Department of Trade and Industry on its 2014/15 Annual Report

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Meeting Summary

The Committee heard the highlights of the Department of Trade and Industry’s Annual Report. Key achievements included keeping South Africa the number one destination for foreign direct investment (FDI) on the continent and negotiating the renewal of the US’s African Growth and Opportunities Act (AGOA). The DTI detailed the success of incentives schemes in bolstering the automotive, textile, film, and electronics industries. The DTI explained plans to create more Special Economic Zones (SEZs) to reach rural areas. Members asked questions about the steel industry, efforts to diversify and localise the economy, fuel cells, imports and exports, and various issues around SEZs.

Meeting report

Department of Trade and Industry (DTI) on its Annual Report 2014/15
Mr Lionel October, DTI Director General, introduced his team and said that the presentation would not be too long. He started with the DTI’s strategic goals:
- Transform and diversify the economy
- Integrate South Africa into the global economy
- Include all South Africans in the economy through economic empowerment.

South Africa is a small economy. In general, the growth of the global economy is lower than expected at 2.2% with significantly weak growth in the US, Europe, and China. South Africa is especially vulnerable to falling commodity prices like platinum, coal, and iron ore. Iron ore prices were at $146.7 in 2010, and are down to $53.4 in 2015. Manufacturing and mining are very interconnected; slowdowns in mining have impacted manufacturing.

The causes of the weaker GDP performance include:
- Plummeting commodity prices
- Electricity supply challenges
- Global steel glut/oversupply
- Drought conditions in KZN and North-West
- Spillover effects from mining into manufacturing.

One positive for South Africa has been Foreign Direct Investment (FDI) despite a slight global slowdown in 2014. South Africa is still the most popular destination for FDI on the continent. In 2013/14, South Africa received R140 billion in FDI; though there was slightly less in 2014, FDI is cumulative. South Africa has seen a growth in exports and a trade surplus in the second quarter of 2015. The DTI is working hard to ensure that the African Growth and Opportunities Act (AGOA) preferential trade agreement stays in effect.

The DTI’s work is organised into clusters:
- Industrial Development
- Trade, Investment, and Exports
- Broadening Participation
- Regulation
- Administration and Co-ordination.

As for Industrial Development, the DTI has built successful, world-class industries in the Automotive and Clothing and Textiles sectors and also greatly improved the Film industry and the Call-Centre Industry.

The DTI has spent a total of R3.7 billion through the Clothing and Textiles Competitiveness Programme (CTCP) and helped ensure that manufacturers like H&M consider sourcing local products. Even retailers are now investing in South African manufacturing.

The Automotive Investment Scheme (AIS) has attracted R2.7 billion in investment from companies like BMW and Mercedes Benz. In addition, China and South Korea are starting to manufacture cars here, both small vehicles and commercial trucks.

The DTI has done extensive work across industries to create designations requiring local procurement; this has covered everything from Eskom sourcing its materials to police uniforms. The Passenger Rail Agency of SA (PRASA) has been revived and is also buying local. Operation Phakisa has targeted marine manufacturing and ports for revitalisation. Other projects include the National Industrial Participation Programme (NIPP), the Gold Loan Scheme, the Manufacturing Competitiveness Enhancement Programme (MCEP), and geographical indicator status for rooibos tea.

The DTI has revised the Business Process Services (BPS) incentive programme to aid in employment creation and employee training. DTI aided Mpact Limited’s creation of a state-of-the-art recycling plant as one example of the DTI’s aid to the private sector and green initiatives. DTI has helped facilitate the manufacturing of solar and wind energy technology. The DTI demonstrated a 100kw fuel cell at the Chamber of Mines in March 2015 to illustrate a way to add value to platinum.

In electronics, the DTI secured investment of R2 billion from Samsung Electronics; it is Samsung’s first investment in South Africa.

In total, the DTI has helped about 450 companies to create about 47 000 jobs through the DTI’s incentive efforts. The biggest recipient of incentives is the metal sector, followed by agriculture. Some of the DTI’s previous programmes have been handed over to the Department of Small Business Development.

As for Trade, the DTI is working to finalise the Tripartite Free Trade Area (TFTA) and the North-South rail connection. The DTI is negotiating the trade relationship with the EU through the Economic Partnership Agreement and the US through AGOA.

