Minister of Trade and Industry on DTI 2014/15 Annual Report; 1st quarter 2015/16 performance; audit findings with Auditor-General

Meeting report

The Chairperson welcomed the Minister and the Director-General of the Department of Trade and Industry (DTI), and the office of the Auditor-General. She expressed appreciation for the growth of the green economy and noted that only three percent of the South African economy was black-owned. She wanted the Committee to enquire as to the health of Ms P Mantashe (ANC). She conveyed apologies for Mr A Williams (ANC), Mr J Esterhuizen (IFP), and Mr D Macpherson (DA). For the record, the Chairperson extended congratulations to Mr G Hill-Lewis (DA) and his wife on the birth of their first child. The agenda was adopted.

Auditor General of South Africa (AGSA)

Ms Corne Myburgh, Senior Manager: Auditor General’s Office, called attention to the improvement in the Trade and Industry portfolio. The Department had moved largely from ‘unqualified with findings’ to ‘unqualified without findings’. Only the National Regulator for Compulsory Specifications (NRCS) remained qualified due to its dependence on external entities to register themselves. The Minister had created a task team to address the NRCS issue.

The AG showed six key focus areas:

1. Quality of submitted financial statements
2. Quality of submitted performance reports
3. Compliance with legislation
4. Financial health
5. Human resource management
6. Information technology

In the first three categories, intervention was required, but only in less than half of the cases. In the last three categories, some areas were marked ‘concerning,’ but none required intervention and thus none had impacted on the audit outcome. Five institutions needed to correct their financial statements. 73% of the annual performance reports were marked ‘reliable’. Most auditees did not comply with legislation in submitting financial statements, with 45% requiring intervention. Well over half of those audited in relation to legislation compliance were marked ‘good’. There was no unauthorised expenditure found in the portfolio. Irregular expenditures were reduced from past levels, and amounted to R40 million. The Lottery Board, the National Consumer Commission (NCC) and the NRCS all reported irregular expenditures. There had also been a significant reduction in fruitless expenditure, from R5 million in 2012/13 to R500 000 in 2014/2015.

Ms LelanieVermeulen, Senior Manager: AG’s Office, said that most entities were marked as generally improved in assurance provided, with none marked as regressed. Drivers of key controls such as leadership were also generally ‘green,’ or good across the board. The National Gambling Board had struggled with oversight responsibility, HR Management, and legislation compliance.

Ms Vermeulen reported that the first three causes were slow responses by management, vacancies in key positions, and lack of consequences for poor performance and transgressions. As for the Minister’s commitment to address root causes, he had implemented an action plan to address the findings of the audit. A quarterly follow-up on these reports and the procurement of action plans from those audited was in progress. New commitments had been made to assist the NRCS and the NGB, as well as to compile quarterly financial statements.

Discussion

The Chairperson lauded the generally good performance of the Department and called for questions for the Auditor General.

Mr Hill-Lewis remarked that the report was clear and he would save his enquiries for the Minister.

Mr N Koornhof (ANC) commented that there had been a huge reduction in irregular expenditure. Was this a stand off? On average, had there been good performance?

Mr Macpherson also chose to save his questions for the Minister.

The Chairperson asked about the issue of levies, imports and exports dating back to last year. To what was this database issue related?

Ms Myburgh agreed that the Department was very happy with the irregular expenditure improvements, because the Department had put a lot of effort into this. She hoped that it would further improve. She could not say what the total government’s irregular expenditures were, but she doubted that this figure stood out. She blamed a slow response by the Department to the database issue, but she also said some responsibility should fall on the importers and exporters themselves.

Ms Vermeulen added that perhaps reports should be collected in conjunction with the financial year, rather than in January and July.

The Chairperson noted that this was a legislated requirement and perhaps should be fixed to address the levies issue. She called the action plans ‘solid’ and thanked the Auditor-General’s office for successfully meeting its constitutional mandate. She informed the Committee that South Africa was one of the top three investors in the green economy in the world.

