. However, this programme had the potential to make major strides in agro-manufacturing as well as the automotive industries, where there was a need to pump money in. In relation to both Dimbaza and another area, the dti had realised that there was not much impact, and programmes were now introduced to revitalise each industrial area in each province. In relation to the black industrialist programme, the dti would support a person who had experience in running a business and wanted to expand, rather than supporting simply anyone. The bulk of the money would come from the DFIs, who would focus on improving employment opportunities across sectors.

 

Ms Scholtz responded to the questions on agency oversight and the audit committees. She said the Minister did meet with all the Chairs of the Audit Committees of all entities, and the dti internal Audit Review team also conducted annual reviews on the entities. Ten of the committees had independent members. They were mostly comprised of chartered accountants. The auditors complied with the requirements of the Public Finance Management Act and there was oversight on the policy and linkages. The dti was constantly working on improving systems and there was continuous monitoring of funds transferred. In any cases where the performance had not been up to standard, steps would be taken.

Ms Shope-Sithole suggested that at the following meeting, the Audit Committee present its report on the audit outcomes. She was very interested in focusing on internal controls and risk management, because she had some worries as the dti spoke.

 

Dr Madlopha wanted clarification on the criteria for selection for a grant, asking if the people chosen included young graduates or those starting the business. She asked for an indication of focus areas.

Ms Mabitje-Thompson (dti) said on the Munyetla Programme it would be graduates or matriculants that were unemployed who would be absorbed by a company in the call-centre industry. She said the call-centre was upgraded to involve multiple fields, which would give graduates a varied range of experience through training and placement.

 

Mr Tau said the dti would mostly target unemployed graduates because the idea was to help address that increasing pool of unemployed graduates. The dti would negotiate with businesses to provide for the requirements of various sectors,.

The Chairperson said that the dti's work was crucial and the Committee would be working closely with it. Incentive programmes must be transparent with very clear criteria, to avoid any instances where accusations of patronage were made. People should be able to access these programmes. The Committee appreciated the presentation and would like to get the numbers of jobs created at the next meeting.

The meeting was adjourned.

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