The DTI provides a red carpet for foreign investment; the Department is world-class. The United Nations Conference on Trade and Development (UNCTAD) recognised the DTI as a global winner for attracting investment. Unilever has opened four new plants in South Africa. The Special Economic Zones (SEZ) Act came into effect in 2014. There is now going to be a SEZ in every province with ten in total. As for Broad-Based Black Economic Empowerment (BBBEE), new codes came into effect 1 May 2015. These new codes are much more targeted and better for small companies. The DTI launched the Equity Equivalent Investment Programme and has created self-service terminals for registering for a BBBEE certificate.

The DTI recently presented liquor and gambling policies to Cabinet. Bills on this subject have been tabled. The regulations on the Intellectual Property (IP) Laws Amendment Act 2013, which will give effect to the protection of indigenous knowledge and the creation of a Council and Trust, was signed and assented by the State President.

The DTI’s vacancy rate is currently at 7.4%, down from 8.5% at the end of the 2014/15 financial year. The DTI employed 47% women in Senior Management. Payment of all eligible creditors were made well within 30 days; the DTI is very proud of this and trying to help other departments do this. Under-spending at the DTI is now around 1% of the Final Appropriated Budget of R9.9 billion. The DTI had an unqualified audit with no findings; this is commonly referred to as a clean audit. Our audit performance has slowly improved over time.

The Chairperson thanked the DTI for the presentation. He called for a limit to three questions per member in the first round. He noted that it is difficult for Ministers to be present at Wednesdays meetings due to the Cabinet meeting.

Mr S Mthimunye (ANC: Mpumalanga) welcomed the presentation. He pointed to slide 14 on export growth. Why did exports go up from 2013? He noted the DTI’s goal to diversify the economy: how is this connected to efforts to beneficiate and to empower black industrialists? Also, investment in provinces seems biased towards urban provinces; how could this be addressed? Urbanisation is a problem. This Committee has not seen the Minister in over a year. This is a problem.

Mr W Faber (DA: Northern Cape) thanked the DTI for its performance. He hoped that the Minister is busy getting the country business. As for the global steel glut, South Africa used to export much steel from the Northern Cape to China. Apparently, the Chinese no longer want to process iron ore in China. Why is South Africa not producing refined materials? In China, there is a problem of excess materials. Should South Africa get more smelters? There are plans to build near the Orange River. He agreed that rural provinces cannot grow without investment. The Northern Cape could easily have a Durban or a Port Elizabeth harbour on the West Coast. As for rail, this industry was supposed to create so many jobs but there were not enough skilled workers. In response to the lack of skills, foreign people from Spain and other countries were brought in instead of people from other provinces. With the way the Rand stands against other currencies, we should take advantage of this and improve exports.

Ms Z Ncitha (ANC: Eastern Cape) agreed that the DTI had produced a good report. On page 11, it referenced the global steel glut. What are the DTI’s plans to address this glut? The DTI’s efforts to close the export-import gap are welcomed; these efforts will help create jobs. The presentation spoke briefly about improving port infrastructure. There were plans to improve the port in East London, but little has happened. Why is this?

Mr October first moved to address the issue of steel. The problem started with the closing of Highveld Steel in Mpumalanga. The DTI set up a rescue team to address this and created a 10% tariff on imports to slow down steel coming in from elsewhere. The DTI has designated local steel products for required use by companies like Eskom. The DTI also organised a credit line to Highveld Steel to help it survive the downturn. The glut is not over. During the boom in the 2000s, technology was not improved and now SA plants are not very competitive. The Chinese do need value-added products; they have agreed to an R5 billion investment in a new steel plant that will have the new technology necessary for competitiveness. This new plant, the first in many years, will come online in 2020.

The DTI agrees that the fact that manufacturing is so concentrated in three provinces is a huge problem. Though the automotive industry is growing in the Eastern Cape, the rest of industry is concentrated in Gauteng, KZN, and the Western Cape. One effort to combat this is creating SEZs in each province to develop industry in rural areas. For example, we are developing the Maluti-A-Phofung SEZ in the Free State, and have plans for others in all the remaining provinces. The DTI agrees that the state must move first, as Mr Faber called for, due to the distance from markets. Saldanha Bay has been one effort to develop the West Coast among others.

In terms of port development, Operation Phakisa persuaded Transnet to make some significant investments. Transnet has started with Saldanha and Coega, and is expanding in East London. Mercedes Benz needs a world-class port facility in East London for all their new C-Class cars.