She introduced the remaining delegation from the Department, thanked the Committee researcher and moved to the Director-General’s presentation.

Department of Trade and Industry

Minister Rob Davies of the DTI introduced the Annual Report and the First Quarter Report. He was excited about the ‘clean audit’ for the Department. He admitted that the economy was headed for turbulent times, with contractions in the most recent quarter and currency issues. It was important to understand and respond to the underlying factors. He pointed to the 2008 financial crisis as an ongoing ‘earthquake,’ and to the restructuring of the Chinese economy. These situations, as well as the excess capacity of steel manufacturing worldwide, had brought about an end to the profitability of the African commodity/mineral market.

In order to respond, South Africa had to act urgently. He lauded the work of the Mineral Resources Minister and the government’s work in the steel industry. South Africa must move up the value-chain and evolve economically. Tighter budgets and increased efficiency would be necessary; the report would reflect this. The achievements in the report were not to the scale that would soon be necessary. Infrastructure progress and Operation Phakisa needed to continue to move forward, and the Department must stay alert and continue to improve. The Minister had come in with the goal to make small improvements across the board consistently, and would continue to pursue that goal. The Department had strived to comply with the Auditor-General, as evidenced by the example of irregular expenditure reduction. The Minister explained that the DG was the accounting officer, whereas the Minister handled strategic leadership. He felt that the dynamic had worked well.

Mr Lionel October, Director-General, DTI, said that some projects had been handed to other entities since the report, but this report would still include them.

The DTI’s strategic goals included:

1. Facilitate economic transformation and industrial development;
2. Build global relations through trade;
3. Facilitate economic participation;
4. Oversee fair regulations;
5. Create a world-class administration.

As for the global economic context, there had been a plunge in commodity prices, especially in iron, coal, and platinum. He presented a graph that showed the 2008 plunge in real gross domestic product (GDP) terms in all countries studied. As for the domestic economic context, the economy had contracted by 1.3% in the last quarter, with commodity prices significantly declining. Electricity supply challenges, drought conditions, and the spillover from mining into manufacturing had all contributed to the SA economy’s downturn. He reported that the overall trend of Foreign Direct Investment (FDI) was up. South Africa was still the largest draw for FDI on the continent; historic highs had been reached in 2013. Exports were also growing, with half of exports being raw materials.

In industrial development, the clothing industry was creating jobs for the first time in years. Footwear manufacturing and exports had also grown. This growth was a result of the DTI’s incentives and tariffs. The mining industry, for example, now bought all its workwear from SA oil companies. The automotive sector had surpassed the R100 billion mark for exports. Mercedes-Benz was a big investor, as well as the Chinese plants, Hyundai, Hino, and Iveco. 18 sectors had been designated for local procurement to raise demand. The PRASA rail system also must buy its products locally. The marine manufacturing sector had been received investment to make tug boats. Operation Phakisa had broken through and invested R7 billion in the public sector. The Manufacturing Competitiveness Enhancement Programme (MCEP) had provided financial support to many companies, including R28 million to Astral Foods. The DTI had launched the Business Process Service (BPS) to increase employment and support companies. The DTI had supported the construction of Mpact Limited’s recycling plant. With green industries, the Renewable Energy Independent Power Producer Programme (REIPPP) was a world leader in green investment. The DTI was pursuing solar power in the Northern Cape and wind farms near Port Elizabeth. Fuel cells to take advantage of South Africa’s platinum reserves were also being pursued. In the electro-technical sector, Samsung had directly invested in a plant in KZN. The and gas industry was growing, with investments coming into Saldhana.

An overview of the incentives programmes showed that the emphasis from the DTI had been on manufacturing. The Department had attempted to spread approvals between all provinces. The 12i tax programme was considering a greater number of applications recently. The DTI was also focusing on black companies for support.

