Trade and Industry Budget Review and Recommendations Report

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Trade and Industry

20 October 2015
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

BRRR Archive: BRRR 2015-2010: Budgetary Review & Recommendations Reports

The Committee sat to finalise and adopt its Budgetary Review and Recommendations Report (BRRR) for the Department of Trade and Industry (DTI).

Members expressed concern about was described as the absurdly short length of time given for this process and the impossibility for the Minister of Finance to consider the Committee’s recommendations before his Medium Term Budget Policy Statement. The Chairperson read through the report in its entirety, making minor edits where necessary.

The Committee asked questions about the status of the National Empowerment Fund (NEF), the African Growth and Opportunities Act (AGOA), the Manufacturing Competitiveness Enhancement Programme (MCEP), how incentives were being used to foster transformation, and whether the goals and targets of entities under the DTI should be higher. 

Meeting report

Opening Remarks

The Chairperson said that, after consulting members, tomorrow’s meeting would need to start at 08h30 because today’s meeting must end by 13h30. She thanked Mr M Kalako (ANC) for leading the Committee as Acting Chairperson last week. She also thanked members for their work last week. She announced that Ms P Mantashe (ANC) had sent an apology but that her health was improving. Apologies were also given for Mr F Shivambu (EFF) and Mr A Alberts (FF+). She said that the decision to start today’s meeting an hour and a half later had been hers, and if she had inconvenienced anyone, she apologised. The agenda was adopted. The Committee had gone through the process of the Budget Review and Recommendation Report (BRRR) last week, and the Committee had been on the point of adoption last week, but it had been delayed to include her.

Mr D Macpherson (DA) expressed concern about the manner in which the BRRR process had been conducted this year. It had been rushed. Members had been given only 19 hours before consideration. He expressed concern that Members were merely ticking a box for the Department; this was not good. The Finance Minister was giving his Medium Term Budget Policy Statement tomorrow. There was no way that the Finance Minister would have taken into account the suggestions of this Committee through this Committee’s BRRR before he gave that statement. What purposeful deliberation could happen today, when the Committee had received the Report at only 15h00 yesterday? No one in the Finance Department would be concerned with this Committee’s deliberation. This was wrong. He had also placed these concerns in writing.

The Chairperson said that some of Mr Macpherson’s concerns have been explored for the past fifteen years. How could these processes be in sync with the other duties of Parliament and the fiscal year cycle? Though the process was not perfect, it was more efficient than it was five years ago. After all, this process was just a review of the past. The Treasury had had these quarterly financials for some time. When Treasury envisioned this three year process, it had utlised historical information alongside current and projected economic indicators. A committee reporting to the National Assembly (NA) had to submit after the adoption of an Appropriations Bill and the adoption of a BRRR, but prior to the medium term budgetary report. This was part of a process through a three-year term. The situation was not ideal, but in the past five years BRRRs had become a continuous process. The first year had been extremely difficult. Committees had done much oversight, hopefully through the quarterly reports. The last term was the first time the quarterly reports had been unpacked so extensively by committees, rather than just the Appropriations Committee.

This was not ideal. Until all three spheres of governments had the same financial cycle, it would not be ideal. The Budget Office was finally working more effectively, but it was still not ideal. Most Members surely had a handle on this Report from last week. The National Empowerment Fund (NEF) issue had come up during the last term. Metrology also needed more funding. This was a medium term budget policy that would be concretised later on.

Mr G Hill-Lewis (DA) agreed with the difficulties of different spheres of government being on different cycles, but the main problem was that this Committee had got the BRRR for review only 19 hours ago. It could not possibly give this due consideration in such a short amount of time.

Mr Kalako noted the concern of the DA, and saw it as reasonable. However, the Committee had gone through the process with the Department during the past week. In the future, Parliament needed to improve this process. The Committee should go through with considering this BRRR, unless there were proposals otherwise.

The Chairperson proposed starting discussion on the BRRR. It might be possible to accommodate certain concerns.

Mr Macpherson said that the DA did not object to processing this BRRR, but hoped that this would be the last time the Committee was asked to process a BRRR in this manner.

Draft Budgetary Review and Recommendation Report comments

The Chairperson said that this process should not be too hampered by concerns for grammar, unless a mistake was egregious. The Committee would go through this Report very methodically.