Mr Yunus Hoosen, DTI Head of Investment Promotion and Facilitation, said that the DTI is currently working with a company from Saudi Arabia called AquaPower to invest in solar cells for the Northern Cape to the tune of R13 billion from two projects. The first project is called Redstone and will be a 50 megawatt plant. Aquapower is also trying to invest in Mpumalanga.

Mr Sipho Zikode, DTI DDG: Broadening Participation Division, said that the Black Industrialists programme will focus on manufacturing and beneficiation in order to diversify the economy. It will not deal as much with mining.

Mr Stephen Hanival, Chief Economist for the DTI, explained that the rise in exports was driven by processed food, transport and mineral exports. In the first quarter, transport equipment exports were R28 billion; in the second quarter they were R32 billion. This is due in part to increased global demand and in part to a slightly weaker exchange rate. As for biases in where industrialisation is happening, there is also the AgriParks programme. Most of the 44 announced AgriParks will be in rural areas.

The Chairperson thanked the DTI for its response and called for a second round of questions.

Ms E Van Lingen (DA: Eastern Cape) said that she has visited Coega and the SEZ there. She also visited Richard’s Bay in KZN. Investors were concerned there with land tenure. Big investments cannot have short-term leases for land tenure. It appears that one cannot purchase land in the SEZs, only rent. In East London, there was a question of coal affecting the air quality of the of the paint shop at the Mercedes-Benz plant. Does the DTI know about this? In Coega, there were two call centres. People working there get about R3 000 a month. Coega is far away from Port Elizabeth and thus transport is expensive. Is this compensation fair? As for FDI, companies are looking for a fair return on their investment. What incentives is SA offering these companies? How does FDI compare to capital flight? On Tesla and Tesla batteries, the import tax on fuel cells makes this impossible. Is Tesla not part of the deal? How stable is the SA grid for supporting solar cells?

The Chairperson welcomed back Ms Van Lingen and confirmed that she is now a full-time member of the Committee.

Dr Y Vawda (EFF: Mpumalanga) said that people seem to be lined up to invest in South Africa but investors that do not keep social justice in mind should not be viewed as investments. It is important to balance imports and exports in favour of exports. Is there a programme in place to support reducing imports and increase exports that have better potential? Are there areas where South Africa is importing an excess of something that we can cut back on? As for the SEZs, how will the DTI ensure that investors target SEZs? Normally, these investors flock to established markets. As for automobiles, is SA producing or assembling automobiles? SA should strive to produce automobiles from start to finish.

Mr Mthimunye said that there was a construction project next to Highveld Steel using lots of steel around the same time Highveld went under. This does not make sense. As for the 30 day turnaround time for payment of SMMEs, his constituency office has fielded many complaints from small-contract providers who are owed by government. You have said that timely payment is a lifeline; if the DTI does not pay on time, then businesses go under. How does starting an SEZ work? If communities are willing to come forward with an innovative business case, are you willing to assist and if so in what manner?

The Chairperson noted that there would be a presentation on SEZs specifically in the near future. The DTI did not include the decline in platinum prices. As for the automotive industry, is this sector only in the Eastern Cape and in Gauteng? The DTI said that Samsung is in Durban. When the Committee did provincial oversight on locomotives last month, it was under the impression that the plant in Nigel was operative. But they have learned now that that plant is not even fenced yet. Help us understand these huge investments. As for the First Automotive Works (FAW), the Committee visited earlier in the year, at what scale of production is FAW? Are they already manufacturing?

Mr J Londt (DA: Western Cape) observed that the DTI sends 100 companies a year to China for market penetration. For how many years has the DTI done this? What is the success rate? After all, this sounds like an expensive project.

Mr October moved to address questions on the automotive industry first. Twenty years ago SA was only exporting one tenth of what SA currently exported. Automotives now employs 300 000 people throughout the industry. The industry is mainly centreed in the Eastern Cape, though Toyota Park in KZN employs 10 000 people. The DTI has tried to scale its incentives to encourage gradually deepening levels of localisation. The first step is attracting assembly here. Before one can construct brakes and other things, there must be a sufficient volume of products. If a company produces, for example, 50 000 brake pads, then it gets the incentive. Volkswagen in Uitenhage uses as much as 75% local products. It is important to have the whole value chain locally. The DTI has lowered the tariff for specific major companies to attract them. All of these companies are both importers and exporters. South Africa produces 600 000 vehicles a year; the target is 1 million. The DTI hopes to attract engine manufacturing. These incentives are very important, and will help South Africa spread into rail, aerospace, and shipbuilding.