For trade growth, the main emphasis had been on development of the Tripartite Free Trade Agreement and creating a North-South Corridor with rail development. Negotiations within the SADC to address trade barriers, within the Economic Participation Agreement, and within the African Growth and Opportunity Act (AGOA) were under way. An investment pipeline of R43 billion for this financial year had been facilitated. In October 2014, the United Nations Conference on Free Trade and Development (UNCTAD) had recognised the DTI as an attractor of foreign direct investment (FDI).

As for broadening participation, The Special Economic Zones Act of 2014 was being implemented, and the new Samsung plant was an example of this. Pro-feasibility studies for 10 new zones had been finalised. Broad-Based Black Economic Empowerment Codes had been gazetted for implementation in May. A commission for implementing the Broad-Based Black Economic Empowerment (BBBEE) Amendment Act had been budgeted for within the DTI and established to strengthen enforcement. The DTI had launched the Equity Equivalent Investment Programme in February, with a value of R700 million. The DTI was working to make access to BBBEE certificates far easier through Companies and Intellectual Property Commission (CIPC) self-serve terminals. An Indaba for Black Industrialists had taken place in March, with the President and 700 delegates in attendance.

As for regulation, the DTI gad developed the Copyright Amendment Bill, the Liquor Amendment Bill, the Gambling Amendment Bill, and the Licensing Amendment Bill for tabling in Cabinet.

The State President had assented to regulations on the final draft Intellectual Property (IP) Laws Amendment Act.

As for administration, the DTI had a vacancy rate of 8.5%. It employed 47% women and 2.8% people with disabilities. Payment of all eligible creditors was made well within 30 days. The President had asked the DTI to conduct workshops for government on how to pay creditors on time. A graph showed that the budget and expenditures had been well aligned for the DTI in the last five years. Incentive programmes for private enterprises comprised most of the budget. The DTI had received a ‘clean audit’, which was an improvement from past performance.

The DG then detailed key achievements from the first quarter. As for industrial development, the DTI had launched the Industrial Policy Action Plan (IPAP) in April. A Danish plant was now making valves, thanks to legislation from June 2014. The DTI had created a rebate provision for     the International Trade Administration Commission (ITAC). The DTI contributed to the SADC Industrialisation Strategy. It was also supporting the aerospace industry. It invested in the launch of a Toyota plant earlier this year. 18 film productions had been approved this year. The Manufacturing Competitiveness Enhancement Programme (MCEP) had approved 161 enterprises already and 538 enterprises had been approved through the Export Marketing and Investment Assistancw (EMIA) programme.

As for trade growth, the DTI had been awarded Best National Pavilion at the Zimbabwe Internationa Trade Fair. The AGOA extension until 2025 had been passed by the US legislature. the DTI was concluding text negotiations for the Common Market for Eastern and Southern Africa (COMESA) and the TFTA. Three Memorandums of Agreement (MoUs) had been signed with Senegal, Zimbabwe, and Mauritania. The Cuba package was being pursued. The Dube trade port and Saldhana Bay continued to attract foreign investment. 30 government officials had been trained in China. Black Econommic Empowerment (BEE) certificates were being issued and the Special Economic Zone (SEZ) board had met in June. The SA Business Incubator Investment Programme had started in May. The liquor and gambling policy had been released for public comment. Work on the National Credit Act and the Lotteries Act was still under way.

In this period, the budget had been R2.18 billion, whereas only R1.6 billion had been spent. However, many applications were still being processed.

The Chairperson thanked the Department for the presentation and reminded the Committee that many beneficial South African companies, such as Triggerfish and Damen shipyards, had booths set up outside the committee room.

She gave Mr Hill-Lewis a gift and a card on the behalf of the committee in recognition of the birth of his daughter.

Committee Business

The Chairperson moved to consider the minutes of 5 and 7 August.

The Committee adopted the minutes without amendment.