Page One included the dates of the Report and said the Department of Trade and Industry’s (DTI’s) key strategy was the implementation of the Industrial Policy Action Plan (IPAP). It went on to explain other goals of the DTI.

The Chairperson noted that the DTI overseas had 13 entities. She hoped that the Report indicated that the budget for small and medium business development had kicked in with only this budget, and thus during the 2015/16 budget cycle. Could the Director General (DG) explain this?

Mr Lionel October, DG: DTI, explained that these functions had been transferred from the Department of Small Business. These functions included the staff, the Small Enterprise Development Agency (SEDA), the Cooperative Incentives Scheme and the Black Business Applied Development Programme. For accounting purposes, the DTI had looked after the auditing and financial systems even before these functions had been transferred from the Small Business Department.

The Chairperson said that it must be very clear that the functions and financial resources had been transferred at slightly different dates.

The Chairperson asked when the National Liquor Policy Review Document and the National Gambling Policy Review Document had been released. The DTI had to confirm these dates.

The Chairperson noted the KZN had been the first province to pass the ‘Money Bill’ requiring the creation of BRRRs, before the NA had done.

The Chairperson said that it was very difficult to transfer funds due to the necessity for a full cost analysis.

She noted that the Report had captured data only up to the first quarter.

She asked who had prepared the Report for the Committee. She continued reading the report.

The Chairperson commented that food security would be a point of emphasis next year. It would be a major issue. She noted how important language on ‘inclusive growth’ was.

She welcomed the DTI’s improvement in developing measurable objectives

She asked whether the effort to support 950 enterprises approved to participate in the Export Marketing and Investment Assistance, was a new initiative.

Mr October said that it was a new programme that had been expanded. The DTI flew hundreds of companies each year to emerging markets for education and expansion opportunities.

The Chairperson noted that Mr Macpherson had been involved with the World Trade Organisation (WTO).

She said that the DTI had to pay all eligible suppliers within 30 days.

She hoped that the DTI was implementing its recommendations from the 2014/15 BRRR. It appeared that it was.

She called for the replacement of the word ‘emanating’ with ‘arising’.

Mr Macpherson said that everyone had agreed during the last BRRR process that the National Empowerment Fund (NEF) should get funding, but the DTI had done nothing. He hoped that this time it would warrant at least a response from the DTI and its Minister.

The Chairperson responded that funds for the NEF had been requested during the Medium Term Expenditure Framework (MTEF), and thus still had time to come in. She called for a response from the DTI.

Mr October said that the Cabinet had called for conservatism and cost cutting a couple years ago, and no additional money had been given at that time. The NEF had now spent almost all of its money. The DTI was unlikely to get money from the fiscus for the NEF. About two weeks ago, the Industrial Development Corporation (IDC) and the NEF had tabled a report after the Minister had suggested that a merger of the two might be necessary, so there was now an interim position on various options that would be taken to Cabinet. In the short-term, the DTI would ensure that the NEF had access to the balance sheet and borrowing powers of the IDC. Therefore, the NEF could complete its mandate without access to the fiscus. The NEF would have a similar arrangement with the Small Enterprise Finance Agency (SEFA). Secondly, the Black Industrialists Programme needed access to finance. The DTI was looking at syndication and the pooling of the resources of various Development Finance Institutions (DFIs) within the DTI, to find funds for black industrialists.

The Chairperson said that the Committee would pursue this further. The Nanotechnology and Molecular Engineering Student Association (NAMESA) had also been an issue.

She said that there would still be regular reviews of the African Growth and Opportunity Act (AGOA).

Mr October said that the import of chicken matter was now at the technical stage, where veterinarians were working to ensure the prevention of avian flu. Later today, the government should put out a statement on the matter. There was no need for concern.

Mr October said that National Treasury hoped, with cuts, to reduce vacancies rather than employment. The DTI was the best performing department in terms of employment equity. The fact that it had not sufficiently reduced its vacancy rate to 6% was due to the external freezing of the budget.

The Chairperson asked whether a bullet on lobbying for AGOA was necessary, considering that the DTI had got the extension and retention of AGOA. It had now been extended for ten years with SA as a partner, assuming the review this week went as planned.