The China programme has been done four times. After every trip, the companies report on their sales and their pipelines. There have been significant improvements. China is becoming the world’s biggest importer. The DTI has always lobbied for China to send a buying mission. In December, China is sending fifty companies to see South African products. This relationship has been built over time.

As for capital flight, this is a big misunderstanding. South Africans investing abroad do not negatively impact the economy; it is not capital flight but rather outward investment that improves the continent and benefits South Africa. A successful country must produce both locally and internationally. There is only capital gain for South Africa. South Africa is the largest investor in the continent. One third of SA exports go to the continent; all of these are value added.

As for the thirty-day payment, the DTI has helped Small Enterprise Development Agency (SEDA) run a hotline for companies that have not been paid by government, then the DTI will call that government department and ensure that they pay. Because of the mining boom, Highveld started producing all of their steel for the mines and stopped producing for manufacturing projects. Fortunately, there has been renewed investment in Highveld and Highveld will be producing for infrastructure projects.

Mr Zikode gave the Small Enterprise Development Agency (SEDA) hotline number as 0860 7663 729. This hotline has assisted SMMEs by facilitating over R300 million in late payments on the behalf on SMMEs.

Ms Van Lingen thanked Mr Zikode for giving the number.

Ms Malebo Mabitje-Thompson, DTI DDG: Incentive Development and Administration Division (IDAD), said that every DTI supported industry has a regulated threshold for employee payment. The DTI will study that Discovery call-centre.

Mr Zikode said that one call centre pays at about R8 000 per month and the other starts at R6 000 per month. Members will be happy to hear that the DTI is trying to revitalise old industrial parks. The DTI will spend R43 million here. The DTI is in partnership here with the Development Bank of Southern Africa on this and has identified ten sites. The DTI has also partnered with the African Development Bank to fund six more industrial parks.

Mr Hanival responded to questions on fuel cells and the grid by saying that the DTI is working with industry to maximise the localisation of all of the components of fuel cells. The DTI wants fuel cells and all of the components thereof to be manufactured locally. The grid should be stable. Local distribution networks may have maintenance issues, but those will be improved if necessary. The DTI is not aware of a grid stability issue at the national level.

Mr October said that Operation Phakisa has identified two main areas for beneficiation. One is upstream mining equipment, and the second is platinum. Once South Africa has a big enough market, companies like Tesla will want to come. The Chamber of Mines head office is powered by fuel cells. The DTI is working with four or five manufacturers to get them into this market.

Mr Zikode said that, as for questions about land tenure in the SEZs, in Coega they do sell land to investors on a case by case basis by application. The DTI will have to research the process in other areas.

The Chairperson said that Ms Van Lingen’s question had more to do with lease agreements and the necessity of security for long term investments. She also asked about coal affecting the Mercs in East London. Some people have talked about the impact of manganese in Port Elizabeth in Port Elizabeth (PE). No one has answered Mr Vawda’s question about FDI in SEZs.

Mr October said that the DTI will come back on the coal question. There is an agreement that the manganese must move from PE to Coega. The DTI will see that a smelter is built in Coega for iron ore to keep heavy duty industrial processing away from PE. Cabinet has approved the Coega operation and Transnet has agreed. We will come back on questions about East London and coal, but East London is an auto terminal most importantly. SEZs come with a 15% corporate tax (lower tax rate) to attract business. Samsung needed the advantage of a SEZ to move into the Dube port; this port also has its own customs processing. Investment has picked up in SEZs.

The Chairperson thanked the DTI and said that it is very helpful to have informed DTI people on oversight.

SACU Summit statement
The Chairperson said that the minutes of 14 October meeting promised the Department of Trade and Industry (DTI) a statement on the Southern African Customs Union (SACU) Summit agreement once the Committee had a quorum. Can the Committee approve the agreement from the SACU Summit?

Ms Z Ncitha (ANC: Eastern Cape) and Mr J Londt (DA: Western Cape) approved the statement.

Committee minutes
The Committee adopted the minutes from the 14 October and 23 September 2015 meetings. The Chairperson noted that members have seen the September minute before, but that there was not a quorum present to adopt it at the last meeting.

The meeting was adjourned.

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