The Chairperson moved to consider the minutes from 14 August.

The Committee did not pass these minutes.

The Chairperson moved to consider the minutes from 18 and 26 August.

The Committee adopted the minutes without amendment.

The Chairperson moved to pass the 14 August minutes with an amendment to add the missing website.

The Committee adopted the minutes with the amendment.

Discussion

The Chairperson commended the Department’s progress and called for Members’ engagement.

Mr G Hill-Lewis (DA) commented on Department’s spending, saying that the DTI’s budget was relatively small compared to other Departments. He congratulated the Department on the clean audit. He noted a difference between the financial management of the Department and that of the entities that reported to it. There was a need to exercise stronger oversight over these entities to improve their financial practices and management capacities. Though the NCC had improved, it was concerning that the NRCS was still in the red zone for the second year in a row. What would be the consequences for not complying with the Public Financw Management Act (PFMA)?

He noted that the Department had emphasised international factors and downplayed the effects of domestic constraints on the economy. When one considered the overall outcomes for the DTI in the South African economy, things did not look good. He expressed frustration at the disconnect between self-selected department goals and outcomes that the economy needed. For example, this year South Africa had slid down international ratings for ‘ease of doing business’, though this was not an outcome for the Department. South Africa was becoming a less attractive destination for investment, as discussed in previous meetings. This was another outcome that the Department had not been measured against.

Mr A Alberts (FF+) commented that this was an extremely important department. Had it investigated ways to bolster growth against international downturns in less conventional ways than IPAPs? Given the severity of future downturns, how could we create protection? Were we planning to invest more heavily in South Africa? What studies had we done on internal inhibitors, such as labour broker prohibitions, which had resulted in 50% job loss and only 8% permanent job creation? He called for a balance between job security and the free market.

Mr D Macpherson (DA) called attention to the AG’s report. There was clearly a disconnect between these studies and what these entities were actually doing. Even the AG had admitted edthat consequences needed improvement. The Minister needs a game plan to deal with this. There was no assurance that senior management at these entities were complying with the DTI.

He noted that the Minister frequently blamed external factors for economic woes. Targets should start reflecting the NDP. We needed to measure ourselves against tangible factors like promoting investment and job creation rather than the number of workshops held.

Mr Koornhof agreed that it was a very busy, very large department. One could not escape external global environment. How many jobs had been created in the film industry? Was our relationship with the USA good enough that if the USA pulled the world out of its economic woes, South Africa would fully benefit.

Mr N Matiase (EFF) expressed concern that South Africa’s economy was declining. He called the DTI a key driver of capital investment. Why was the DTI not benefitting our development? Did the DTI feel that development should only be fueled by foreign investment? He called attention to the automobile and textile industries. What was the contribution of DTI’s intervention in these industries to down-stream beneficiation and consumption? SA must move away from only assembling. What progress had been made on the role of catalytic converters as a downstream beneficiation? He noted that the textile industry was in crisis and that operations dating back to the apartheid Bantustans had been shut down. SA’s relationship with China had disadvantaged South Africans; what was being done about this?

Mr M Kolako (ANC) commended the improvement of the Department and the plans for further improvements. On the MCEP programme, he noted that some provinces had improved, but the Eastern Cape, Northern Cape and North West, for example, had not grown. What had been done to promote inclusive growth? He noted that a high proportion of the workforce was unskilled, and that the DTI had many programmes to address this; the greatest beneficiary of these programmes was private industry. Perhaps these programmes should be more inclusive. One could clearly see the DTI’s contribution to job growth, but it needed to emphasise inclusive growth; not all people would be business people.

The Chairperson said she would like to see the Department address previously identified deficiencies. The action plans were there, but implementation needed to be tracked. The supervisory element was clearly weak. The DTI had obviously reformed, but vacancies still needed to be filled. Issues with the timeline also needed to be addressed.