Mr October said that although the DTI had been successful, the bullet should stay.

Mr B Mkongi (ANC) lauded the DTI’s efforts to keep SA as part of AGOA. The media had devoted much time to this accomplishment. The DTI had done well.

The Chairperson noted that a statement saying that ‘the BBBEE Commission was meant to be’ established should read, ‘the BBBEE Commission was expected to be’ established.

Mr October said that the Support Programme for Industrial Innovation (SPII) had been contracted outside the DTI, but was being reincorporated into the DTI in order to solve problems of efficiency.

The Chairperson asked where business process services were located.

Mr October said that they were mainly in Cape Town, Gauteng, and KwaZulu-Natal, though the DTI was trying to encourage them to expand to other provinces.

He said that the Industrial Policy Action Plan (IPAP) had been launched in the first week of April 2015. It had been tabled then also.

Mr Macpherson noted the importance of the Manufacturing Competitiveness Enhancement Programme (MCEP). There had been concerns about its ability to continue to do its work, so a phase two may be necessary. There had been a specific focus on financing for small businesses, if he was not mistaken.

Mr October agreed that the DTI was trying to shift the focus to more labour intensive businesses with market multiplier potential. This was pure investment spending which went into productive hands, and the Committee’s support was welcome.

Mr Hill-Lewis said that there was a growing literature on government capital investment. The literature debated how much investment in a company was necessary. Some schools of thought said there should be a one-time large investment to push companies to the cutting edge of technology and infrastructure.

Mr October welcomed the point. The old subsidy system had had automatic access to government grants, regardless of competitiveness. The new system tried to find market winners. SA had done away with its general subsidy programme. The new system required companies to be expanding and investing in new capital. The DTI did reject applications. The entrepreneur took 80% of the risk before getting DTI money. This was in line with the new thinking that Mr Hill-Lewis had referenced.

The Chairperson welcomed a targeted approach. She said that an instance of ‘program’ should be corrected to ‘programme’. She noted that it should be clear in the BRRR that the DTI had reprioritised its Parliamentary programme.

She asked whether the Special Economic Zone (SEZ) regulations were still out there for comment.

Mr October said that the DTI had created a board to process comments on the Act. Everything had now been completed and incorporated. The regulations should be issued shortly.

The Chairperson asked why the MCEP Business Process Services (BPS) incentives supported seven projects, instead of ten.

Mr October said that meeting employment targets was difficult. The only thing that the DTI controlled was the approval of the incentive; the DTI could not control job creation and market demand. The job creation targets needed to be re-evaluated.

Mr Mkongi asked how the DTI used incentives to foster transformation and to meet national goals.

Mr October said that this was a very important question. The country needed to diversify and restructure the economy to have more value-added activity. This would benefit everyone and raise employment. The country also needed more black entrepreneurs, managers, and other black economic participants. This year, given the new codes of conduct, incentives would only be given if companies complied to a certain growing degree on Black Economic Empowerment (BEE). Beyond the MCEP, the DTI was engaging with the automobile industry to de-racialise it. Though incentives should have been tied to transformation more strongly earlier, they were now.

Mr Mkongi said that his question was specifically about the automobile industry. How would one capture this progress and this necessity in the report? Economic transformation was difficult. The Committee must be able to assess progress in transformation.

Mr Hill-Lewis said that the process could cause trouble for companies. For example, companies had applied before the new rule, but the response had taken so long that the rules had come into effect and thus the companies had been denied. At the point they submitted, there had been no such rule. As a second example, companies had applied after the rule was in place and thus knew that they needed to be Level Four compliant, but had applied before the new BEE codes were in place. If these companies were Level Four before the new codes, they may now be Level Five. There were some process issues here. Sometimes, companies received letters of confirmation and yet no contract. In his personal view, the codes at the time of application should be the only thing considered.

Mr October said that the changeover period always created challenges. The DTI had asked some companies to appeal. It had given people very long notice and many opportunities to apply. Also, there had been 21 years of incentives with no transformation requirements, then people had been given three years of warning about BEE. Companies had not always been compliant with the spirit, despite significant DTI support. That being said, there had been some genuine issues that would be reviewed on appeal.

Mr Mkongi said that the DTI should be clear with companies about the requirements, because after all the businesses would lobby against black economic empowerment.

The Chairperson said that the Committee had captured both sides of this issue.

Mr Macpherson cautioned against emotive language. Lobbying government was a constitutional right.

The Chairperson said that nobody would do that. However, offering perspective was a noble goal. Calling for a balanced lobbying with government goals was appropriate.

She commented that tracking trade deals was quite a large task.

She asked whether the public comments on the national gambling and national liquor policies had been completed.

Mr October said that they had been, and that these would be tabled on 2 November.

The Chairperson asked when the Committee could expect a final report on jobs.

Mr October said that all performance reviews had come with the Annual Report.

The Chairperson asked about financial data in relation to foreign governments.

Mr October said that he would check with the CFO.

The Chairperson asked why administration had a higher budgetary variance than most categories? She said that the DTI could respond later.

She said that oilrigs would bring big money to the Saldanha Bay Industrial Development Zone.

Mr October said that, in order to take action against non-compliant entities, the Minister should meet quarterly with entities in the presence of the Auditor General. Parliament also oversaw entities. CEOs had been dismissed in some situations. There was zero tolerance for fraud in terms of the Public Finance Management Act (PFMA). The Minister had been very tough on entities in forcing compliance with the Auditor General.

The Chairperson called for comment on this.

Mr Mkongi corrected the write-up of this DTI comment.

The Chairperson personally recalled at least three instances of serious DTI action against financial misconduct. The challenge was that the Committee was not discovering these problems during its engagement with entities. The Committee realised that this sort of thing started off with minor infringement of good governance. An unqualified audit was not the same as a clean audit -- in the situation of an unqualified audit, the Committee must analyse more deeply.

She wondered how the DTI would be able to fill the critical posts it had mentioned with the constrained nature of the budget.

Mr October said that the previous Minister had entered into a number of unlawful contracts, such as a long-term lease for the National Credit Commission. These irregular expenditures were leftovers.

The Chairperson said that Members should have seen a recommendation regarding the capping of insurance and the National Credit Regulator (NCR). The BRRR should capture these recommendations.

Mr October said that changes to the NCR should be complete by March 2016. The DTI had intensively engaged with the NCR to make sure that they could handle these caps and cuts. It had also engaged with the banks.

The Chairperson reminded everyone that companies could not force individuals to take out a second unnecessary life insurance policy.

Mr October said that there had been vigorous action to prevent that, including raids on some major corporations.

The Chairperson said that the Committee should track how the NCR implemented its mandate in alternative ways due to budget constraints. The Committee should also track financial performance.

The Committee Researcher explained that the NCR had budgeted for more than they actually paid out because they had not received invoices from service providers.

The Chairperson noted the proposed improvement of the National Regulator for Compulsory Specifications’ (NRCS’) processing time for Letters of Authority, from 120 business days to 120 calendar days.

Mr Macpherson said that the reality here was that the problem still persisted. Companies could not afford these administration times, and were laying off workers. Safety was important, but it could not be at the expense of job creation. Protected but unemployed people were not the goal. This problem was far from solved. The NRCS had been looking at this for too long -- it was time for improvement.

The Chairperson said that safety could not be compromised.

Mr October said that we also could not compromise growth. Regulating imports was not bad for growth. Imports must comply with South African standards. If there was a black spot on one orange, South African exports were stopped. Our government should have the same right.

The Chairperson ensured that the BRRR reflected that the Committee welcomed the fact that labour relations within the Companies and Intellectual Properties Commission (CIPC) were starting to stabilise in the first quarter of this financial year.

She said that the Committee should enquire as to why the Companies Tribunal had settled only forty percent of cases instead of sixty, through Alternative Dispute Resolution.

Committee Conclusions and Recommendations in the BRRR

Mr Macpherson submitted a new drafting of point 6.3. “The Committee noted the importance of MCEP and urged the Minister (of Trade and Industry) to consult with the Minister of Finance to upscale this programme over the outer years of the MTEF period.”

The Chairperson said that this was important. She noted that, for 6.4, actual companies set jobs targets, not the DTI. Downstream benefits could take longer.

Mr October accepted the previous wording, because the DTI did set the target, though it had no control.