Mr October took the point that entity oversight needed work. He said that the NRCS was only qualified, and that their revenue model needed attention. He reminded the Committee that the NRCS had been in major crisis a few years back, which had resulted in a completely new management being put in place in order to remedy most problems therein. In the NCC, new leadership had also been appointed to address financial management issues. In the agencies, boards had resulted in fraud and had thus been replaced by accounting officers. A meeting of all audit committees occurred twice a year for the DTI in order to have a permanent oversight structure. One collective bargaining manager had been created for each agency for labour relations.

Ms Jodi Scholtz, Chief Operating Officer (COO): DTI, said it would take two to three years to fix the NRCS. The internal audit was striving to appoint strong leadership for these entities. A quarterly report on the audit committee findings would be given to the Minister.

Minister Davies reminded the Committee that most entities were perfectly clean and that the NRCS had and woud continue to improve. He was glad to hear the Committee urge him to take an active role in oversight, because some of these entities had claimed independence from oversight. He would expect entities to respond to advice from the DTI.

As for the more general economic questions, he pointed to international export drops and recessions in Australia, Brazil, and Canada. The international factor was the key issue, though the President’s nine-point plan addressed domestic issues such as electricity problems, investment promotion, and labour relations. As for the accusation on the lack of ease for doing business, he plainly disagreed and quoted Business Insider as saying that it was very easy to do business in South Africa. He also disagreed that there had been a withdrawal of foreign investment. He mentioned the opening of four Unilever plants and Unilever’s belief in African markets. South Africa was very capable of manufacturing. He pointed out the outstanding performance of the South African BMW plant. Chinese representatives had said that South Africa had the second most effective international manufacturing plant. He agreed that the continent could not depend only on commodity markets. He agreed that inclusive growth at 5% was very necessary. Old factors for inclusive growth were not available, so South Africa had to move up the value chain.

He told the Committee that these policy platforms took time to make an impact. For example, the clothing and textile industries were dying and the DTI had taken on the challenge of saving them by promoting local production and a crackdown on illegal imports. For example, a representative from Foschini had said that its presence in South Africa made economic sense for his country. He admitted that manufacturing was still too tied to mining, but he felt that the DTI had shown its capacity to act.

As for contradictions between the IPAP and the NDP, he explained that the IPAP had been created to be in line with the NDP. Which parts of the IPAP did the DA want to pull? The DA could not claim credit for IPAP investments while also criticising it. The film industry had quadrupled its production of films, and the reason for this was incentives and film rebate schemes. Cape Town claimed a film industry deal, did it not? As for the weaker Rand, the Minister reminded the Committee that a few years back the International Monetary Fund (IMF) had marked the Rand as overvalued. Now that the Rand was undervalued, there had been a relative increase in exports.

 As for SA’s US relationship, no one relationship would save SA. The US had decided to re-industrialise in energy after a previous emphasis on the service industry. The AGOA had been reviewed, and meat trade issues needed to be resolved, but in general AGOA had grown that relationship. As for the auto sector, the DTI had a significant tariff on finished products. The motor industry programme had made progress, but SA needed to follow through on catalytic converters. It needed to find a price for platinum that would support catalytic converters.

Mr Macpherson explained that the NDP was market-driven, whereas the IPAP state-driven. He noted that the Minister had blamed the mining economy. Why had it taken so long to convert the South African economy into a more free-market, entrepreneur-based economy? He claimed that the state had stifled all opportunities for this transition. He agreed that South Africa must move up the value chain. How could SA expect the steel industry to evolve if it was collapsing and did not have access to electricity? He applauded the restructuring of entity boards. When would this process be complete? As for the Cape Town film industry deal, did the DTI support all the corruption that had resulted? He went through the under-performance, and thus over-spending, of the MCEP programme. He said that there was a place for incentives, but that South Africa could not spend half of its export promotion money on staff. He agreed that the economy must diversify, but to do this SA must empower entrepreneurs.