Mr Mkongi suggested an extra point to be included as a point 6.5, to emphasise the DTI’s commitment to economic transformation, especially through the use of incentives.

Mr Macpherson said that the MCEP was not available to companies that did not comply with BEE.

Mr October said that this had been true very recently. Companies now had to be Level Four compliant. MCEP was the first programme to enforce transformation for incentives.

Mr Macpherson said that, therefore, the Committee was not coming up with something new.

The Chairperson said that it was newer than this financial year -- in fact, these standards had come into effect only a couple of months ago. She did take the point, however.

Mr A Williams (ANC) said that transformation was not just about ownership, but also company control. Mr Mkongi’s point was very important.

The Chairperson said that it must be quite clear that these requirements were important and quite recent.

The Chairperson asked whether MCEPs should be linked together or left separate.

Mr Kalako said that there was no problem with them being linked, because the DTI had the same goals throughout its endeavours. Transformation should be a goal for all of the DTI.

Mr Mkongi welcomed Mr Kalako’s point, and called for further language calling for the DTI to use incentives to encourage companies to assist in achieving national development goals.

Mr October noted that the DTI itself, and some of its entities, had received a clean audit and asked that the old point 6.6, new point 6.9 should reflect this.

Mr Mkongi succeded in gaining the insertion of a footnote explaining that a clean audit meant an audit with no findings.

The Chairperson said that there were now 20 points under section six for Committee Recommendations. The Committee adopted the three new points.

Mr Macpherson pointed out that Mr Mkongi’s proposed point 6.5 became repetitive in calling for emphasising economic transformation twice.

Mr Mkongi said that the first sentence spoke to the objectives of the DTI specifically, whereas the second sentence spoke to national issues.

The Chairperson felt that the second sentence should be a separate point.

Mr J Esterhuizen (IFP) had three recommendations. Firstly, to revise the structure of the DTI so that it was optimally structured and staffed to carry out its mandate. Secondly, to ensure that the DTI and its Board was staffed by individuals who had the correct technical abilities to execute responsibilities. Thirdly, to strengthen the oversight functions of the DTI and this Committee, not only in terms of financial oversight, but also over the execution of key projects.

The Chairperson said that some points already covered these recommendations. She called for an overarching point on staff issues. She said that this report could not call for improvements to the Committee -- that was the job of the end of the year report.

Mr Kalako and Mr Macpherson thought that the inclusion of a point on staff was acceptable.

Mr Mkongi proposed a point thanking the DTI for concluding AGOA, and the Chairperson said that there already was a point doing this.

Mr October said that the Minister had been hands-on in applying political pressure to the veterinarians to conclude the matter.

The Chairperson said that, once this had been printed, the leader of each party should come in and sign off on the BRRR.

Mr Macpherson said that during the presentations of the annual reports, the Committee had seen that performance targets were generally fairly low. He called for a recommendation that the DTI link performance targets to job creation.

The Chairperson said that she had tried in the past to track each job created, but the problem was that government was only enabling job creation and was not the one creating the jobs. Therefore, it was much harder to measure. Sometimes, jobs were phased in earlier or later -- companies were not perfect.

Mr October said that the recommendation should be to strengthen the incentive programme, rather than to review it. As for Mr Macpherson’s point, language about a ‘link’ should be removed. The automotive industry had created 300 000 jobs, thanks to government programmes. Still, the company dictated how many people each programme employs, but the DTI could create conditions in which the company could create jobs.

Mr Macpherson appreciated Mr October’s point -- businesses create jobs. His recommendation aimed to address entities having embarrassingly low targets. Entities needed to contribute better.

Mr October was wary that performance targets must be within the control of the entity. Specific job creation could not be a target.

Mr Kalako said that entities like the NCC and the NCR currently set their own targets for various things, and the Committee had seen that these targets were low. The Committee was not speaking about external, unachievable targets.

The Chairperson called for a proposal for the adoption of the BRRR.

Mr Kalako moved to adopt the BRRR, with amendments. Mr Williams seconded.

Mr Macpherson said that he abstained. The DA would always abstain from these reports until it had a mandate.

The Chairperson thanked Members for their input. Tomorrow’s meeting will be at 08h30, and Members should please bring all documentation.

The meeting was adjourned.


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