Mr Matiase quoted that ‘all that glitters was not gold’ and that ‘all who wander are not lost’. He said that the government was lost. In 21 years, the ANC should have been able to take the country forward. As for the issue of platinum and catalytic converters, South Africa produced 72% of the world’s platinum and owned only 8%. These figures prevented jobs and downstream beneficiation. The government should intervene. South Africa was a country of extensive labour, and should invest in this labour, but the ANC lacked the political will. The unemployed were losing patience.

Mr Alberts asked again about unconventional, innovative means for growing the economy. He agreed that unemployment was a major issue, and that IPAP was not doing enough. He suggested culling best practices from the world and combining them into a unique plan for South Africa. He noted that the film industry allowed for on the job training. Since it had too many applications for jobs, was the DTI considering expanding funding for the film industry?

The Chairperson asked when the geographical indicator status for Rooibos tea had been secured. She referred to a previous study of footwear industries in Vietnam. What was the scale of the jobs created in footwear? She noted that it had been difficult in the past to get private industry to take BBBEE seriously. In January, the committee had gone to Saldhana Bay and seen that some investment had gone through, but that the industrial action plan needed to improve in order to localise. One hoped that the private sector would heed persuasion from government to open up to localised products.

Minister Davies expressed amusement that the EFF and the DA were aligned, and did not accept that the NDP was about markets and that the IPAP was about the state. He believed that they were both combinations thereof. The IPAP supported private manufacturing, and no state-owned manufacturing exists. He felt that there was a strong case for an industrial policy given by foreign countries, large and small. The state must play an active role in industrialisation, and would not always be perfect. The DTI would target areas for improvement and be open to criticism. He did not believe that the DTI was lost and only having frantic seminars. The film industry could not supplant efforts for the automotive and clothing industries -- there was no magic bullet. Sectors like metal fabrication needed stronger emphasis.

As for the steel industry, the situation ironically created a much better environment for pricing negotiations. Conditions created include banning price inflation and the acceptance of tariffs. South Africa needed to defend upstream steel manufacturers, but this defence would not create a price increase. South Africa had made progress on electricity. There had been an enquiry into the Cape Town film industry deal corruption. Regardless of corruption, the deal had had serious benefits.

He agreed on the need for honest review, but he posited that the current track across sectors and industries was the right track. The DTI was well aware and concerned with unemployment. The effectiveness of IPAP had been hindered by the 2008 crisis. However, he credited IPAP for reversing the trend of de-industrialisation and saving many industries, such as the clothing and textile industry. The programme needed to raise its scale, but not turn back. The Geographical Indicators would come through when the EU approved it; the legal scrubbing was not concerned with South African issues. This process should end soon. He said that some entities would still have a board, but many had been reformed.

Mr October told the Committee that the film industry employed some 60 000 South Africans. The Geographical Indicator agreement had been signed by South Africa in July 2014. The DTI set very high employment targets, especially considering that much of it relied on private industry. The DTI had discontinued the Export Incentive Programme (EIP) to its overlap with the MCEP. In the past, all MCEP applicants were approved, but now the conditions had been made stricter. As for the perceptions index, perceptions were not solid and were based on polling. The DTI based its figures on UN data. When perception surveys were done, a gap occurred between those who did and did not already have companies here in Africa; those who were invested here were much more confident in the African continent.

The Chairperson asked for the number of companies that were establishing plants in South Africa. With steel, the insistence from Members in the past, when steel was profitable, was that the steel industry should provide a developmental price. Now that steel was not profitable, the industry still would not provide the information. She noted that this was an example of the unreliability of private industry. She asked the DTI to prove a one-page report on what the problem here was.

Minister Davies noted that the conversation on pricing was much more positive now. There may be more tariff applications including applications for anti-dumping measures.

The Chairperson called for final questions to go to her in order to request written responses on the annual report.

The meeting was adjourned.